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 September 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:

8,088,638 shares of common stock, par value $0.01 per share, were issued and outstanding as of October 31, 2023. 

 

 

 

     

Table of Contents 

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

September 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   29
       
Item 3. Quantitative and Qualitative Disclosures about Market Risk   45
       
Item 4. Controls and Procedures   46
       
PART II – OTHER INFORMATION    
       
Item 1. Legal Proceedings   46
       
Item 1A. Risk Factors   46
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   46
       
Item 3. Defaults upon Senior Securities   47
       
Item 4. Mine Safety Disclosures   47
       
Item 5. Other Information   47
       
Item 6. Exhibits   47

2

Table of Contents 

PART I. CONSOLIDATED FINANCIAL INFORMATION

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

             
 
    September 30,     December 31,  
(dollars in thousands, except share data)   2023     2022  
    (Unaudited)     (Audited)  
ASSETS                
Cash and cash equivalents:                
Cash and due from banks   $ 17,395       18,788  
Federal funds sold     127,714       101,277  
Interest-bearing deposits with banks     7,283       50,809  
Total cash and cash equivalents     152,392       170,874  
Investment securities:                
Investment securities available for sale     144,035       93,347  
Other investments     19,600       10,833  
Total investment securities     163,635       104,180  
Mortgage loans held for sale     7,117       3,917  
Loans     3,553,632       3,273,363  
Less allowance for credit losses     (41,131 )     (38,639 )
Loans, net     3,512,501       3,234,724  
Bank owned life insurance     52,140       51,122  
Property and equipment, net     95,743       99,183  
Deferred income taxes, net     13,078       12,522  
Other assets     23,351       15,459  
Total assets   $ 4,019,957       3,691,981  
LIABILITIES                
Deposits   $ 3,347,771       3,133,864  
FHLB advances and related debt     275,000       175,000  
Subordinated debentures     36,295       36,214  
Other liabilities     56,993       52,391  
Total liabilities     3,716,059       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, 8,088,638 and 8,011,045 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively     81       80  
Nonvested restricted stock     (4,065 )     (3,306 )
Additional paid-in capital     121,757       119,027  
Accumulated other comprehensive loss     (15,255 )     (13,410 )
Retained earnings     201,380       192,121  
Total shareholders’ equity     303,898       294,512  
Total liabilities and shareholders’ equity   $ 4,019,957       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 nine months  
    ended September 30,     ended September 30,  
(dollars in thousands, except share data)   2023     2022     2023     2022  
Interest income                                
Loans   $ 43,542       29,752       121,380       80,294  
Investment securities     1,470       506       2,788       1,428  
Federal funds sold and interest-bearing deposits with banks     2,435       676       4,295       915  
Total interest income     47,447       30,934       128,463       82,637  
Interest expense                                
Deposits     25,130       5,021       64,245       7,773  
Borrowings     2,972       459       5,623       1,362  
Total interest expense     28,102       5,480       69,868       9,135  
Net interest income     19,345       25,454       58,595       73,502  
Provision for credit losses     (500 )     950       2,235       3,830  
Net interest income after provision for credit losses     19,845       24,504       56,360       69,672  
Noninterest income                                
Mortgage banking income     1,208       1,230       3,167       3,907  
Service fees on deposit accounts     356       318       1,011       949  
ATM and debit card income     588       542       1,680       1,604  
Income from bank owned life insurance     349       315       1,018       945  
Loss on disposal of fixed assets     -       -       -       (394 )
Gain on sale of securities     -       -       -       12  
Other income     249       275       653       850  
Total noninterest income     2,750       2,680       7,529       7,873  
Noninterest expenses                                
Compensation and benefits     10,231       9,843       30,874       29,214  
Occupancy     2,562       2,442       7,537       6,439  
Outside service and data processing costs     1,744       1,529       5,078       4,591  
Insurance     1,243       507       2,829       1,134  
Professional fees     504       555       1,914       1,848  
Marketing     293       338       994       934  
Other     725       832       2,573       2,360  
Total noninterest expenses     17,302       16,046       51,799       46,520  
Income before income tax expense     5,293       11,138       12,090       31,025  
Income tax expense     1,195       2,725       2,831       7,402  
Net income   $ 4,098       8,413       9,259       23,623  
Earnings per common share                                
Basic   $ 0.51       1.06       1.15       2.97  
Diluted     0.51       1.04       1.15       2.93  
Weighted average common shares outstanding                                
Basic     8,052,926       7,972,146       8,043,410       7,954,025  
Diluted     8,072,408       8,065,087       8,077,830       8,071,988  

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 September 30,		     For the nine months
ended September 30,		  
(dollars in thousands)   2023     2022     2023     2022  
Net income   $ 4,098       8,413       9,259       23,623  
Other comprehensive loss:                                
Unrealized loss on securities available for sale:                                
Unrealized holding loss arising during the period, pretax     (3,221 )     (4,894 )     (2,333 )     (16,783 )
Tax expense     676       1,028       488       3,524  
Reclassification of realized gain     -       -       -       (12 )
Tax benefit     -       -       -       2  
Other comprehensive loss     (2,545 )     (3,866 )     (1,845 )     (13,269 )
Comprehensive income   $ 1,553       4,547       7,414       10,354  

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 September 30,  
    Common stock     Preferred stock     Nonvested
restricted		     Additional
paid-in		     Accumulated
other
comprehensive		     Retained        
(dollars in thousands, except share data)   Shares     Amount     Shares     Amount     stock     capital     income (loss)     earnings     Total  
June 30, 2022     7,985,644     $ 80       -       -     $ (3,230 )   $ 117,714     $ (10,143 )   $ 178,216     $ 282,637  
Net income Retained earnings     -       -       -       -       -       -       -       8,413       8,413  
Proceeds from exercise of stock options     3,000       -       -       -       -       87       -       -       87  
Issuance of restricted stock     8,700       -       -       -       (405 )     405       -       -       -  
Compensation expense related to restricted stock, net of tax     -       -       -       -       287       -       -       -       287  
Compensation expense related to stock options, net of tax     -       -       -       -       -       227       -       -       227  
Other comprehensive loss     -       -       -       -       -       -       (3,866 )     -       (3,866 )
Additional paid-in capital                                                                        
September 30, 2022     7,997,344     $ 80       -     $ -     $ (3,348 )   $ 118,433     $ (14,009 )   $ 186,629     $ 287,785  
June 30, 2023     8,058,438     $ 81       -     $ -     $ (4,051 )   $ 120,912     $ (12,710 )   $ 197,282     $ 301,514  
Net income     -       -       -       -       -       -       -       4,098       4,098  
Proceeds from exercise of stock options     14,250       -       -       -       -       312       -       -       312  
Issuance of restricted stock, net of forfeitures     15,950       -       -       -       (388 )     388       -       -       -  
Compensation expense related to restricted stock, net of tax     -       -       -       -       374       -       -       -       374  
Compensation expense related to stock options, net of tax     -       -       -       -       -       145       -       -       145  
Other comprehensive loss     -       -       -       -       -       -       (2,545 )     -       (2,545 )
                                                                         
September 30, 2023     8,088,638     $ 81       -     $ -     $ (4,065 )   $ 121,757     $ (15,255 )   $ 201,380     $ 303,898  

 

    For the nine months ended September 30,  
    Common stock     Preferred stock     Nonvested
restricted		     Additional
paid-in		     Accumulated
other
comprehensive		     Retained        
(dollars in thousands, except share data)   Shares     Amount     Shares     Amount     stock     capital     income (loss)     earnings     Total  
December 31, 2021 Preferred stock     7,925,819     $ 79       -       -     $ (1,435 )   $ 114,226     $ (740 )   $ 165,771     $ 277,901  
Net income Common stock     -       -       -       -       -       -       -       23,623       23,623  
Proceeds from exercise of stock options     24,750       1       -       -       -       793       -       -       794  
Issuance of restricted stock     46,775       -       -       -       (2,710 )     2,710       -       -       -  
Adoption of ASU 2016-13     -       -       -       -       -       -       -       (2,765 )     (2,765 )
Compensation expense related to restricted stock, net of tax     -       -       -       -       797       -       -       -       797  
Compensation expense related to stock options, net of tax     -       -       -       -       -       704       -       -       704  
Other comprehensive loss     -       -       -       -       -       -       (13,269 )     -       (13,269 )
                                                                         
September 30, 2022     7,997,344     $ 80       -     $ -     $ (3,348 )   $ 118,433     $ (14,009 )   $ 186,629     $ 287,785  
December 31, 2022     8,011,045     $ 80       -     $ -     $ (3,306 )   $ 119,027     $ (13,410 )   $ 192,121     $ 294,512  
Net income     -       -       -       -       -       -       -       9,259       9,259  
Proceeds from exercise of stock options     25,250       -       -       -       -       497       -       -       497  
Issuance of restricted stock     52,343       1       -       -       (1,824 )     1,823       -       -       -  
Compensation expense related to restricted stock, net of tax     -       -       -       -       1,065       -       -       -       1,065  
Compensation expense related to stock options, net of tax     -       -       -       -       -       410       -       -       410  
Other comprehensive loss     -       -       -       -       -       -       (1,845 )     -       (1,845 )
Accumulated other comprehensive income (loss)                                                                        
September 30, 2023     8,088,638     $ 81       -     $ -     $ (4,065 )   $ 121,757     $ (15,255 )   $ 201,380     $ 303,898  

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

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SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

             
 
    For the nine months ended
September 30,		  
(dollars in thousands)   2023     2022  
Operating activities                
Net income   $ 9,259       23,623  
Adjustments to reconcile net income to cash provided by operating activities:                
Provision for credit losses     2,235       3,830  
Depreciation and other amortization     3,611       2,521  
Accretion and amortization of securities discounts and premium, net     142       554  
Loss on sale of fixed assets     -       394  
Gain on sale of securities     -       (12 )
Net change in operating leases     188       814  
Compensation expense related to stock options and restricted stock grants     1,475       1,501  
Gain on sale of loans held for sale     (2,793 )     (2,700 )
Loans originated and held for sale     (112,930 )     (191,448 )
Proceeds from sale of loans held for sale     112,523       198,461  
Increase in cash surrender value of bank owned life insurance     (1,018 )     (945 )
Increase in deferred tax asset     (66 )     (5,766 )
(Increase) decrease in other assets     (7,892 )     5  
Increase in other liabilities     6,059       6,006  
Net cash provided by operating activities     10,793       36,838  
Investing activities                
Increase (decrease) in cash realized from:                
Increase in loans, net     (280,627 )     (538,816 )
Purchase of property and equipment     (1,120 )     (13,134 )
Purchase of investment securities:                
Available for sale     (58,204 )     (10,094 )
Other investments     (49,949 )     (15,235 )
Payments and maturities, calls and repayments of investment securities:                
Available for sale     5,039       21,517  
Other investments     41,182       13,806  
Proceeds from sale of fixed assets     -       95  
Net cash used for investing activities     (343,679 )     (541,861 )
Financing activities                
Increase in cash realized from:                
Increase in deposits, net     213,907       437,626  
Increase in Federal Home Loan Bank advances and other borrowings, net     100,000       60,000  
Proceeds from the exercise of stock options     497       794  
Net cash provided by financing activities     314,404       498,420  
Net decrease in cash and cash equivalents     (18,482 )     (6,603 )
Cash and cash equivalents at beginning of the period     170,874       167,209  
Cash and cash equivalents at end of the period   $ 152,392       160,606  
Supplemental information                
Cash paid for                
Interest   $ 64,390       9,155  
Income taxes     586       8,270  
Schedule of non-cash transactions                
Unrealized gain (loss) on securities, net of income taxes     (1,845 )     (13,259 )
Right-of-use assets obtained in exchange for lease obligations:                
Operating leases     147       237  

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 nine-month periods ended September 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 and 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 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 continued impact of these bank 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                                
 
    September 30, 2023  
    Amortized     Gross Unrealized     Fair  
(dollars in thousands)   Cost     Gains     Losses     Value  
Available for sale                                
Corporate bonds   $ 2,153       -       303       1,850  
US treasuries     25,737       2       136       25,603  
US government agencies     21,225       -       2,501       18,724  
State and political subdivisions     22,708       -       4,398       18,310  
Asset-backed securities     29,780       25       164       29,641  
Mortgage-backed securities                                
FHLMC     23,379       -       4,639       18,740  
FNMA     33,251       -       6,285       26,966  
GNMA     5,111       -       910       4,201  
Total mortgage-backed securities     61,741       -       11,834       49,907  
Total investment securities available for sale   $ 163,344       27       19,336       144,035  

 

    December 31, 2022  
    Amortized     Gross Unrealized     Fair  
    Cost     Gains     Losses     Value  
Available for sale                                
Corporate bonds   $ 2,172       -       289       1,883  
US treasuries US treasuries [Member]     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 FHLMC [Member]     24,086       -       3,745       20,341  
FNMA FNMA [Member]     35,141       -       5,520       29,621  
GNMA GNMA [Member]     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 September 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                                                                                
                               
                      September 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]   $ -       -     $ -       -     $ 1,850       2.01 %   $ -       -     $ 1,850       2.01 %
US treasuries     24,739       5.39 %     864       1.27 %     -       -       -       -       25,603       5.25 %
US government agencies US government agencies [Member]     956       0.45 %     2,293       1.00 %     15,475       4.45 %     -       -       18,724       3.82 %
State and political subdivisions State and political subdivisions [Member]     -       -       872       1.94 %     4,919       1.80 %     12,519       2.17 %     18,310       2.06 %
Asset-backed securities Asset-backed securities [Member]     -       -       -       -       340       6.24 %     29,301       6.61 %     29,641       6.60 %
Mortgage-backed securities Mortgage-backed securities [Member]     -       -       4,680       1.16 %     5,140       1.59 %     40,087       1.94 %     49,907       1.83 %
Total investment securities Total investment securities [Member]   $ 25,695       5.21 %   $ 8,709       1.20 %   $ 27,724       3.31 %   $ 81,907       3.64 %   $ 144,035       3.71 %

 

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

The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities at September 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                                                                        
                   
                September 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     $ 1,850     $ 303       1     $ 1,850     $ 303  
US treasuries     -       -       -       1       863       136       1       863       136  
US government agencies     2       8,156       60       10       10,568       2,441       12       18,724       2,501  
State and political subdivisions     2       734       33       30       17,576       4,365       32       18,310       4,398  
Asset-backed     5       15,631       83       7       5,039       81       12       20,670       164  
Mortgage-backed securitiesMortgage-backed securities [Member]                                                                        
FHLMCFHLMC [Member]     2       2,726       189       19       16,014       4,450       21       18,740       4,639  
FNMA     -       -       -       37       26,966       6,285       37       26,966       6,285  
GNMA     -       -       -       6       4,201       910       6       4,201       910  
Total investment securities     11     $ 27,247     $ 365       111     $ 83,077     $ 18,971       122     $ 110,324     $ 19,336  

 

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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 September 30, 2023 the Company had 122 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 September 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)   September 30, 2023     December 31, 2022  
Federal Home Loan Bank stock   $ 16,046       9,250  
Other nonmarketable investments     3,151       1,180  
Investment in Trust Preferred subsidiaries     403       403  
Total other investments   $ 19,600       10,833  

The Company has evaluated other investments for impairment and determined that the other investments are not impaired as of September 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 September 30 2023, mortgage loans held for sale totaled $7.1 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 $7.1 million as of September 30, 2023 and $7.3 million as of December 31, 2022.

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Schedule of composition of our loan portfolio            
    September 30, 2023     December 31, 2022  
(dollars in thousands) Commercial [Member]   Amount     %  of Total     Amount     %  of Total  
Commercial                                
Owner occupied RE Owner occupied RE [Member]   $ 637,038       17.9 %   $ 612,901       18.7 %
Non-owner occupied RE Non-owner occupied RE [Member]     937,749       26.4 %     862,579       26.3 %
Construction Construction [Member]     119,629       3.4 %     109,726       3.4 %
Business Business [Member]     500,253       14.1 %     468,112       14.3 %
Total commercial loans Consumer [Member]     2,194,669       61.8 %     2,053,318       62.7 %
Consumer                                
Real estate Real estate [Member]     1,074,679       30.2 %     931,278       28.4 %
Home equity Home equity [Member]     180,856       5.1 %     179,300       5.5 %
Construction Construction [Member]     54,210       1.5 %     80,415       2.5 %
Other Other [Member]     49,218       1.4 %     29,052       0.9 %
Total consumer loans     1,358,963       38.2 %     1,220,045       37.3 %
Total gross loans, net of deferred fees     3,553,632       100.0 %     3,273,363       100.0 %
Less—allowance for credit losses     (41,131 )             (38,639 )        
Total loans, net   $ 3,512,501             $ 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         September 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   $ 13,679       177,138       404,693       41,528       637,038  
Non-owner occupied RE     66,746       501,700       343,953       25,350       937,749  
Construction     23,899       44,452       51,278       -       119,629  
Business     106,126       198,150       191,559       4,418       500,253  
Total commercial loans     210,450       921,440       991,483       71,296       2,194,669  
Consumer                                        
Real estate     8,646       50,898       304,890       710,245       1,074,679  
Home equity     1,996       24,720       149,252       4,888       180,856  
Construction     -       259       31,796       22,155       54,210  
Other     12,945       33,082       2,376       815       49,218  
Total consumer loans     23,587       108,959       488,314       738,103       1,358,963  
Total gross loans, net of deferred fees   $ 234,037       1,030,399       1,479,797       809,399       3,553,632  

 

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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                  
    September 30, 2023     December 31, 2022  
    Interest Rate           Interest Rate  
(dollars in thousands)   Fixed     Floating or
Adjustable		     Fixed     Floating or
Adjustable		  
CommercialCommercial [Member]                                
Owner occupied REOwner occupied RE [Member]   $ 614,563       8,796       598,513       3,814  
Non-owner occupied RENon-owner occupied RE [Member]     787,479       83,524       742,763       75,246  
ConstructionConstruction [Member]     65,517       30,213       90,246       13,971  
BusinessBusiness [Member]     300,464       93,663       298,866       73,089  
Total commercial loans     1,768,023       216,196       1,730,388       166,120  
ConsumerConsumer [Member]                                
Real estateReal estate [Member]     1,066,033       -       919,130       11  
Home equityHome equity [Member]     12,403       166,457       14,173       163,791  
ConstructionConstruction [Member]     54,210       -       79,750       -  
OtherOther [Member]     11,916       24,357       19,113       6,013  
Total consumer loans     1,144,562       190,814       1,032,166       169,815  
Total gross loans, net of deferred fees   $ 2,912,585       407,010       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.

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

 Schedule of breakdown of outstanding loans by risk category                                                      
                                        September 30, 2023  
(dollars in thousands)   2023     2022     2021     2020     2019     Prior     Revolving     Revolving Converted to Term     Total  
Commercial                                                                        
Owner occupied RE                                                                        
Pass   $ 38,310       178,722       143,057       67,509       62,216       112,528       -       167       602,509  
Watch     -       3,482       464       16,074       3,551       6,821       -       -       30,392  
Special Mention     -       186       -       -       -       3,074       -       -       3,260  
Substandard     -       -       -       -       -       877       -       -       877  
Total Owner occupied RE     38,310       182,390       143,521       83,583       65,767       123,300       -       167       637,038  
                                                                         
Non-owner occupied RE                                                                        
Pass     79,567       302,942       169,567       109,566       59,595       173,400       257       -       894,894  
Watch     772       828       10,221       -       5,393       6,610       -       -       23,824  
Special Mention     -       -       199       -       8,267       878       -       -       9,344  
Substandard     -       -       -       -       8,073       1,614       -       -       9,687  
Total Non-owner occupied RE     80,339       303,770       179,987       109,566       81,328       182,502       257       -       937,749  
                                                                         
Construction                                                                        
Pass     13,921       72,528       22,179       9,897       -       -       -       -       118,525  
Watch     -       1,104       -       -       -       -       -       -       1,104  
Special Mention     -       -       -       -       -       -       -       -       -  
Substandard     -       -       -       -       -       -       -       -       -  
Total Construction     13,921       73,632       22,179       9,897       -       -       -       -       119,629  
                                                                         
Business                                                                        
Pass     41,808       136,635       50,098       19,637       18,214       53,775       144,671       1,099       465,937  
Watch     282       14,431       1,955       1,114       913       3,958       6,697       -       29,350  
Special Mention     101       977       77       793       211       234       -       98       2,491  
Substandard     -       490       164       -       153       1,199       447       22       2,475  
Total Business     42,191       152,533       52,294       21,544       19,491       59,166       151,815       1,219       500,253  
Total Commercial loans     174,761       712,325       397,981       224,590       166,586       364,968       152,072       1,386       2,194,669  
                                                                         
Consumer                                                                        
Real estate                                                                        
Pass     126,174       273,593       283,538       178,459       66,468       108,094       -       -       1,036,326  
Watch     490       5,684       7,877       3,941       2,058       4,098       -       -       24,148  
Special Mention     -       2,319       1,663       1,301       2,407       2,799       -       -       10,489  
Substandard     -       186       637       820       323       1,750       -       -       3,716  
Total Real estate     126,664       281,782       293,715       184,521       71,256       116,741       -       -       1,074,679  
                                                                         
Home equity                                                                        
Pass     -       -       -       -       -       -       168,399       -       168,399  
Watch     -       -       -       -       -       -       6,870       -       6,870  
Special Mention     -       -       -       -       -       -       4,150       -       4,150  
Substandard     -       -       -       -       -       -       1,437       -       1,437  
Total Home equity     -       -       -       -       -       -       180,856       -       180,856  
                                                                         
Construction                                                                        
Pass     9,798       35,606       8,806       -       -       -       -       -       54,210  
Watch     -       -       -       -       -       -       -       -       -  
Special Mention     -       -       -       -       -       -       -       -       -  
Substandard     -       -       -       -       -       -       -       -       -  
Total Construction     9,798       35,606       8,806       -       -       -       -       -       54,210  
                                                                         
Other                                                                        
Pass     923       2,643       2,578       1,505       846       2,726       36,718       -       47,939  
Watch     44       33       352       4       1       167       94       -       695  
Special Mention     -       334       -       -       27       84       51       -       496  
Substandard     -       -       80       -       1       -       7       -       88  
Total Other     967       3,010       3,010       1,509       875       2,977       36,870       -       49,218  
                                                                         
Total Consumer loans     137,429       320,398       305,531       186,030       72,131       119,718       217,726       -       1,358,963  
  Total loans   $ 312,190       1,032,723       703,512       410,620       238,717       484,686       369,798       1,386       3,553,632  
Current period gross write-offs     -       (200 )     -       (28 )     -       (10 )     (405 )     -       (643 )

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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       96       -       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  
Current period gross write-offs     -       (91 )     -       (23 )     -       (32 )     (339 )     -       (485 )

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

Schedule of loan balances by payment status                         
    September 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   $ -       -       -       -       637,038       637,038  
Non-owner occupied RE     440       -       -       1,615       935,694       937,749  
Construction     -       -       -       -       119,629       119,629  
Business     347       27       -       404       499,475       500,253  
Consumer                                                
Real estate     1,210       -       -       1,228       1,072,241       1,074,679  
Home equity     226       182       -       1,068       179,380       180,856  
Construction     -       -       -       -       54,210       54,210  
Other     -       -       -       -       49,218       49,218  
    Total loans   $ 2,223       209       -       4,315       3,546,885       3,553,632  
Total loans over 90 days past due     -       -       -       -       -       1,572  
                                                 
    December 31, 2022  
(dollars in thousands)   Accruing 30-
59 days past
due		     Accruing 60-89
days past due		     Accruing 90
days or more
past due		     Nonaccrual
loans		     Accruing
current		     Total  
Commercial                                                
Owner occupied RE   $ -       -       -       -       612,901       612,901  
Non-owner occupied RE     119       757       -       247       861,456       862,579  
Construction     -       -       -       -       109,726       109,726  
Business     24       1       -       182       467,905       468,112  
Consumer                                                
Real estate     330       -       -       1,099       929,849       931,278  
Home equity     50       -       -       1,099       178,151       179,300  
Construction     -       -       -       -       80,415       80,415  
Other     88       -       -       -       28,964       29,052  
    Total loans   $ 611       758       -       2,627       3,269,367       3,273,363  
Total loans over 90 days past due     -       -       -       -       -       402  

As of September 30, 2023 and December 31, 2022, loans 30 days or more past due represented 0.13% and 0.11% of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.05% and 0.03% of the Company’s total loan portfolio as of September 30, 2023 and December 31, 2022, respectively. Consumer loans 30 days or more past due were 0.08% and 0.08% of total loans as of September 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   September 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     379       1,236       1,615       114       133       247  
Construction     -       -       -       -       -       -  
Business     170       234       404       -       182       182  
Total commercial     549       1,470       2,019       114       315       429  
Consumer                                                
Real estate     227       1,001       1,228       -       1,099       1,099  
Home equity     181       887       1,068       194       905       1,099  
Construction     -       -       -       -       -       -  
Other     -       -       -       -       -       -  
Total consumer     408       1,888       2,296       194       2,004       2,198  
Total nonaccrual loans     957       3,358       4,315       308       2,319       2,627  

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

We did not recognize interest income on nonaccrual loans for the nine months ended September 30, 2023 and September 30, 2022. Accrued interest of $35,000 was reversed during the nine months ended September 30, 2023 and $16,000 was reversed during the nine months ended September 30, 2022.

The table below summarizes information regarding nonperforming assets.

Schedule of nonperforming assets, including nonaccruing TDRs            
             
(dollars in thousands)   September 30, 2023     December 31, 2022  
Nonaccrual loans   $ 4,315       2,627  
Other real estate owned     -       -  
Total nonperforming assets   $ 4,315       2,627  
Nonperforming assets as a percentage of:                
Total assets     0.11 %     0.07 %
Gross loans     0.12 %     0.08 %
Total loans over 90 days past due   $ 1,572       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.

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

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Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification.

The following table shows the amortized cost basis of the loans modified to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2023, disaggregated by class of loans and type of concession granted and describes the financial effect of the modifications made to borrowers experiencing financial difficulty.

 Schedule of amortized cost basis of loans     Term Extension
(dollars in thousands) Amortized Cost Basis % of Total Loan Type Financial Effect
Commercial Business $           329 0.07% Added a 1-year term to both of the loans modified. One loan was granted an extended amortization due to the inability to pay on a 3-year amortization. The other loan was given an interest only period due to the ability to pay only interest to get the loan renewed.

Neither of the two loans modified had a payment default during the period. The Company closely monitors the performance of the loans that are modified for borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. Both loans are in current payment status since the loan modification occurred in the third quarter of 2023. There have been no commitments to lend additional funds to the borrowers experiencing financial difficulty as of September 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.

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.

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Management also considers further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that exist for the period over which historical information is evaluated as well as other changes in qualitative factors not inherently considered in the quantitative analyses. The 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 nine months ended September 30, 2023 and September 30, 2022 under the CECL methodology.

Schedule of activity related to the allowance for credit losses                                                      
                         
                      Three months ended September 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   $ 5,896       11,584       1,331       8,152       10,395       2,521       684       542       41,105  
Provision for credit losses     300       (247 )     (34 )     (148 )     191       (20 )     (102 )     (40 )     (100 )
Loan charge-offs     -       (1 )     -       (42 )     -       -       -       -       (43 )
Loan recoveries     -       154       -       13       -       2       -       -       169  
Net loan recoveries (charge-offs)     -       153       -       (29 )     -       2       -       -       126  
Balance, end of period   $ 6,196       11,490       1,297       7,975       10,586       2,503       582       502       41,131  
Net recoveries to average loans (annualized)                                                                     (0.01 )%
Allowance for credit losses to gross loans                                                                     1.16 %
Allowance for credit losses to nonperforming loans                                                                     953.25 %

 

                                                       
                      Three months ended September 30, 2022  
    Commercial     Consumer        
(dollars in thousands)   Owner occupied RE     Non-
owner occupied RE		     Construction     Business     Real Estate     Home
Equity		     Construction     Other     Total  
Balance, beginning of period   $ 4,829       10,010       1,060       6,717       7,992       2,442       851       291       34,192  
Provision for credit losses     476       (1,595 )     (82 )     875       782       3       41       25       525  
Loan charge-offs     -       -       -       -       -       -       -       -       -  
Loan recoveries     -       1,540       -       51       -       8       -       1       1,600  
Net loan recoveries (charge-offs)     -       1,540       -       51       -       8       -       1       1,600  
Balance, end of period   $ 5,305       9,955       978       7,643       8,774       2,453       892       317       36,317  
Net recoveries to average loans (annualized)                                                                     (0.22 )%
Allowance for credit losses to gross loans                                                                     1.20 %
Allowance for credit losses to nonperforming loans                                                                     1,388.87 %

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                      Nine months ended September 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     329       1,138       5       120       1,099       278       (311 )     192       2,850  
Loan charge-offs     -       (209 )     -       (43 )     -       (389 )     -       (2 )     (643 )
Loan recoveries     -       185       -       37       -       63       -       -       285  
Net loan recoveries (charge-offs)     -       (24 )     -       (6 )     -       (326 )     -       (2 )     (358 )
Balance, end of period   $ 6,196       11,490       1,297       7,975       10,586       2,503       582       502       41,131  
Net charge-offs to average loans (annualized)                                                                     0.01 %
Allowance for credit losses to gross loans                                                                     1.16 %
Allowance for credit losses to nonperforming loans                                                                     953.25 %

 

                      Nine months ended September 30, 2022  
    Commercial     Consumer        
(dollars in thousands)   Owner occupied RE     Non-
owner occupied RE		     Construction     Business     Real Estate     Home
Equity		     Construction     Other     Total  
Balance, beginning of period   $ 4,700       10,518       625       4,887       7,083       1,697       578       320       30,408  
Adjustment for CECL     (313 )     333       154       1,057       (294 )     438       130       (5 )     1,500  
Provision for credit losses     918       (2,436 )     199       1,558       1,985       575       184       92       3,075  
Loan charge-offs     -       -       -       (55 )     -       (339 )     -       (91 )     (485 )
Loan recoveries     -       1,540       -       196       -       82       -       1       1,819  
Net loan recoveries (charge-offs)     -       1,540       -       141       -       (257 )     -       (90 )     1,334  
Balance, end of period   $ 5,305       9,955       978       7,643       8,774       2,453       892       317       36,317  
Net recoveries to average loans (annualized)                                                                     (0.06 )%
Allowance for credit losses to gross loans                                                                     1.20 %
Allowance for credit losses to nonperforming loans                                                                     1,388.87 %

The $100,000 reversal of the provision for credit losses for the three months ended September 30, 2023 was driven by net recoveries of $126,000 for the quarter combined with lower expected loss rates. The $2.9 million provision for credit losses for the nine months ended September 30, 2023 was driven by $280.3 million in loan growth for the period. In addition to loan growth, the provision for credit losses was impacted by lower expected loss rates due to continued low charge-offs during the first nine months 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. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses.

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The following tables present an analysis of collateral-dependent loans of the Company as of September 30, 2023 and December 31, 2022.

Schedule of analysis of collateral-dependent loans of the company               
September 30, 2023		  
    Real     Business              
(dollars in thousands)   estate     assets     Other     Total  
Commercial                                
Owner occupied RE   $ -       -       -       -  
Non-owner occupied RE     908       -       -       908  
Construction     -       -       -       -  
Business     244       -       -       244  
Total commercial     1,152       -       -       1,152  
Consumer                                
Real estate     386       -       -       386  
Home equity     182       -       -       182  
Construction     -       -       -       -  
Other     -       -       -       -  
Total consumer     568       -       -       568  
Total   $ 1,720       -       -       1,720  

 

              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 $2.2 million and $2.8 million at September 30, 2023 and December 31, 2022, respectively, 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 nine months ended September 30, 2023 and September 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)   September 30, 2023     September 30, 2022  
Balance, beginning of period   $ 2,565       2,330  
   Adjustment for adoption of CECL     -       -  
Provision for (reversal of) credit losses     (400 )     425  
Balance, end of period   $ 2,165       2,755  
Unfunded Loan Commitments   $ 780,581       840,912  
Reserve for Unfunded Commitments to Unfunded Loan Commitments     0.28 %     0.33 %

 

    Nine months ended     Nine months ended  
(dollars in thousands)   September 30, 2023     September 30, 2022  
Balance, beginning of period   $ 2,780       -  
   Adjustment for adoption of CECL     -       2,000  
Provision for (reversal of) credit losses     (615 )     755  
Balance, end of period   $ 2,165       2,755  
Unfunded Loan Commitments   $ 780,581       840,912  
Reserve for Unfunded Commitments to Unfunded Loan Commitments     0.28 %     0.33 %

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 are 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 September 30, 2023 and December 31, 2022.

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Schedule of carrying value of hedged asset and cumulative fair value hedging adjustment   September 30, 2023     December 31, 2022  
(dollars in thousands)   Carrying
Amount		     Hedged Asset     Carrying
Amount		     Hedged Asset  
Fixed Rate Asset1   $ 206,250     $ 6,250     $ -     $ -  
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 September 30, 2023, the amortized cost basis of the closed portfolio used in this hedging relationship was $729.5 million, the cumulative basis adjustment associated with this hedging relationship was $6.3 million, and the amount of the designated hedged item was $200.0 million.

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

                 
Schedule of outstanding financial derivative instruments             September 30, 2023  
              Fair Value  
(dollars in thousands)   Notional     Balance Sheet Location   Asset/(Liability)  
Derivatives designated as hedging instruments:                    
Fair value swapFair value swap [Member]   $ 200,000     Other assets   $ 6,250  
                     
Derivatives not designated as hedging instruments:                    
Mortgage loan interest rate lock commitmentsMortgage loan interest rate lock commitments [Member]     16,401     Other assets     160  
MBS forward sales commitmentsMBS forward sales commitments [Member]     10,000     Other assets     38  
Total derivative financial instrumentsTotal derivative financial instruments [Member]   $ 226,401         $ 6,448  

 

              December 31, 2022  
              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 September 30, 2023 totaled $280,000 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 nine months ended September 30, 2023 and September 30, 2022.

             
Schedule of summarize the effect of fair value hedging relationship recognized in consolidated statement of income    Three months ended
September 30,		     Nine months ended
September 30,		  
(dollars in thousands)   2023     2022     2023     2022  
Gain (loss) on fair value hedging relationship:                                
Hedged asset   $ 3,500       -       6,250       -  
Fair value derivative designated as hedging instrument     (3,501 )     -       (6,285 )     -  
Total gain (loss) recognized in interest income on loans   $ (1 )     -       (35 )     -  

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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 September 30, 2023 and December 31, 2022.

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Schedule of assets and liabilities measured at fair value on a recurring basis                        
                   
                September 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]   $ -       1,850       -       1,850  
US treasuries Level 3 [Member]     -       25,603       -       25,603  
US government agencies     -       18,724       -       18,724  
State and political subdivisions     -       18,310       -       18,310  
Asset-backed securities     -       29,641       -       29,641  
Mortgage-backed securities     -       49,907       -       49,907  
Mortgage loans held for sale     -       7,117       -       7,117  
Mortgage loan interest rate lock commitments     -       160       -       160  
MBS forward sales commitments     -       38       -       38  
Derivative asset     -       6,250       -       6,250  
Total assets measured at fair value on a recurring basis   $ -       157,600       -       157,600  

 

                         
    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 September 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 September 30, 2023 and December 31, 2022.

Schedule of assets and liabilities measured at fair value on a nonrecurring basis                        
                As of September 30, 2023  
(dollars in thousands)     Level 1       Level 2       Level 3       Total  
Assets                                
Individually evaluated loans   $ -       957       3,624       4,581  
Total assets measured at fair value on a nonrecurring basis   $ -       957       3,624       4,581

 
                   
                As of December 31, 2022  
(dollars in thousands)   Level 1     Level 2     Level 3     Total  
Assets                                
Individually evaluated loans   $ -       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.

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For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of September 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.

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

Schedule of estimated fair values of the company's financial instruments                                        
                 
          September 30, 2023  
(dollars in thousands)   Carrying
Amount		     Fair
Value		     Level 1     Level 2     Level 3  
Financial Assets:                                        
Other investments, at cost   $ 19,600       19,600       -       -       19,600  
Loans1     3,506,372       3,221,087       -       -       3,221,087  
Financial Liabilities:                                        
Deposits     3,347,771       2,957,882       -       2,957,882       -  
Subordinated debentures     36,295       40,820       -       40,820       -  

 

                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 $22.6 million and $23.6 million as of September 30, 2023 and December 31, 2022, respectively.  The Company had lease liabilities, included in other liabilities, of $25.0 million and $25.8 million as of September 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 6.16 years as of September 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. 

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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 September 30, 2023.

The total operating lease costs were $597,000 and $582,000 for the three months ended September 30, 2023 and 2022, respectively, and $1.8 million and $2.1 million for the nine months ended September 30, 2023 and 2022, respectively.

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

Schedule of maturities of lease liabilities      
   
Operating		  
(dollars in thousands)   Leases  
2023   $ 516  
2024     2,099  
2025     2,157  
2026     2,210  
2027     2,268  
Thereafter     22,202  
Total undiscounted lease payments     31,452  
Discount effect of cash flows     6,468  
Total lease liability   $ 24,984  

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 and nine-month periods ended September 30, 2023 and 2022. Dilutive common shares arise from the potentially dilutive effect of the Company’s stock options that were outstanding at September 30, 2023. The assumed conversion of stock options can create a difference between basic and dilutive net income per common share. At September 30, 2023 and 2022, there were 351,746 and 162,060 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
September 30,		     Nine months ended
September 30,		  
(dollars in thousands, except share data)   2023     2022     2023     2022  
Numerator:                                
Net income available to common shareholders   $ 4,098       8,413       9,259       23,623  
Denominator:                                
Weighted-average common shares outstanding – basic     8,052,926       7,972,146       8,043,410       7,954,025  
Common stock equivalents     19,482       92,941       34,420       117,963  
Weighted-average common shares outstanding – diluted     8,072,408       8,065,087       8,077,830       8,071,988  
Earnings per common share:                                
Basic   $ 0.51       1.06       1.15       2.97  
Diluted   $ 0.51       1.04       1.15       2.93  

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

The following discussion reviews our results of operations for the three and nine month periods ended September 30, 2023 as compared to the three and nine month periods ended September 30, 2022 and assesses our financial condition as of September 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

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Annual Report on Form 10-K for that period. Results for the three and nine month periods ended September 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. 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;

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  ● 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;
  ● 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, 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 September 30, 2023, we had total assets of $4.02 billion, an 8.9% increase from total assets of $3.69 billion at December 31, 2022. The largest component of our total assets is loans which were $3.55 billion and $3.27 billion at September 30, 2023 and December 31, 2022, respectively. Our liabilities and shareholders’ equity at September 30, 2023 totaled $3.72 billion and $303.9 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 $3.35 billion and $3.13 billion at September 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.

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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 $4.1 million and $8.4 million for the three months ended September 30, 2023 and 2022, respectively. Diluted earnings per share (“EPS”) was $0.51 for the third quarter of 2023 as compared to $1.04 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 525 basis point interest rate increase during the past 19 months.

Our net income to common shareholders was $9.3 million and $23.6 million for the nine months ended September 30, 2023 and 2022, respectively. Diluted EPS was $1.15 for the nine months ended September 30, 2023 as compared to $2.93 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 $19.3 million for the third quarter of 2023, a 24.0% decrease over net interest income of $25.5 million for the third 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 1.97% for the third quarter of 2023 compared to 3.19% 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 nine month periods ended September 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 September 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   $ 181,784     $ 2,435       5.31 %   $ 122,071     $ 676       2.20 %
Investment securities, taxable     148,239       1,429       3.82 %     91,462       449       1.95 %
Investment securities, nontaxable(2)     7,799       55       2.77 %     10,160       74       2.89 %
Loans(3)     3,554,478       43,542       4.86 %     2,941,350       29,752       4.01 %
Total interest-earning assets     3,892,300       47,461       4.84 %     3,165,043       30,951       3.88 %
Noninterest-earning assets     159,103                       159,233                  
Total assets   $ 4,051,403                     $ 3,324,726                  
Interest-bearing liabilities                                                
NOW accounts   $ 297,028       620       0.83 %   $ 361,500       178       0.20 %
Savings & money market     1,748,638       16,908       3.84 %     1,417,181       3,663       1.03 %
Time deposits     648,949       7,602       4.65 %     361,325       1,180       1.30 %
Total interest-bearing deposits     2,694,615       25,130       3.70 %     2,140,006       5,021       0.93 %
FHLB advances and other borrowings     264,141       2,414       3.63 %     1,357       10       2.92 %
Subordinated debentures     36,278       558       6.10 %     36,169       449       4.93 %
Total interest-bearing liabilities     2,995,034       28,102       3.72 %     2,177,532       5,480       1.00 %
Noninterest-bearing liabilities     752,433                       858,202                  
Shareholders’ equity     303,936                       288,542                  
Total liabilities and shareholders’ equity   $ 4,051,403                     $ 3,324,276                  
Net interest spread                     1.12 %                     2.88 %
Net interest income (tax equivalent) / margin           $ 19,359       1.97 %           $ 25,471       3.19 %
Less: tax-equivalent adjustment(2)             14                       17          
Net interest income           $ 19,345                     $ 25,454          
  (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 122 basis points to 1.97% during the third quarter of 2023, compared to the third quarter of 2022, primarily due to higher costs on our interest-bearing liabilities. Our average interest-bearing liabilities grew by $817.5 million during the third quarter of 2023 from the prior year, while the rate on these liabilities increased 272 basis points to 3.72%. In contrast, our average interest-earning assets grew by $727.3 million during the third quarter of 2023 from the prior year, while the average yield on these assets increased by only 96 basis points to 4.84% during the same period.

The increase in our average interest-bearing liabilities during the third quarter of 2023 resulted primarily from a $554.6 million increase in our interest-bearing deposits from the prior year, while the 272 basis point increase in rate on our interest-bearing liabilities was driven by a 277 basis point increase in deposit rates.

The increase in average interest-earning assets for the third quarter of 2023 related primarily to an increase of $613.1 million in our average loan balances from the prior year. The 96 basis point increase in yield on our interest-earning assets was driven by an 85 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 1.12% for the third quarter of 2023 compared to 2.88% 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 272 basis point increase in the rate on our interest-bearing liabilities was partially offset by a 96 basis point increase in yield on our interest-earning assets, resulting in a 176 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 Nine Months Ended September 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   $ 113,269     $ 4,295       5.07 %   $ 97,479     $ 915       1.25 %
Investment securities, taxable     111,551       2,663       3.19 %     100,947       1,278       1.69 %
Investment securities, nontaxable(2)     7,978       162       2.72 %     10,811       195       2.41 %
Loans(3)     3,467,550       121,380       4.68 %     2,771,546       80,294       3.87 %
  Total interest-earning assets     3,700,348       128,500       4.64 %     2,980,783       82,682       3.71 %
Noninterest-earning assets     158,746                       155,511                  
  Total assets   $ 3,859,094                     $ 3,136,294                  
Interest-bearing liabilities                                                
NOW accounts   $ 299,123       1,598       0.71 %   $ 385,543       437       0.15 %
Savings & money market     1,712,827       44,197       3.45 %     1,309,502       5,481       0.56 %
Time deposits     588,876       18,450       4.19 %     266,791       1,855       0.93 %
Total interest-bearing deposits     2,600,826       64,245       3.30 %     1,961,836       7,773       0.53 %
FHLB advances and other borrowings     140,336       3,996       3.81 %     23,665       129       0.73 %
Subordinated debentures     36,251       1,627       6.00 %     36,143       1,233       4.56 %
Total interest-bearing liabilities     2,777,413       69,868       3.36 %     2,021,644       9,135       0.60 %
Noninterest-bearing liabilities     780,408                       831,684                  
Shareholders’ equity     301,273                       282,966                  
Total liabilities and shareholders’ equity   $ 3,859,094                     $ 3,136,294                  
Net interest spread                     1.28 %                     3.11 %
Net interest income (tax equivalent) / margin           $ 58,632       2.12 %           $ 73,547       3.30 %
Less:  tax-equivalent adjustment(2)             37                       45          
Net interest income           $ 58,595                     $ 73,502          
  (1) Annualized for the nine month period.
  (2) The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis.
  (3) Includes mortgage loans held for sale.

During the first nine months of 2023, our net interest margin (TE) decreased by 118 basis points to 2.12%, compared to 3.30% for the first nine months of 2022, driven by the increase in yield on our interest-bearing liabilities. Our average interest-bearing liabilities grew by $755.8 million from the prior year, with the average yield increasing by 276 basis points to 3.36%. In contrast, our average interest-earning assets grew by $719.6 million, while the rate on these assets increased by only 93 basis points to 4.64%.

The increase in average interest-bearing liabilities for the first nine months of 2023 was driven by an increase in interest-bearing deposits of $639.0 million and a $116.7 million increase in FHLB advances and other borrowings, while the increase in cost was driven by a 277 basis point increase on our interest-bearing deposits and a 308 basis point increase on FHLB advances and other borrowings.

The increase in average interest-earning assets for the first nine months of 2023 related primarily to a $696.0 million increase in our average loan balances. The increase in yield on our interest-earning assets was driven by an 81 basis point increase in our loan yield.

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Our net interest spread was 1.28% for the first nine months of 2023 compared to 3.11% for the same period in 2022. The 183 basis point decrease in our net interest spread was driven by the 276 basis point increase in yield on our interest-bearing liabilities.

Rate/Volume Analysis

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

       
    Three Months Ended  
    September 30, 2023 vs. 2022     September 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   $ 6,233       6,248       1,309       13,790     $ 5,674       815       200       6,689  
Investment securities     271       451       242       964       (9 )     164       (4 )     151  
Federal funds sold and interest-bearing deposits with banks     331       959       469       1,759       (11 )     740       (121 )     608  
Total interest income     6,835       7,658       2,020       16,513       5,654       1,719       75       7,448  
Interest expense                                                                
Deposits     762       16,798       2,549       20,109       217       3,142       728       4,087  
FHLB advances and other borrowings     1,938       2       466       2,406       -       -       10       10  
Subordinated debentures     1       106       -       107       1       68       -       69  
Total interest expense     2,701       16,906       3,015       22,622       218       3,210       738       4,166  
Net interest income   $ 4,134       (9,248 )     (995 )     (6,109 )   $ 5,436       (1,491 )     (663 )     3,282  

Net interest income, the largest component of our income, was $19.3 million for the third quarter of 2023 and $25.5 million for the third quarter of 2022, a $6.1 million, or 24.0%, decrease year over year. The decrease during 2023 was driven by a $22.6 million increase in interest expense primarily due to higher rates on our interest-bearing deposits. Partially offsetting the increase in interest expense was a $16.5 million increase in interest income primarily due to an increase in volume of loans and the rates on loans.

       
    Nine Months Ended  
    September 30, 2023 vs. 2022     September 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   $ 20,388       16,507       4,191       41,086     $ 16,300       (3,180 )     (764 )     12,356  
Investment securities     99       1,179       82       1,360       146       307       49       502  
Federal funds sold and interest-bearing deposits with banks     148       2,781       451       3,380       (11 )     813       (54 )     748  
Total interest income     20,635       20,467       4,724       45,826       16,435       (2,060 )     (769 )     13,606  
Interest expense                                                                
Deposits     1,656       45,190       9,626       56,472       719       3,265       780       4,764  
FHLB advances and other borrowings     636       545       2,686       3,867       63       3       59       125  
Subordinated debentures     4       389       1       394       4       86       -       90  
Total interest expense     2,296       46,124       12,313       60,733       786       3,354       839       4,979  
Net interest income   $ 18,339       (25,657 )     (7,589 )     (14,907 )   $ 15,649       (5,414 )     (1,608 )     8,627  
                                                                 

Net interest income for the first nine months of 2023 was $58.6 million compared to $73.5 million for 2022, a $14.9 million, or 20.3%, decrease. The decrease in net interest income during 2023 was driven by a $60.7 million increase in interest expense, related primarily to higher rates on our interest-bearing deposits, partially offset by a $45.8 million increase in interest income related to an increase in volume of loans and the rates on loans.

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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.

We recorded a reversal of $500,000 to the provision for credit losses in the third quarter of 2023, compared to a $950,000 provision for credit losses in the third quarter of 2022. We recorded a provision expense of $2.2 million and $3.8 million for the nine months ended September 30, 2023 and September 30, 2022, respectively. The provision reversal during the third quarter of 2023 includes a $100,000 reversal of the provision for credit losses and a $400,000 reversal of the reserve for unfunded commitments. The reversal of the provision for credit losses was driven by lower expected loss rates, while the reversal of the reserve for unfunded commitments was driven by a decrease in the balance of unfunded commitments at September 30, 2023, compared to the previous quarter and year. The $2.2 million provision expense for the first nine months of 2023 included a $2.9 million provision for credit losses and a $615,000 reversal for unfunded commitments.

Noninterest Income

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

             
    Three months ended
September 30,		     Nine months ended
September 30,		  
(dollars in thousands)   2023     2022     2023     2022  
Mortgage banking income   $ 1,208       1,230       3,167       3,907  
Service fees on deposit accounts     356       318       1,011       949  
ATM and debit card income     588       542       1,680       1,604  
Income from bank owned life insurance     349       315       1,018       945  
Loss on disposal of fixed assets     -       -       -       (394 )
Gain on sale of securities     -       -       -       12  
Other income     249       275       653       850  
Total noninterest income   $ 2,750       2,680       7,529       7,873  

Noninterest income was $2.7 million for the third quarter of 2023 and 2022. Mortgage banking income continues to be the largest component of our noninterest income at $1.2 million for both the third quarter of 2023 and 2022.

Noninterest income decreased $344,000, or 4.4%, during the first nine months of 2023 as compared to 2022. The decrease in total noninterest income resulted primarily from the following:

  ● Mortgage banking income decreased $740,000, or 18.9%, from the first nine months of 2022 driven by lower mortgage volume and less income recorded on the related derivative.
  ● Other income decreased $197,000, or 23.2%, primarily due to a decrease in loan and appraisal fee income.

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Noninterest expenses

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

             
    Three months ended
September 30,		     Nine months ended
September 30,		  
(dollars in thousands)   2023     2022     2023     2022  
Compensation and benefits   $ 10,231       9,843       30,874       29,214  
Occupancy     2,562       2,442       7,537       6,439  
Outside service and data processing costs     1,744       1,529       5,078       4,591  
Insurance     1,243       507       2,829       1,134  
Professional fees     504       555       1,914       1,848  
Marketing     293       338       994       934  
Other     725       832       2,573       2,360  
Total noninterest expense   $ 17,302       16,046       51,799       46,520  

Noninterest expense was $17.3 million for the third quarter of 2023, a $1.3 million, or 7.8%, increase from noninterest expense of $16.0 million for the third quarter of 2022. The increase in noninterest expense was driven primarily by the following:

  ● Compensation and benefits expense increased $388,000, or 3.9%, relating primarily to annual salary increases and hiring of new team members as well as higher benefit related expenses.
  ● Outside service and data processing costs increased $215,000, or 14.1%, relating primarily to an increase in software licensing and maintenance costs.
  ● Insurance costs increased $736,000, or 145.2%, as a result of higher FDIC insurance premiums.

Noninterest expense was $51.8 million for the first nine months of 2023, a $5.3 million, or 11.3%, increase from noninterest expense of $46.5 million for the first nine months of 2022. The increase in noninterest expense was driven primarily by increases in compensation and benefits and insurance expense as discussed above. Occupancy costs also increased over the prior year primarily related to increased depreciation, maintenance and property tax expense on our new headquarters building.

Our efficiency ratio was 78.3% for the third quarter of 2023, compared to 57.0% for the third 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 third quarter of 2023, compared to the third quarter of 2022, relates primarily to the decrease in net interest income combined with higher noninterest expenses.

We incurred income tax expense of $1.2 million and $2.7 million for the three months ended September 30, 2023 and 2022, respectively, and $2.8 million and $7.4 million for the nine months ended September 30, 2023 and 2022, respectively. Our effective tax rate was 23.4% and 23.9% for the nine months ended September 30, 2023 and 2022, respectively.

Balance Sheet Review

Investment Securities

At September 30, 2023, the $163.6 million in our investment securities portfolio represented approximately 4.1% 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 $144.0 million and an amortized cost of $163.3 million, resulting in an unrealized loss of $19.3 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. In addition, other investments, which includes FHLB Stock, increased $8.8 million from December 31, 2022 to $19.6 million at September 30, 2023.

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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 nine months ended September 30, 2023 and 2022 were $3.46 billion and $2.76 billion, respectively. Before the allowance for credit losses, total loans outstanding at September 30, 2023 and December 31, 2022 were $3.55 billion and $3.27 billion, respectively.

The principal component of our loan portfolio is loans secured by real estate mortgages. As of September 30, 2023, our loan portfolio included $3.0 billion, or 84.5%, 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 $180.9 million as of September 30, 2023, of which approximately 45% 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 $84,000 and a loan to value of 73% as of both September 30, 2023 and December 31, 2022. Further, 0.8% and 0.6% of our total home equity lines of credit were over 30 days past due as of September 30, 2023 and December 31, 2022, respectively.

Following is a summary of our loan composition at September 30, 2023 and December 31, 2022. During the first nine months of 2023, our loan portfolio increased by $280.3 million, or 8.6%, with a 6.9% increase in commercial loans while consumer loans increased by 11.4% 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 266.3% of the Bank’s total risk-based capital at September 30, 2023. Our consumer real estate portfolio grew by $143.4 million and includes high quality 1-4 family consumer real estate loans. Our average consumer real estate loan currently has a principal balance of $475,000, a term of 25 years, and an average rate of 4.05% as of September 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.

             
    September 30, 2023     December 31, 2022  
(dollars in thousands)   Amount     %  of Total     Amount     %  of Total  
Commercial                                
Owner occupied RE   $ 637,038       17.9 %   $ 612,901       18.7 %
Non-owner occupied RE     937,749       26.4 %     862,579       26.3 %
Construction     119,629       3.4 %     109,726       3.4 %
Business     500,253       14.1 %     468,112       14.3 %
Total commercial loans     2,194,669       61.8 %     2,053,318       62.7 %
Consumer                                
Real estate     1,074,679       30.2 %     931,278       28.4 %
Home equity     180,856       5.1 %     179,300       5.5 %
Construction     54,210       1.5 %     80,415       2.5 %
Other     49,218       1.4 %     29,052       0.9 %
Total consumer loans     1,358,963       38.2 %     1,220,045       37.3 %
Total gross loans, net of deferred fees     3,553,632       100.0 %     3,273,363       100.0 %
Less—allowance for credit losses     (41,131 )             (38,639 )        
Total loans, net   $ 3,512,501             $ 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.

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A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms and to show capacity to continue performing into the future before that loan can be placed back on accrual status. As of September 30, 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)   September 30, 2023     December 31, 2022  
Commercial   $         2,019                 429  
Consumer     2,296       2,198  
Total nonaccrual loans     4,315       2,627  
Other real estate owned     -       -  
Total nonperforming assets   $ 4,315       2,627  

At September 30, 2023, nonperforming assets were $4.3 million, or 0.11% of total assets and 0.12% 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. Nonaccrual loans increased $1.7 million during the first nine months of 2023 due primarily to four commercial relationships and two consumer loans that were added to nonaccrual status.

The amount of foregone interest income on nonaccrual loans in the first nine months of 2023 and 2022 was not material. At September 30, 2023 and December 31, 2022, the allowance for credit losses represented 953.25% and 1,470.74% of the total amount of nonperforming loans, respectively. A significant portion of the nonperforming loans at September 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 September 30, 2023, 84.5% of our loans were collateralized by real estate and 82.1% 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 September 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 individually evaluated loans when we do not expect repayment to occur as agreed upon under the original terms of the loan agreement.

At September 30, 2023, individually evaluated loans totaled $6.1 million with a reserve of approximately $1.5 million allocated in the allowance for credit losses. During the first nine months of 2023, the average recorded investment in individually evaluated loans was approximately $5.5 million. Comparatively, individually evaluated loans totaled $7.1 million at December 31, 2022 for which $6.8 million of these loans had a reserve of approximately $1.3 million allocated in the allowance 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 953.25%, of nonperforming loans at September 30, 2023 compared to $38.6 million, or 1.18% of outstanding loans and 1,470.84% of nonperforming loans at December 31, 2022.

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At September 30, 2022, the allowance for credit losses was $36.3 million, or 1.20% of outstanding loans and 1,388.87% 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 89.8% of total deposits, while our wholesale deposits represented $342.4 million, or 10.2%, of total deposits at September 30, 2023. At December 31, 2022, retail deposits represented $2.90 billion, or 92.5%, of our total deposits and wholesale deposits were $236.2 million, representing 7.5% of our total deposits. Our loan-to-deposit ratio was 106% at September 30, 2023 and 104% at December 31, 2022.

The following is a detail of our deposit accounts:

             
    September 30,     December 31,  
(dollars in thousands)   2023     2022  
Non-interest bearing   $ 675,409       804,115  
Interest bearing:                
NOW accounts     306,667       318,030  
Money market accounts     1,685,736       1,506,418  
Savings     34,737       40,673  
Time, less than $250,000     125,506       89,876  
Time and out-of-market deposits, $250,000 and over     519,716       374,752  
Total deposits   $ 3,347,771       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 $2.87 billion and $2.76 billion at September 30, 2023, and December 31, 2022, respectively. In addition, at September 30, 2023 and December 31, 2022, we estimate that we have approximately $1.4 billion and $1.5 billion, or 40.4% and 47.8% of total deposits, respectively, in uninsured deposits, including related interest accrued and unpaid. Since it is not reasonably practicable to provide a precise measure of uninsured deposits, the amounts above are estimates and are based on the same methodologies and assumptions used by the FDIC for the Bank’s regulatory reporting requirements.

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

       
    Nine months ended
September 30,		  
    2023     2022  
(dollars in thousands)   Amount     Rate     Amount     Rate  
Noninterest-bearing demand deposits   $ 726,660       0.00 %   $ 781,303       0.00 %
Interest-bearing demand deposits     299,123       0.71 %     385,543       0.15 %
Money market accounts     1,675,181       3.53 %     1,268,039       0.58 %
Savings accounts     37,646       0.10 %     41,463       0.05 %
Time deposits less than $250,000     96,506       3.75 %     24,519       0.45 %
Time deposits greater than $250,000     492,371       4.27 %     242,272       0.98 %
Total deposits   $ 3,327,487       2.58 %   $ 2,743,139       0.38 %

During the first nine months of 2023, our average transaction account balances increased by $262.3 million, or 10.6%, from the prior year, while our average time deposit balances increased by $322,000, or 120.7%. We have experienced record growth in new account openings throughout our footprint during the first nine months of 2023.

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In addition, we have added $167.3 million in wholesale time deposits.

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

       
(dollars in thousands)   September 30, 2023  
Three months or less   $ 148,458  
Over three through six months     180,510  
Over six through twelve months     110,657  
Over twelve months     80,091  
Total   $ 519,716  

Time deposits that meet or exceed the FDIC insurance limit of $250,000 at September 30, 2023 and December 31, 2022 were $519.7 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. With IntraFi, we have the option to keep deposits on balance sheet or sell them to other members of the network.

At September 30, 2023, the Company had $275.0 million of convertible fixed rate FHLB advances with a weighted average rate of 3.58%, while at December 31, 2022, the Company had a $175.0 million FHLB advance at a variable rate of 4.57%.

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 September 30, 2023 and December 31, 2022, our cash and cash equivalents totaled $152.4 million and $170.9 million, respectively, or 3.8% and 4.6% of total assets, respectively. Our investment securities at September 30, 2023 and December 31, 2022 amounted to $163.6 million and $104.2 million, respectively, or 4.1% 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 September 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.

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The unused borrowing capacity currently available from the FHLB at September 30, 2023 was $528.4 million, based primarily on the Bank’s qualifying mortgages available to secure any future borrowings. However, we are able to pledge additional securities to the FHLB in order to increase our available borrowing capacity. In addition, at September 30, 2023 and December 31, 2022 we had $397.7 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. At September 30, 2023, we had $13.0 million of marketable investment securities pledged in the Federal Reserve’s Bank Term Funding Program. At September 30, 2023, we had $219.9 million pledged and available with the Federal Reserve Discount Window.

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.

We also have a line of credit with another financial institution for $15.0 million, which was unused at September 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 September 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 $303.9 million at September 30, 2023 and $294.5 million at December 31, 2022. The $9.4 million increase from December 31, 2022 is primarily related to net income of $9.3 million during the first nine months of 2023, stock option exercises and equity compensation expenses of $1.5 million, partially offset by a $1.8 million increase in the unrealized loss on securities available for sale.

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

             
    September 30, 2023     December 31, 2022  
Return on average assets     0.32 %     0.90 %
Return on average equity     4.11 %     10.20 %
Return on average common equity     4.11 %     10.20 %
Average equity to average assets ratio     7.81 %     8.85 %
Tangible common equity to assets ratio     7.56 %     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.

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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 September 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.

             
  September 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)   $  385,063       12.27 %   $ 251,151       8.00 %   $ 313,939       10.00 %
Tier 1 Capital (to risk weighted assets)     345,798       11.01 %     188,363       6.00 %     251,151       8.00 %
Common Equity Tier 1 Capital (to risk weighted assets)     345,798       11.01 %     141,272       4.50 %     204,060       6.50 %
Tier 1 Capital (to average assets)     345,798       8.50 %     162,633       4.00 %     203,291       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 %

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

             
  September 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)   $ 394,419       12.56 %   $ 251,162       8.00 %     N/A       N/A  
Tier 1 Capital (to risk weighted assets)     332,154       10.58 %     188,372       6.00 %     N/A       N/A  
Common Equity Tier 1 Capital (to risk weighted assets)     319,154       10.17 %     141,279       4.50 %     N/A       N/A  
Tier 1 Capital (to average assets)     332,154       8.17 %     162,654       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.

Effect of Inflation and Changing Prices

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

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

Off-Balance Sheet Risk

Commitments to extend credit are agreements to lend money to a client as long as the client has not violated any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At September 30, 2023 unfunded commitments to extend credit were $780.6 million, of which $178.2 million were at fixed rates and $602.4 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 September 30, 2023, the reserve for unfunded commitments was $2.2 million or 0.28% of total unfunded commitments.

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As of December 31, 2022, the reserve for unfunded commitments was $2.8 million or 0.32% of total unfunded commitments.

At September 30, 2023 and December 31, 2022, there were commitments under letters of credit for $15.0 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.

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 September 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.

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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     (19.19 )%
Up 200 basis points     (12.76 )%
Up 100 basis points     (6.43 )%
Base     -  
Down 100 basis points     8.33 %
Down 200 basis points     15.59 %
Down 300 basis points     21.89 %

Item 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial

Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the nine months ended September 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.

There have been no material changes to the risk factors previously disclosed in the Company’s (i) Annual Report on Form 10-K for fiscal year ended December 31, 2022 and (ii) Quarterly Reports on Form 10-Q for fiscal quarters ended March 31, 2023 and June 30, 2023.

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
     
31.1   Rule 13a-14(a) Certification of the Principal Executive Officer.
     
31.2   Rule 13a-14(a) Certification of the Principal Financial Officer.  
     
32   Section 1350 Certifications.
     
101   The following materials from the Quarterly Report on Form 10-Q of Southern First Bancshares, Inc. for the quarter ended September 30, 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)
       

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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: October 31, 2023   /s/R. Arthur Seaver, Jr.
    R. Arthur Seaver, Jr.
    Chief Executive Officer (Principal Executive Officer)
     
     
Date: October 31, 2023   /s/D. Andrew Borrmann
    D. Andrew Borrmann
    Chief Financial Officer (Principal Financial and Accounting Officer)

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EX-31.1 2 sfst4259241-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:  October 31, 2023 By: /s/ R. Arthur Seaver, Jr.  
    R. Arthur Seaver, Jr.  
    Chief Executive Officer  

 

     

EX-31.2 3 sfst4259241-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:  October 31, 2023 By: /s/D. Andrew Borrmann  
    D. Andrew Borrmann  
    Chief Financial Officer  

 

     

EX-32 4 sfst4259241-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 September 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: October 31, 2023  
     
  /s/ D. Andrew Borrmann  
  D. Andrew Borrmann  
  Chief Financial Officer  
  Date: October 31, 2023