SOUTHERN FIRST BANCSHARES INC 10-K

Item 8. Financial Statements and Supplementary Data MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of Southern First Bancshares, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the U.S. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records, that in reasonable detail, accurately and fairly reflect the transactions and disposition of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of the financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with the authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material impact on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. Management conducted an evaluation of the effectiveness of the internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013. Based on this evaluation under the COSO criteria, management concluded that the internal control over financial reporting was effective as of December 31, 2021. The effectiveness of the internal control structure over financial reporting as of December 31, 2021 has been audited by Elliott Davis, LLC, an independent registered public accounting firm, as stated in their report included in this Annual Report on Form 10-K, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. /s/ R. Arthur Seaver, Jr. /s/ Michael D. Dowling Chief Executive Officer Chief Financial Officer & Chief Operating Officer Southern First Bancshares, Inc. Southern First Bancshares, Inc. 66 Table of Contents Report of Independent Registered Public Accounting Firm (PCAOB ID 149 ) To the Shareholders and Board of Directors of Southern First Bancshares, Inc. and Subsidiary Opinion on the Internal Control Over Financial Reporting We have audited Southern First Bancshares, Inc. and Subsidiary's (the “Company”) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020 and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021 of the Company and our report dated March 4, 2022 expressed an unqualified opinion. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company's internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Elliott Davis, LLC Greenville, South Carolina March 4, 2022 67 Table of Contents Report of Independent Registered Public Accounting Firm (PCAOB ID 149 ) To the Shareholders and Board of Directors of Southern First Bancshares, Inc. and Subsidiary Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Southern First Bancshares, Inc. and Subsidiary (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes to the consolidated financial statements (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 4, 2022, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 68 Table of Contents Allowance for Loan Losses As described in Note 4 to the Company’s consolidated financial statements, the Company has a gross loan portfolio of $2.5 billion and related allowance for loan losses of $30.4 million as of December 31, 2021. As described by the Company in Note 1, the evaluation of the allowance for loan losses is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses is evaluated on a regular basis and is based upon the Company’s review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. We identified the Company’s estimate of the allowance for loan losses as a critical audit matter. The principal considerations for our determination of the allowance for loan losses as a critical audit matter related to the high degree of subjectivity in the Company’s judgments in determining the qualitative factors. Auditing these complex judgments and assumptions by the Company involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill or knowledge needed. The primary procedures we performed to address this critical audit matter included the following: • We tested the design and operating effectiveness of controls relating to the Company’s determination of the allowance for loan losses, including controls over qualitative factors.   • We evaluated the relevance and the reasonableness of assumptions related to evaluation of the loan portfolio, current economic conditions, and other risk factors used in development of the qualitative factors for collectively evaluated loans.   • We evaluated the reasonableness of assumptions and data used by the Company in developing the qualitative factors by comparing these data points to internally developed and third-party sources, and other audit evidence gathered.   /s/ Elliott Davis, LLC We have served as the Company’s auditor since 1999. Greenville, South Carolina March 4, 2022 69 Table of Contents SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS   December 31, (dollars in thousands, except share data) 2021 2020 ASSETS Cash and cash equivalents: Cash and due from banks $ 21,770 $ 12,920 Federal funds sold 86,882 21,744 Interest-bearing deposits with banks 58,557 66,023 Total cash and cash equivalents 167,209 100,687 Investment securities: Investment securities available for sale 120,281 94,729 Other investments 4,021 3,635 Total investment securities 124,302 98,364 Mortgage loans held for sale 13,556 60,257 Loans 2,489,877 2,142,867 Less allowance for loan losses ( 30,408 ) ( 44,149 ) Loans, net 2,459,469 2,098,718 Bank owned life insurance 49,833 41,102 Property and equipment, net 92,370 60,236 Deferred income taxes, net 8,397 9,518 Other assets 10,412 13,705 Total assets $ 2,925,548 $ 2,482,587 LIABILITIES Deposits $ 2,563,826 $ 2,142,758 Federal Home Loan Bank advances and other borrowings - 25,000 Subordinated debentures 36,106 35,998 Other liabilities 47,715 50,537 Total liabilities 2,647,647 2,254,293 SHAREHOLDERS’ EQUITY Preferred stock, par value $. 01 per share, 10,000,000 shares authorized - - Common stock, par value $. 01 per share, 10,000,000 shares authorized, 7,925,819 and 7,772,748 shares issued and outstanding at December 31, 2021 and 2020, respectively 79 78 Nonvested restricted stock ( 1,435 ) ( 698 ) Additional paid-in capital 114,226 108,831 Accumulated other comprehensive income (loss) ( 740 ) 1,023 Retained earnings 165,771 119,060 Total shareholders’ equity 277,901 228,294 Total liabilities and shareholders’ equity $ 2,925,548 $ 2,482,587   See notes to consolidated financial statements that are an integral part of these consolidated statements. 70 Table of Contents SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME   For the years ended December 31, (dollars in thousands, except per share data) 2021 2020 2019 Interest income Loans $ 91,599 93,133 88,929 Investment securities 1,335 1,415 2,101 Federal funds sold and interest-bearing deposits with banks 233 270 1,622 Total interest income 93,167 94,818 92,652 Interest expense Deposits 3,909 13,055 23,730 Borrowings 1,526 1,953 1,653 Total interest expense 5,435 15,008 25,383 Net interest income 87,732 79,810 67,269 Provision for (reversal of) loan losses ( 12,400 ) 29,600 2,300 Net interest income after provision for loan losses 100,132 50,210 64,969 Noninterest income Mortgage banking income 11,376 19,785 9,923 Service fees on deposit accounts 757 860 1,061 ATM and debit card income 2,092 1,741 1,728 Income from bank owned life insurance 1,231 1,091 1,001 Gain on sale of investment securities, net ( 3 ) 3 727 Loss on extinguishment of debt - ( 37 ) ( 1,496 ) Net lender fees on PPP loan sale - 2,247 - Other income 1,648 1,663 2,039 Total noninterest income 17,101 27,353 14,983 Noninterest expenses Compensation and benefits 28,854 26,287 23,826 Mortgage production costs 8,753 9,898 6,436 Occupancy 6,950 6,226 5,513 Other real estate owned (income) expenses, net 385 1,223 ( 26 ) Outside service and data processing costs 4,865 4,223 3,782 Insurance 1,149 1,380 813 Professional fees 2,057 1,771 1,327 Marketing 873 628 791 Other 2,544 2,108 2,011 Total noninterest expenses 56,430 53,744 44,473 Income before income tax expense 60,803 23,819 35,479 Income tax expense 14,092 5,491 7,621 Net income available to common shareholders $ 46,711 18,328 27,858 Earnings per common share Basic $ 5.96 2.37 3.70 Diluted $ 5.85 2.34 3.58 Weighted average common shares outstanding Basic 7,843,692 7,718,615 7,528,283 Diluted 7,988,980 7,824,214 7,772,544   See notes to consolidated financial statements that are an integral part of these consolidated statements. 71 Table of Contents SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME   For the years ended December 31, (dollars in thousands) 2021 2020 2019 Net income $ 46,711 18,328 27,858 Other comprehensive income: Unrealized gain (loss) on securities available for sale: Unrealized holding gain (loss) arising during the period, pretax ( 2,232 ) 1,675 1,510 Tax (expense) benefit 467 ( 352 ) ( 317 ) Reclassification of realized (gain) loss 3 ( 3 ) ( 727 ) Tax expense ( 1 ) 1 153 Other comprehensive income (loss) ( 1,763 ) 1,321 619 Comprehensive income $ 44,948 19,649 28,477   See notes to consolidated financial statements that are an integral part of these consolidated statements. 72 Table of Contents SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019   Accumulated other Nonvested Additional comprehensive Common stock Preferred stock restricted paid-in income Retained (dollars in thousands, except share data) Shares Amount Shares Amount stock capital (loss) Earnings Total December 31, 2018 7,466,481 $ 75 - $ - $ ( 741 ) $ 102,625 $ ( 917 ) $ 72,874 $ 173,916 Net income - - - - - - - 27,858 27,858 Proceeds from exercise of stock options   191,497 2 - - - 1,767 - - 1,769 Issuance of restricted stock, net of forfeitures 14,700 - - - ( 490 ) 490 - - - Compensation expense related to restricted stock, net of tax   - - - - 428 - - - 428 Compensation expense related to stock options, net of tax   - - - - - 1,270 - - 1,270 Other comprehensive income - - - - - - 619 - 619 December 31, 2019 7,672,678 $ 77 - $ - $ ( 803 ) $ 106,152 $ ( 298 ) $ 100,732 $ 205,860 Net income - - - - - - - 18,328 18,328 Proceeds from exercise of stock options   93,870 1 - - - 1,387 - - 1,388 Issuance of restricted stock, net of forfeitures 6,200 - - - ( 275 ) 275 - - - Compensation expense related to restricted stock, net of tax   - - - - 380 - - - 380 Compensation expense related to stock options, net of tax   - - - - - 1,017 - - 1,017 Other comprehensive income - - - - - - 1,321 - 1,321 December 31, 2020 7,772,748 $ 78 - $ - $ ( 698 ) $ 108,831 $ 1,023   $ 119,060 $ 228,294 Net income - - - - - - - 46,711 46,711 Proceeds from exercise of stock options   127,871 1 - - - 3,011 - - 3,012 Issuance of restricted stock, net of forfeitures 25,200 - - - ( 1,236 ) 1,236 - - - Compensation expense related to restricted stock, net of tax   - - - - 499 - - - 499 Compensation expense related to stock options, net of tax   - - - - - 1,148 - - 1,148 Other comprehensive loss - - - - - - ( 1,763 ) - ( 1,763 ) December 31, 2021 7,925,819 $ 79 - $ - $ ( 1,435 ) $ 114,226 $ ( 740 ) $ 165,771 $ 277,901   See notes to consolidated financial statements that are an integral part of these consolidated statements. 73 Table of Contents SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS   For the years ended December 31, (dollars in thousands) 2021 2020 2019 Operating activities Net income $ 46,711 18,328 27,858 Adjustments to reconcile net income to cash provided by operating activities: Provision for (reversal of) loan losses ( 12,400 ) 29,600 2,300 Depreciation and other amortization 2,319 2,190 1,915 Accretion and amortization of securities discounts and premiums, net 935 710 432 Write-down of real estate owned - 1,029 - Loss on sale of other real estate owned 376 (Gain) loss on sale of investment securities available for sale 3 ( 3 ) ( 727 ) Gain on sale of fixed assets ( 10 ) ( 196 ) - Net change in operating leases 605 180 585 Compensation expense related to stock options and restricted stock grants 1,647 1,397 1,698 Gain on sale of loans held for sale ( 13,676 ) ( 21,186 ) ( 10,219 ) Loans originated and held for sale ( 486,145 ) ( 594,289 ) ( 380,632 ) Proceeds from sale of loans held for sale 546,522 582,264 373,046 Increase in cash surrender value of bank owned life insurance ( 1,231 ) ( 1,091 ) ( 1,001 ) Increase (decrease) in deferred tax asset 1,589 ( 2,741 ) ( 420 ) (Increase) decrease in other assets, net 2,126 ( 4,670 ) ( 600 ) Increase (decrease) in other liabilities, net ( 11,302 ) 9,097 4,074 Net cash provided by operating activities 78,069 20,619 18,309 Investing activities Increase (decrease) in cash realized from: Increase in loans, net ( 348,718 ) ( 203,632 ) ( 267,613 ) Purchase of property and equipment ( 26,509 ) ( 7,276 ) ( 8,431 ) Purchase of investment securities: Available for sale ( 49,393 ) ( 50,854 ) ( 39,930 ) Other investments ( 2,250 ) ( 2,338 ) ( 4,675 ) Proceeds from maturities, calls and repayments of investment securities: Available for sale 20,673 24,784 19,212 Other investments 1,861 5,651 1,848 Proceeds from sale of investment securities available for sale - - 29,006 Purchase of bank owned life insurance policies ( 7,500 ) - ( 5,000 ) Proceeds from sale of fixed assets 50 2,895 - Proceeds from sale of other real estate owned 1,159 - - Net cash used for investing activities ( 410,627 ) ( 230,770 ) ( 275,583 ) Financing activities Increase (decrease) in cash realized from: Increase in deposits, net 421,068 266,634 227,988 Increase (decrease) in Federal Home Loan Bank advances and other borrowings ( 25,000 ) ( 85,000 ) 60,000 Increase of subordinated debt - - 22,460 Proceeds from the exercise of stock options 3,012 1,388 1,769 Net cash provided by financing activities 399,080 183,022 312,217 Net increase (decrease) in cash and cash equivalents 66,522 ( 27,129 ) 54,943 Cash and cash equivalents, beginning of year 100,687 127,816 72,873 Cash and cash equivalents, end of year $ 167,209 100,687 127,816 Supplemental information Cash paid for Interest $ 6,402 16,312 25,156 Income taxes 21,652 2,741 7,883 Schedule of non-cash transactions Foreclosure of other real estate 367 2,198 - Unrealized gain (loss) on securities, net of income taxes ( 1,763 ) 1,323 1,193 Right-of-use assets obtained in exchange for lease obligations: Operating leases 10,221 2,115 21,459   See notes to consolidated financial statements that are an integral part of these consolidated statements. 74 Table of Contents NOTE 1 – Summary of Significant Accounting Policies and Activities 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 Trust 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 include the accounts of the Company and its wholly owned subsidiary, Southern First Bank. In consolidation, all significant intercompany transactions have been eliminated. The accounting and reporting policies conform to accounting principles generally accepted in the United States of America. In accordance with guidance issued by the Financial Accounting Standards Board (“FASB”), the operations of the Trusts have not been consolidated in these financial statements. Business Segments ASC Topic 280-10, “Segment Reporting,” requires selected segment information of operating segments based on a management approach. The Company’s three reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning by management. Please refer to “Note 24 – Reportable Segments” for further information on the reporting for the Company’s three business segments. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of income and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, derivatives, real estate acquired in settlement of loans, fair value of financial instruments, evaluating other-than-temporary-impairment of investment securities and valuation of deferred tax assets. Risks and Uncertainties In the normal course of its business, the Company encounters two significant types of risks: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different bases, than its interest-earning assets. Credit risk is the risk of default within the Company’s loan portfolio that results from borrowers’ inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of real estate held by the Company. The Company is subject to the regulations of various governmental agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to changes with respect to valuation of assets, amount of required loan loss allowance and operating restrictions resulting from the regulators’ judgments based on information available to them at the time of their examinations. The Bank makes loans to individuals and businesses in the Upstate, Midlands, and Lowcountry regions of South Carolina as well as the Triangle, Triad and Charlotte regions of North Carolina and Atlanta, Georgia for various personal and commercial purposes. The Bank’s loan portfolio has a concentration of real estate loans. As of December 31, 2021 and 2020, real estate loans represented 85.5 % and 84.6 %, respectively, of total loans. However, borrowers’ ability to repay their loans is not dependent upon any specific economic sector. The impact of the coronavirus (COVID-19) pandemic is fluid and continues to evolve, adversely affecting many of the Bank’s clients. The unprecedented and rapid spread of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and significant volatility and disruption in financial markets, and has had an adverse effect on the Company’s business, financial condition and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including governmental and private sector initiatives, the effect of the recent rollout of vaccinations for the virus, whether such vaccinations will be effective against any resurgence of the virus, including any new strains, and the ability for customers and businesses to return to their pre-pandemic routine. 75 Table of Contents The Company’s business, financial condition and results of operations generally rely upon the ability of the Bank’s borrowers to repay their loans, the value of collateral underlying the Bank’s secured loans, and demand for loans and other products and services the Bank offers, which are highly dependent on the business environment in the Bank’s primary markets where it operates and in the United States as a whole. On March 3, 2020, the Federal Reserve reduced the target federal funds rate by 50 basis points, followed by an additional reduction of 100 basis points on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, an adverse effect on Company’s business, financial condition and results of operations. For instance, the pandemic has had negative effects on the Bank’s interest income, provision for loan losses, and certain transaction-based line items of noninterest income. Other financial impacts could occur though such potential impact is unknown at this time. As of December 31, 2021, the Company’s and the Bank’s capital ratios were in excess of all regulatory requirements. While management believes that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by further credit losses. The Company maintains access to multiple sources of liquidity, including a $ 15.0 million holding company line of credit with another bank which could be used to support capital ratios at the subsidiary bank. As of December 31, 2021, the $ 15.0 million line was unused. 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. Management performed an evaluation to determine whether there have been any subsequent events since the balance sheet date and determined that no subsequent events occurred requiring accrual or disclosure. 76 Table of Contents 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. Cash and Cash Equivalents Cash and cash equivalents include cash and due from banks, interest bearing deposits and federal funds sold. Cash and cash equivalents have original maturities of three months or less, and federal funds sold are generally purchased and sold for one-day periods. Accordingly, the carrying value of these instruments is deemed to be a reasonable estimate of fair value. At December 31, 2021 and 2020, included in cash and cash equivalents was $ 5.2 million and $ 12.6 million, respectively, on deposit with the Federal Reserve Bank. Investment Securities We classify our investment securities as held to maturity securities, trading securities and available for sale securities as applicable. Investment securities are designated as held to maturity if we have the intent and the ability to hold the securities to maturity. Held to maturity securities are carried at amortized cost, adjusted for the amortization of any related premiums or the accretion of any related discounts into interest income using a methodology which approximates a level yield of interest over the estimated remaining period until maturity. Unrealized losses on held to maturity securities, reflecting a decline in value judged by us to be other than temporary, are charged to income in the Consolidated Statements of Income. Investment securities that are purchased and held principally for the purpose of selling in the near term are reported as trading securities. Trading securities are carried at fair value with unrealized holding gains and losses included in earnings. We classify investment securities as available for sale when at the time of purchase we determine that such securities may be sold at a future date or if we do not have the intent or ability to hold such securities to maturity. Securities designated as available for sale are recorded at fair value. Changes in the fair value of available for sale debt securities are included in shareholders’ equity as unrealized gains or losses, net of the related tax effect. Unrealized losses on available for sale securities, reflecting a decline in value judged to be other than temporary, are charged to income in the Consolidated Statements of Income. Realized gains or losses on available for sale securities are computed on the specific identification basis. Other Investments Other investments include stock acquired for membership and regulatory purposes, such as Federal Home Loan Bank of Atlanta (“FHLB”) stock, investments in unconsolidated subsidiaries and other nonmarketable securities. FHLB stock is generally pledged against any borrowings from the FHLB and cash dividends on our FHLB stock are recorded in investment income. Other nonmarketable securities consist of investments in funds related to the Small Business Investment Company (“SBIC”) and Rural Business Investment Company (“RBIC”) Programs. No ready market exists for these stocks and they have no quoted market value. As a result, these securities are carried at cost and are periodically evaluated for impairment. Loans Loans are stated at the principal balance outstanding. Unamortized net loan fees and the allowance for possible loan losses are deducted from total loans on the balance sheets. Interest income is recognized over the term of the loan based on the principal amount outstanding. The net of loan origination fees received and direct costs incurred in the origination of loans is deferred and amortized to interest income over the contractual life of the loans adjusted for actual principal prepayments using a method approximating the interest method. 77 Table of Contents Nonaccrual and Past Due Loans Loans are generally placed on nonaccrual status when principal or interest becomes 90 days past due, or when payment in full is not anticipated. When a loan is placed on nonaccrual status, interest accrued but not received is generally reversed against interest income. Cash receipts on nonaccrual loans are not recorded as interest income, but are used to reduce the loan’s principal balance. A nonaccrual loan is generally returned to accrual status and accrual of interest is resumed when payments have been made according to the terms and conditions of the loan for a continuous six month period. Our loans are considered past due when contractually required principal or interest payments have not been made on the due dates. Nonperforming Assets Nonperforming assets include real estate acquired through foreclosure or deed taken in lieu of foreclosure, loans on nonaccrual status and loans past due 90 days or more and still accruing interest. Loans are placed on nonaccrual status when, in the opinion of management, the collection of additional interest is uncertain. Thereafter no interest is taken into income until such time as the borrower demonstrates the ability to pay both principal and interest. Impaired Loans Our impaired loans include loans on nonaccrual status and loans modified in a troubled debt restructuring (“TDR”), whether on accrual or nonaccrual status. For loans that are classified as impaired, an allowance is established when the fair value (discounted cash flows, collateral value, or observable market price) of the impaired loan less costs to sell, are lower than the carrying value of that loan. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due, among other factors. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including, without limitation, the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and consumer loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Loan Charge-off Policy For commercial loans, we generally fully charge off or charge collateralized loans down to net realizable value when management determines the loan to be uncollectible; repayment is deemed to be projected beyond reasonable time frames; the loan has been classified as a loss by either our internal loan review process or our banking regulatory agencies; the client has filed bankruptcy and the loss becomes evident owing to a lack of assets; or the loan is 120 days past due unless both well-secured and in the process of collection. For consumer loans, we generally charge down to net realizable value when the loan is 180 days past due. Troubled Debt Restructuring (TDRs) The Company considers a loan to be a TDR when the debtor experiences financial difficulties and the Company provides concessions such that we will not collect all principal and interest in accordance with the original terms of the loan agreement. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing challenges in the current economic environment. In accordance with the CARES Act, the Company implemented loan modification programs in response to the COVID-19 pandemic, and the Company elected the accounting policy in the CARES Act to not apply TDR accounting to loans modified for borrowers impacted by the COVID-19 pandemic. In 2020, the Company granted short-term loan deferrals to six client relationships which were considered TDRs due to the client experiencing financial difficulty before the pandemic. Our policy with respect to accrual of interest on loans restructured in a TDR follows relevant supervisory guidance. That is, if a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms; continued accrual of interest at the restructured interest rate is likely. If a borrower was materially delinquent on payments prior to the restructuring, but shows capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual going forward. Lastly, if the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status. We will continue to closely monitor these loans and will cease accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms. If, after previously being classified as a TDR, a loan is restructured a second time and the borrower continues to experience financial difficulties, then that loan is automatically placed on nonaccrual status. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments of principal and interest in accordance with the loan terms before that loan can be placed back on accrual status. Further, the borrower must show capacity to continue performing into the future prior to restoration of accrual status. In addition, our policy, in accordance with supervisory guidance, also provides for a loan to be removed from TDR status if the loan is modified or renewed at terms consistent with current market rates and the loan has been performing under modified terms for an extended period of time or under certain circumstances. 78 Table of Contents In the determination of the allowance for loan losses, management considers TDRs on commercial and consumer loans and subsequent defaults in these restructurings by measuring impairment, on a loan by loan basis, based on either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. Allowance for Loan Losses The allowance for loan losses is management’s estimate of credit losses inherent in the loan portfolio. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. We have an established process to determine the adequacy of the allowance for loan losses that assesses the losses inherent in our portfolio. While we attribute portions of the allowance to specific portfolio segments, the entire allowance is available to absorb credit losses inherent in the total loan portfolio. Our process involves procedures to appropriately consider the unique risk characteristics of our commercial and consumer loan portfolio segments. For each portfolio segment, impairment is measured individually for each impaired loan. Our allowance levels are influenced by loan volume, loan grade or delinquency status, historic loss experience and other economic conditions. See Note 4 to the Consolidated Financial Statements for additional information on the allowance for loan losses. Other Real Estate Owned Real estate acquired through foreclosure is initially recorded at the lower of cost or estimated fair value less selling costs. Subsequent to the date of acquisition, it is carried at the lower of cost or fair value, adjusted for net selling costs. Fair values of real estate owned are reviewed regularly and write-downs are recorded when it is determined that the carrying value of real estate exceeds the fair value less estimated costs to sell. Costs relating to the development and improvement of such property are capitalized, whereas those costs relating to holding the property are expensed. Property and Equipment Property and equipment are stated at cost. Major repairs are charged to operations, while major improvements are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Upon retirement, sale, or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts, and gain or loss is included in income from operations. Construction in progress is stated at cost, which includes the cost of construction and other direct costs attributable to the construction. No provision for depreciation is made on construction in progress until such time as the relevant assets are completed and put into use. Operating Leases Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842)” which requires for all operating leases the recognition of a right-of-use (“ROU”) asset and a corresponding lease liability, in the balance sheet. Upon adoption, the Company elected practical expedients including existing leases retaining their classification as operating leases and combining lease and non-lease components. The Company also elected to not recognize right-of-use assets and lease liabilities arising from short-term leases. Bank Owned Life Insurance Policies Bank owned life insurance policies represent the cash value of policies on certain officers of the Company. Comprehensive Income Comprehensive income (loss) consists of net income and net unrealized gains (losses) on securities and is presented in the statements of shareholders’ equity and comprehensive income. The statement requires only additional disclosures in the consolidated financial statements; it does not affect our results of operations. 79 Table of Contents Revenue from Contracts with Customers The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods. The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, the Company has made no significant judgments in applying the revenue guidance prescribed in Topic 606 that affect the determination of the amount and timing of revenue from contracts with customers. Income Taxes The financial statements have been prepared on the accrual basis. When income and expenses are recognized in different periods for financial reporting purposes versus for the purposes of computing income taxes currently payable, deferred taxes are provided on such temporary differences. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The Company believes that its income tax filing positions taken or expected to be taken on its tax returns will more likely than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Company’s financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded. The Company’s federal and state income tax returns are open and subject to examination from the 2018 tax return year and forward. Stock-Based Compensation The Company has a stock-based employee compensation plan. Compensation cost is recognized for all stock options granted and for any outstanding unvested awards as if the fair value method had been applied to those awards as of the date of grant. 80 Table of Contents Newly Issued, But Not yet Effective Accounting Standards ASU 2016-13 – Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace the current incurred loss approach with an expected loss model, referred to as the current expected credit loss (“CECL”) model. The new standard will apply to financial assets subject to credit losses and measured at amortized cost and certain off-balance-sheet credit exposures, which include, but are not limited to, loans, leases, held-to-maturity securities, loan commitments and financial guarantees. ASU 2016-13 simplifies the accounting for purchased credit-impaired debt securities and loans and expands the disclosure requirements regarding an entity’s assumptions, models and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. For public business entities that meet the definition of a smaller reporting company, such as the Company, the ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2022. Early adoption is permitted in any interim period as long as the Company has adopted to the amendments in ASU 2016-13. Upon adoption, ASU 2016-13 provides for a modified retrospective transition by means of a cumulative effect adjustment to equity as of the beginning of the period in which the guidance is effective. The Company is finalizing its evaluation of the adoption of this ASU and plans to early adopt as of January 1, 2022. The Company to date has selected the software vendor of choice for implementation, sourced and tested required data from the Company’s loan systems, tested data feeds to the model, contracted for and received results from independent third parties of model validation of the CECL model and process, determined appropriate segmentations of its portfolio, selected a preliminary forecast period for reasonable and supportable forecasts, and has performed parallel runs of the model. The Company is currently finalizing its assessment of current and forecasted macroeconomic factors and assumptions and testing and finalization of internal controls. The Company currently estimates the allowance for loan losses will increase by a range of $ 1 million and $ 3 million. In addition, the Company expects to recognize a liability for unfunded commitments between $ 2.5 million and $ 4 million upon adoption. The Company will finalize the adoption during the first quarter of 2022. In October 2020, the FASB updated various Topics of the Accounting Standards Codification to align the guidance in various SEC sections of the Codification with the requirements of certain SEC final rules. The amendments were effective upon issuance and did not have a material effect on the financial statements. In August 2021, the FASB issued amendments to update SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The amendments are effective upon issuance. The Company does not expect these amendments to have a material effect on its 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. NOTE 2 – Investment Securities The amortized costs and fair value of investment securities are as follows:   December 31, 2021 Amortized Gross Unrealized Fair (dollars in thousands) Cost Gains Losses Value Available for sale Corporate bonds $ 2,198 - 10 2,188 US treasuries 999 - 7 992 US government agencies 14,504 1 336 14,169 SBA securities 429 9 - 438 State and political subdivisions 24,887 549 260 25,176 Asset-backed securities 10,136 45 17 10,164 Mortgage-backed securities FHLMC 23,057 102 494 22,665 FNMA 40,924 235 660 40,499 GNMA 4,084 3 97 3,990 Total mortgage-backed securities 68,065 340 1,251 67,154 Total $ 121,218 944 1,881 120,281 81 Table of Contents   December 31, 2020 Amortized Gross Unrealized Fair (dollars in thousands) Cost Gains Losses Value Available for sale US government agencies $ 6,500 1 8 6,493 SBA securities 504 - 19 485 State and political subdivisions 18,614 804 30 19,388 Asset-backed securities 11,587 15 73 11,529 Mortgage-backed securities FHLMC 12,157 206 47 12,316 FNMA 35,893 507 91 36,309 GNMA 8,179 53 23 8,209 Total mortgage-backed securities 56,229 766 161 56,834 Total $ 93,434 1,586 291 94,729 During 2021, approximately $ 770,000 of investment securities were either sold or called, subsequently resulting in a loss on sale of investment securities of $ 3,000 . During 2020, approximately $ 2.0 million of investment securities were either sold or called, resulting in a gain on sale of investment securities of $ 3,000 . The amortized costs and fair values of investment securities available for sale at December 31, 2021 and 2020, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers have the right to prepay the obligations.   December 31, 2021 2020 Amortized Fair Amortized Fair (dollars in thousands) Cost Value Cost Value Available for sale Due within one year $ 384 387 - - Due after one through five years 7,429 7,363 4,957 5,015 Due after five through ten years 27,298 26,953 17,345 17,575 Due after ten years 86,107 85,578 71,132 72,139 $ 121,218 120,281 93,434 94,729 The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2021 and 2020.   Less than 12 months 12 months or longer Total Fair Unrealized Fair Unrealized Fair Unrealized (dollars in thousands) # value losses # value losses # value losses As of December 31, 2021 Available for sale Corporate bonds 1 $ 2,188 $ 10 - $ - $ - 1 $ 2,188 $ 10 US treasuries 1 992 7 - - - 1 992 7 US government agencies 7 9,831 173 4 3,837 163 11 13,668 336 State and political subdivisions 9 7,821 193 6 2,909 67 15 10,730 260 Asset-backed 2 1,751 9 2 1,717 7 4 3,468 16 Mortgage-backed FHLMC 10 13,705 303 4 4,644 192 14 18,349 495 FNMA 11 16,098 296 9 11,264 364 20 27,362 660 GNMA 2 655 4 3 3,215 93 5 3,870 97 43 $ 53,041 $ 995 28 $ 27,586 $ 886 71 $ 80,627 $ 1,881 82 Table of Contents   Less than 12 months 12 months or longer Total Fair Unrealized Fair Unrealized Fair Unrealized (dollars in thousands) # value losses # value losses # value losses As of December 31, 2020 Available for sale US government agencies 3 $ 2,992 $ 8 - $ - $ - 3 $ 2,992 $ 8 SBA securities - - - 1 484 19 1 484 19 State and political subdivisions 8 4,861 30 - - - 8 4,861 30 Asset-backed - - - 6 6,998 73 6 6,998 73 Mortgage-backed FHLMC 4 5,313 47 - - - 4 5,313 47 FNMA 9 11,659 66 3 1,984 25 12 13,643 91 GNMA 2 3,838 23 - - - 2 3,838 23 26 $ 28,663 $ 174 10 $ 9,466 $ 117 36 $ 38,129 $ 291 At December 31, 2021, the Company had 43 individual investments with a fair market value of $ 53.0 million that were in an unrealized loss position for less than 12 months and 28 individual investments with a fair market value of $ 27.6 million that were in an unrealized loss position for 12 months or longer. The unrealized losses were primarily attributable to changes in interest rates, rather than deterioration in credit quality. The individual securities are each investment grade securities. The Company considers the length of time and extent to which the fair value of available-for-sale debt securities have been less than cost to conclude that such securities were not other-than-temporarily impaired. We also consider other factors such as the financial condition of the issuer including credit ratings and specific events affecting the operations of the issuer, volatility of the security, underlying assets that collateralize the debt security, and other industry and macroeconomic conditions. As the Company has no intent to sell securities with unrealized losses and it is not more-likely-than-not that the Company will be required to sell these securities before recovery of amortized cost, we have concluded that the securities are not impaired on an other-than-temporary basis. Other investments are comprised of the following and are recorded at cost which approximates fair value:   December 31, (dollars in thousands) 2021 2020 Federal Home Loan Bank stock $ 1,241 3,103 Other nonmarketable investments 2,377 129 Investment in Trust Preferred subsidiaries 403 403 Total other investments $ 4,021 3,635 The Company has evaluated other investments for impairment and determined that the other investments are not other than temporarily impaired as of December 31, 2021 and ultimate recoverability of the par value of this investment is probable. All of the FHLB stock is used to collateralize advances with the FHLB. At December 31, 2021 and 2020, there were no securities pledged as collateral for repurchase agreements from brokers. 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. Loans held for sale include mortgage loans which are saleable into the secondary mortgage markets and their fair values are estimated using observable quoted market or contracted prices or market price equivalents, which would be used by other market participants. 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 December 31, 2021, mortgage loans held for sale totaled $ 13.6 million compared to $ 60.2 million at December 31, 2020. Mortgage loans held for sale are considered de-recognized, or sold, when the Company surrenders control over the financial assets. Control is considered to have been surrendered when the transferred assets have been isolated from the Company, beyond the reach of the Company and its creditors; the purchaser obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and the Company does not maintain effective control over the transferred assets through an agreement that both entitles and obligates the Company to repurchase or redeem the transferred assets before their maturity or the ability to unilaterally cause the holder to return specific assets. Gains and losses from the sale of mortgage loans are recognized based upon the difference between the sales proceeds and carrying value of the related loans upon sale and are recorded in mortgage banking income in the statement of income. Mortgage banking income also includes the unrealized gains and losses associated with the loans held for sale and the realized and unrealized gains and losses from derivatives. 83 Table of Contents Mortgage loans sold to investors by the Company, and which were believed to have met investor and agency underwriting guidelines at the time of sale, may be subject to repurchase or indemnification in the event of specific default by the borrower or subsequent discovery that underwriting standards were not met. The Company may, upon mutual agreement, agree to repurchase the loans or indemnify the investor against future losses on such loans. In such cases, the Company bears any subsequent credit loss on the loans. As appropriate, the Company establishes mortgage repurchase reserves related to various representations and warranties that reflect management’s estimate of losses. NOTE 4 – Loans and Allowance for Loan Losses The Company makes loans to individuals and small businesses for various personal and commercial purposes primarily in the Upstate, Midlands, and Lowcountry regions of South Carolina, the Triangle and Triad regions of North Carolina as well as Atlanta, Georgia. The Company’s loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers. The Company focuses its lending activities primarily on the professional markets in these regions including doctors, dentists, and small business owners. The principal component of the loan portfolio is loans secured by real estate mortgages which account for 85.5 % of total loans at December 31, 2021. Commercial loans comprise 57.3 % of total real estate loans and consumer loans account for 42.7 %. Commercial real estate loans are further categorized into owner occupied which represents 19.6 % of total loans and non-owner occupied loans represent 26.8 %. Commercial construction loans represent only 2.6 % of the total loan portfolio. In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, management monitors exposure to credit risk from concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g. principal deferral periods, loans with initial interest-only periods, etc.), and loans with high loan-to-value ratios. Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life. For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon payment loans). The various types of loans are individually underwritten and monitored to manage the associated risks. The allowance for loan losses is management's estimate of credit losses inherent in the loan portfolio at the balance sheet date. We have an established process to determine the adequacy of the allowance for loan losses that assesses the losses inherent in our portfolio. While we attribute portions of the allowance to specific portfolio segments, the entire allowance is available to absorb credit losses inherent in the total loan portfolio. Our process involves procedures to appropriately consider the unique risk characteristics of our commercial and consumer loan portfolio segments. For each portfolio segment, impairment is measured individually for each impaired loan. Our allowance levels are influenced by loan volume, loan grade or delinquency status, historic loss experience and other economic conditions. Paycheck Protection Program (“PPP”) On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act or the “Act”) to provide emergency assistance and health care response for individuals, families, and businesses affected by the coronavirus pandemic. The Small Business Administration (“SBA”) received funding and authority through the Act to modify existing loan programs and establish a new loan program to assist small businesses nationwide adversely impacted by the COVID-19 emergency. The Act temporarily permits the SBA to guarantee 100 % of certain loans under a new program titled the “Paycheck Protection Program” and also provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the PPP. In an effort to assist our clients as best we could through the pandemic, we became an approved SBA lender in March 2020 and processed 853 loans under the PPP for a total of $ 97.5 million, receiving SBA lender fee income of $ 3.9 million. As the regulations and guidance for PPP loans and the forgiveness process continued to change and evolve, management recognized the operational risk and complexity associated with this portfolio and decided to pursue the sale of the PPP loan portfolio to a third party better suited to support and serve our PPP clients through the loan forgiveness process. The loan sale allowed our team to focus on serving our clients and proactively monitoring and addressing credit risk brought on by the pandemic. On June 26, 2020, we completed the sale of our PPP loan portfolio to The Loan Source Inc., together with its servicing partner, ACAP SME LLC, and immediately recognized SBA lender fee income of $ 2.2 million, net of sale and processing costs, which is included in other noninterest income in the consolidated financial statements. The SBA offered a second round of PPP loans through May 31, 2021; however, we did not originate any new PPP loans. We did, however, receive referral fees of approximately $ 268,000 during the three months ended June 30, 2021 from The Loan Source Inc. for PPP loans they originated to our clients. Portfolio Segment Methodology Commercial Commercial loans are assessed for estimated losses by grading each loan using various risk factors identified through periodic reviews. The Company applies historic grade-specific loss factors to each loan class. In the development of statistically derived loan grade loss factors, the Company observes historical losses over 20 quarters for each loan grade. These loss estimates are adjusted as appropriate based on additional analysis of external loss data or other risks identified from current economic conditions and credit quality trends. The allowance also includes an amount for the estimated impairment on nonaccrual commercial loans and commercial loans modified in a TDR, whether on accrual or nonaccrual status. Consumer For consumer loans, the Company determines the allowance on a collective basis utilizing historical losses over 20 quarters to represent its best estimate of inherent loss. The Company pools loans, generally by loan class with similar risk characteristics. The allowance also includes an amount for the estimated impairment on nonaccrual consumer loans and consumer loans modified in a TDR, whether on accrual or nonaccrual status. 84 Table of Contents The following table summarizes the composition of our loan portfolio. Total gross loans are recorded net of deferred loan fees and costs, which totaled $ 5.0 million and $ 3.9 million as of December 31, 2021 and December 31, 2020, respectively.   December 31, (dollars in thousands) 2021 2020 Commercial Owner occupied RE $ 488,965 19.6 % 433,320 20.2 % Non-owner occupied RE 666,833 26.8 % 585,269 27.3 % Construction 64,425 2.6 % 61,467 2.9 % Business 333,049 13.4 % 307,599 14.4 % Total commercial loans 1,553,272 62.4 % 1,387,655 64.8 % Consumer Real estate 694,401 27.9 % 536,311 25.0 % Home equity 154,839 6.2 % 156,957 7.3 % Construction 59,846 2.4 % 40,525 1.9 % Other 27,519 1.1 % 21,419 1.0 % Total consumer loans 936,605 37.6 % 755,212 35.2 % Total gross loans, net of deferred fees 2,489,877 100.0 % 2,142,867 100.0 % Less – allowance for loan losses ( 30,408 ) ( 44,149 ) Total loans, net $ 2,459,469 2,098,718 The composition of gross loans by rate type is as follows:     December 31, (dollars in thousands) 2021 2020 Floating rate loans $ 376,805 400,506   Fixed rate loans 2,113,072 1,742,361 $ 2,489,877 2,142,867 At December 31, 2021, approximately $936.9 million of the Company’s mortgage loans were pledged as collateral for advances from the FHLB, as set forth in Note 10. Credit Quality Indicators Commercial We manage a consistent process for assessing commercial loan credit quality by monitoring our loan grading trends and past due statistics. All loans are subject to individual risk assessment. Our risk categories include Pass, Special Mention, Substandard, and Doubtful, each of which is defined by banking regulatory agencies. Delinquency statistics are also an important indicator of credit quality in the establishment of our allowance for credit losses. We categorize our loans into risk categories based on relevant information about the ability of the borrower to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. A description of the general characteristics of the risk grades is as follows: • Pass—These loans range from minimal credit risk to average however still acceptable credit risk.   • Special mention—A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.   • Substandard—A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that may jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.   85 Table of Contents • Doubtful—A doubtful loan has all of the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable.   The following tables provide past due information for outstanding commercial loans and include loans on nonaccrual status.     December 31, 2021 Owner Non-owner (dollars in thousands) occupied RE occupied RE Construction Business Total Current $ 488,965 666,833 64,425 333,049 1,553,272   30-59 days past due - - - - - 60-89 days past due - - - - - Greater than 90 days - - - - - $ 488,965 666,833 64,425 333,049 1,553,272   December 31, 2020   Owner Non-owner occupied RE occupied RE Construction Business Total Current $ 432,711 584,565 61,467 307,261 1,386,004 30-59 days past due 403 282 - 35 720   60-89 days past due - - - 266 266 Greater than 90 days 206 422 - 37 665 $ 433,320 585,269 61,467 307,599 1,387,655 As of December 31, 2021 and 2020, loans 30 days or more past due represented 0.09 % and 0.17 % of our total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.00 % and 0.08 % as of December 31, 2021 and 2020, respectively. The tables below provide a breakdown of outstanding commercial loans by risk category.     December 31, 2021 Owner Non-owner (dollars in thousands) occupied RE occupied RE Construction Business Total Pass $ 487,422 589,280 64,425 328,371 1,469,498   Special Mention 327 48,310 - 1,530 50,167 Substandard 1,216 29,243 - 3,148 33,607 Doubtful - - - - - $ 488,965 666,833 64,425 333,049 1,553,272     December 31, 2020 Owner Non-owner (dollars in thousands) occupied RE occupied RE Construction Business Total Pass $ 430,291 576,095 61,328 301,838 1,369,552   Special Mention 624 587 - 1,703 2,914 Substandard 2,405 8,587 139 4,058 15,189   Doubtful - - - - - $ 433,320 585,269 61,467 307,599 1,387,655 Consumer We manage a consistent process for assessing consumer loan credit quality by monitoring our loan grading trends and past due statistics. All loans are subject to individual risk assessment. Our risk categories include Pass, Special Mention, Substandard, and Doubtful, which are defined above. Delinquency statistics are also an important indicator of credit quality in the establishment of our allowance for loan losses. 86 Table of Contents The following tables provide past due information for outstanding consumer loans and include loans on nonaccrual status.     December 31, 2021 (dollars in thousands) Real estate Home equity Construction Other Total Current 693,712 153,309 59,846 27,515 934,382   30-59 days past due 135 1,356 - 4 1,495 60-89 days past due - 174 - - 174 Greater than 90 days 554 - - - 554 $ 694,401 154,839 59,846 27,519 936,605 December 31, 2020 Real estate Home equity Construction Other Total   Current $ 534,648 156,657 40,525 21,419 753,249 30-59 days past due - - - - - 60-89 days past due 332 - - - 332 Greater than 90 days 1,331 300 - - 1,631   $ 536,311 156,957 40,525 21,419 755,212 Consumer loans 30 days or more past due were 0.09 % as of December 31, 2021 and 2020, respectively. The tables below provide a breakdown of outstanding consumer loans by risk category.   December 31, 2021 (dollars in thousands) Real estate Home equity Construction Other Total   Pass $ 684,923 148,933 59,846 27,365 921,067 Special Mention 4,294 2,986 - 129 7,409 Substandard 5,184 2,920 - 25 8,129 Doubtful - - - - -   $ 694,401 154,839 59,846 27,519 936,605 December 31, 2020 (dollars in thousands) Real estate Home equity Construction Other Total   Pass $ 530,515 152,154 40,525 21,290 744,484 Special Mention 1,968 1,005 - 91 3,064 Substandard 3,828 3,798 - 38 7,664   Doubtful - - - - - $ 536,311 156,957 40,525 21,419 755,212 87 Table of Contents Nonperforming assets The following table shows the nonperforming assets and the related percentage of nonperforming assets to total assets and gross loans. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received.     December 31,   (dollars in thousands) 2021 2020   Commercial   Owner occupied RE $ - -   Non-owner occupied RE 270 1,143   Construction - 139   Business - 195   Consumer   Real estate 989 2,536   Home equity 653 547   Construction - -   Other - -   Nonaccruing troubled debt restructurings 2,952 3,509   Total nonaccrual loans, including nonaccruing TDRs 4,864 8,069   Other real estate owned - 1,169   Total nonperforming assets $ 4,864 9,238   Nonperforming assets as a percentage of:   Total assets 0.17 % 0.37 % Gross loans 0.20 % 0.43 % Total loans over 90 days past due $ 554 2,296   Loans over 90 days past due and still accruing - -   Accruing TDRs 3,299 4,893   Foregone interest income on the nonaccrual loans for the year ended December 31, 2021 was approximately $ 55,000 and approximately $ 61,000 for the same period in 2020. Impaired Loans The table below summarizes key information for impaired loans. Our impaired loans include loans on nonaccrual status and loans modified in a TDR, whether on accrual or nonaccrual status. These impaired loans may have estimated impairment which is included in the allowance for loan losses. Our commercial and consumer impaired loans are evaluated individually to determine the related allowance for loan losses.   December 31, 2021   Recorded investment Impaired loans Impaired loans Unpaid with no related with related Related Principal Impaired allowance for allowance for allowance for (dollars in thousands) Balance loans loan losses loan losses loan losses Commercial Owner occupied RE $ 1,261 1,261 1,261 - -   Non-owner occupied RE 2,012 1,070 270 800 171 Construction - - - - - Business 1,104 1,104 - 1,104 452 Total commercial 4,377 3,435 1,531 1,904 623 Consumer Real estate 2,638 2,561 1,743 818 144 Home equity 2,206 2,044 1,989 55 55 Construction - - - - - Other 123 123 - 123 14 Total consumer 4,967 4,728 3,732 996 213 Total $ 9,344 8,163 5,263 2,900 836 88 Table of Contents     December 31, 2020 Recorded investment Impaired loans Impaired loans Unpaid with no related with related Related Principal Impaired allowance for allowance for allowance for (dollars in thousands) Balance loans loan losses loan losses loan losses Commercial   Owner occupied RE $ 1,753 1,649 1,497 152 76 Non-owner occupied RE 3,212 2,188 705 1,483 366 Construction 141 139 139 - - Business 2,892 2,449 279 2,170 897 Total commercial 7,998 6,425 2,620 3,805 1,339 Consumer Real estate 4,362 4,031 3,108 923 190 Home equity 2,498 2,371 2,096 275 163 Construction - - - - - Other 135 135 - 135 17 Total consumer 6,995 6,537 5,204 1,333 370 Total $ 14,993 12,962 7,824 5,138 1,709 The following table provides the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans after impairment by portfolio segment and class.   Year ended December 31,   2021 2020 2019 Average Recognized Average Recognized Average Recognized recorded interest recorded interest recorded interest (dollars in thousands) investment income investment income investment income Commercial   Owner occupied RE $ 1,387 65 2,423 88 2,739 128 Non-owner occupied RE 3,128 182 4,217 221 4,161 255 Construction 55 - 56 6 - - Business 2,218 62 2,306 243 1,582 79 Total commercial 6,788 309 9,002 558 8,482 462 Consumer Real estate 3,641 98 3,372 170 2,771 131 Home equity 1,964 85 2,128 5 853 42 Construction - - - - - - Other 129 4 141 79 153 5 Total consumer 5,734 187 5,641 254 3,777 178 Total $ 12,522 496 14,643 812 12,259 640 89 Table of Contents Allowance for Loan Losses The following table summarizes the activity related to our allowance for loan losses:   Year ended December 31,   (dollars in thousands) 2021 2020 2019 Balance, beginning of period $ 44,149 16,642 15,762 Provision for loan losses ( 12,400 ) 29,600 2,300   Loan charge-offs: Commercial Owner occupied RE - ( 94 ) ( 110 ) Non-owner occupied RE ( 837 ) ( 1,508 ) ( 239 ) Construction - - - Business ( 1,181 ) ( 1,309 ) ( 910 ) Total commercial ( 2,018 ) ( 2,911 ) ( 1,259 ) Consumer Real estate - ( 134 ) - Home equity ( 139 ) ( 299 ) ( 174 ) Construction - - - Other ( 9 ) ( 70 ) ( 82 ) Total consumer ( 148 ) ( 503 ) ( 256 ) Total loan charge-offs ( 2,166 ) ( 3,414 ) ( 1,515 ) Loan recoveries: Commercial Owner occupied RE 94 65 - Non-owner occupied RE 263 670 2 Construction - - - Business 239 470 43 Total commercial 596 1,205 45 Consumer Real estate 18 18 37 Home equity 201 69 2 Construction - - - Other 10 29 11 Total consumer 229 116 50 Total recoveries 825 1,321 95 Net loan charge-offs ( 1,341 ) ( 2,093 ) ( 1,420 ) Balance, end of period $ 30,408 44,149 16,642 The following tables summarize the activity in the allowance for loan losses by our commercial and consumer portfolio segments. Year ended December 31, 2021 (dollars in thousands) Commercial Consumer Total   Balance, beginning of period $ 29,166 14,983 44,149 Provision ( 7,014 ) ( 5,386 ) ( 12,400 ) Loan charge-offs ( 2,018 ) ( 148 ) ( 2,166 ) Loan recoveries 596 229 825 Net loan charge-offs ( 1,422 ) 81 ( 1,341 ) Balance, end of period $ 20,730 9,678 30,408 Year ended December 31, 2020 Commercial Consumer Total   Balance, beginning of period $ 11,372 5,270 16,642 Provision 19,500 10,100 29,600 Loan charge-offs ( 2,911 ) ( 503 ) ( 3,414 ) Loan recoveries 1,205 116 1,321 Net loan charge-offs ( 1,706 ) ( 387 ) ( 2,093 ) Balance, end of period $ 29,166 14,983 44,149 90 Table of Contents The following table disaggregates our allowance for loan losses and recorded investment in loans by method of impairment evaluation. December 31, 2021 Allowance for loan losses Recorded investment in loans   (dollars in thousands) Commercial Consumer Total Commercial Consumer Total Individually evaluated $ 623 213 836 3,435 4,728 8,163   Collectively evaluated 20,107 9,465 29,572 1,549,837 931,877 2,481,714 Total $ 20,730 9,678 30,408 1,553,272 936,605 2,489,877 December 31, 2020 Allowance for loan losses Recorded investment in loans Commercial Consumer Total Commercial Consumer Total   Individually evaluated $ 1,339 370 1,709 6,425 6,537 12,962   Collectively evaluated 27,827 14,613 42,440 1,381,230 748,675 2,129,905 Total $ 29,166 14,983 44,149 1,387,655 755,212 2,142,867 NOTE 5 – Troubled Debt Restructurings At December 31, 2021, we had 14 loans totaling $ 6.3 million and at December 31, 2020 we had 20 loans totaling $ 8.4 million, which we considered as TDRs. The Company considers a loan to be a TDR when the debtor experiences financial difficulties and the Company grants a concession to the debtor that it would not normally consider. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing challenges in the current economic environment. A restructuring that results in only a delay in payments that is insignificant is not considered an economic concession. In accordance with the CARES Act, the Company implemented loan modification programs in response to the COVID-19 pandemic, and the Company elected the accounting policy in the CARES Act to not apply TDR accounting to loans modified for borrowers impacted by the COVID-19 pandemic. Under the CARES Act, the Company granted short-term loan deferrals to 864 loan clients, of which all had returned to normal payments as of December 31, 2021. In addition, short-term loan deferrals were granted to six clients with loans totaling $ 3.2 million at December 31, 2020, which were considered TDRs due to the client experiencing financial difficulty before the pandemic. Three loans totaling $443,000 were renewed during 2021 and considered TDRs at the time of renewal. The following table summarizes the concession at the time of modification and the recorded investment in our TDRs before and after their modification.   For the year ended December 31, 2021 Pre- Post- modification modification Renewals Reduced Converted Maturity Total outstanding outstanding deemed a or deferred to interest date number recorded recorded (dollars in thousands) concession payments only extensions of loans investment Investment Consumer Real estate 2 - - - 2 $ 259 $ 262 Home equity 1 - - - 1 181 181 Total loans 3 - - - 3 $ 440 $ 443 For the year ended December 31, 2020 Pre- Post- modification modification Renewals Reduced Converted Maturity Total outstanding outstanding deemed a or deferred to interest date number recorded recorded concession payments only extensions of loans investment Investment Commercial Business 1 - - - 1 $ 1,037 $ 1,037 Consumer Real estate 2 - - - 2 647 647 Home equity 2 - - - 2 1,448 1,448 Total loans 5 - - - 5 $ 3,132 $ 3,132 As of December 31, 2021 and 2020 there were no loans modified as TDRs for which there was a payment default (60 days past due) within 12 months of the restructuring date. 91 Table of Contents NOTE 6 – Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Components of property and equipment included in the consolidated balance sheets are as follows:   December 31, (dollars in thousands) 2021 2020 Land $ 10,678 10,678 Buildings 22,150 21,966 Leasehold improvements 6,860 5,503 Furniture and equipment 11,589 10,459 Software 389 386 Construction in process 29,942 6,179 Accumulated depreciation and amortization ( 15,882 ) ( 13,703 ) Property and equipment, excluding ROU assets 65,726 41,468 ROU assets 26,644 18,768 Total property and equipment $ 92,370 60,236 On October 9, 2020 we sold two of our office locations in Columbia, South Carolina and recognized a gain of $ 180,000 in the transaction. Construction in process at December 31, 2021 and 2020 primarily included costs associated with the new bank headquarters building located in Greenville, South Carolina. Depreciation and amortization expense for the years ended December 31, 2021 and 2020 was $ 2.2 million and $ 2.1 million, respectively. Depreciation and amortization are charged to operations utilizing a straight-line method over the estimated useful lives of the assets. The estimated useful lives for the principal items follow:   Type of Asset Life in Years Software 3 Furniture and equipment 5 to 7 Leasehold improvements 5 to 15 Buildings 40 NOTE 7 – Leases As of December 31, 2021, the Company leased seven of our offices under various operating lease agreements. The lease agreements have maturity dates ranging from February 2022 to February 2032, some of which include options for multiple five-year extensions. The weighted average remaining life of the lease term for these leases was 7.92 years and 7.30 years as of December 31, 2021 and 2020, respectively. The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption and as of the lease commencement date for leases subsequently entered in to. The weighted average discount rate for leases was 2.28 % and 2.70 % as of December 31, 2021 and 2020, respectively. Total operating lease costs were $ 3.0 million and $ 2.4 million for the years ended December 31, 2021 and 2020, respectively. The ROU asset, included in property and equipment, and lease liability, included in other liabilities, were $ 26.6 million and $ 28.0 million as of December 31, 2021, respectively, compared to $ 18.8 million and $ 19.5 million as of December 31, 2020, respectively. The ROU asset and lease liability are recognized at lease commencement by calculating the present value of lease payments over the lease term. 92 Table of Contents Maturities of lease liabilities as of December 31, 2021 were as follows:   Operating (dollars in thousands) Leases 2022 $ 1,974 2023 1,939 2024 1,990 2025 2,046 2026 2,096 Thereafter 24,092 Total undiscounted lease payments 34,137 Discount effect of cash flows 6,124 Total lease liability $ 28,013 NOTE 8 – Other Real Estate Owned Other real estate owned is comprised of real estate acquired in settlement of loans and is included in other assets on the balance sheet. At December 31, 2021 there was no commercial property owned compared to one commercial property owned totaling $ 1.2 million at December 31, 2020. The following summarizes the activity in the real estate acquired in settlement of loans portion of other real estate owned:   For the year ended December 31, (dollars in thousands) 2021 2020 Balance, beginning of year $ 1,169 $ - Additions 367 2,198 Sales ( 1,536 ) - Write-downs, net - ( 1,029 ) Balance, end of year $ - $ 1,169 NOTE 9 – Deposits The following is a detail of the deposit accounts:   December 31, (dollars in thousands) 2021 2020 Noninterest bearing $ 768,651 576,610 Interest bearing: NOW accounts 401,788 268,739 Money market accounts 1,201,099 1,042,745 Savings 39,696 27,254 Time deposits 152,592 227,410 Total deposits $ 2,563,826 2,142,758 At December 31, 2021 and 2020, time deposits greater than $250,000 were $ 84.4 million and $ 130.9 million, respectively. Also, at December 31, 2021, the Company had no deposits that were obtained outside of the Company’s primary market, while at December 31, 2020 these balances were $ 22.0 million. Interest expense on time deposits greater than $100,000 was $ 1.1 million for the year ended December 31, 2021, $ 4.6 million for the year ended December 31, 2020, and $ 6.9 million for the year ended December 31, 2019. 93 Table of Contents At December 31, 2021 the scheduled maturities of time deposits are as follows:   (dollars in thousands) 2022 $ 119,674 2023 20,195 2024 6,810 2025 5,803 2026 and after 110 $ 152,592 NOTE 10 – Federal Home Loan Bank Advances and Other Borrowings At December 31, 2021, the Company had no FHLB Advances, while at December 31, 2020 there were $25.0 million in FHLB Advances. Listed below is a summary of the terms and maturities of the advances outstanding at December 31, 2021 and 2020. The $25.0 million outstanding at December 31, 2020 was at a variable rate.   December 31, (dollars in thousands) 2021 2020 Maturity Amount Rate Amount Rate December 31, 2021 $ - - % $ 25,000 0.36 % The Company also has an unsecured, interest only line of credit for $ 15 million with another financial institution which was unused at December 31, 2021. The line was renewed on December 21, 2021, bearing interest at One Month CME Term SOFR plus 3.50 % and maturing on December 20, 2023 . The loan agreement contains various financial covenants related to capital, earnings and asset quality. NOTE 11 – Subordinated Debentures On June 26, 2003, Greenville First Statutory Trust I (a non-consolidated subsidiary) issued $ 6.0 million floating rate trust preferred securities with a maturity of June 26, 2033 . At December 31, 2021, the interest rate was 3.32 % and is indexed to the 3-month LIBOR rate plus 3.10 % and adjusted quarterly. The Company received from the Trust the $ 6.0 million proceeds from the issuance of the securities and the $ 186,000 initial proceeds from the capital investment in the Trust, and accordingly has shown the funds due to the Trust as $ 6.2 million junior subordinated debentures. On December 22, 2005, Greenville First Statutory Trust II (a non-consolidated subsidiary) issued $ 7.0 million floating rate trust preferred securities with a maturity of December 22, 2035 . At December 31, 2021, the interest rate was 1.66 % and is indexed to the 3-month LIBOR rate plus 1.44 % and adjusted quarterly. The Company received from the Trust the $ 7.0 million proceeds from the issuance of the securities and the $ 217,000 initial proceeds from the capital investment in the Trust, and accordingly has shown the funds due to the Trust as $ 7.2 million junior subordinated debentures. The current regulatory rules allow certain amounts of junior subordinated debentures to be included in the calculation of regulatory capital. However, provisions within the Dodd-Frank Act prohibit institutions that had more than $15 billion in assets on December 31, 2009 from including trust preferred securities as Tier 1 capital beginning in 2013, with one-third phased out over the two years ending in 2015. Financial institutions with less than $15 billion in total assets, such as the Bank, may continue to include their trust preferred securities issued prior to May 19, 2010 in Tier 1 capital, but cannot include in Tier 1 capital trust preferred securities issued after such date. 94 Table of Contents On September 30, 2019, the Company entered into Subordinated Note Purchase Agreements (collectively, the “Purchase Agreement”) with certain qualified institutional buyers and accredited investors (the “Purchasers”) pursuant to which the Company sold and issued $ 23.0 million in aggregate principal amount of its 4.75 % Fixed-to-Floating Rate Subordinated Notes due 2029 (the “Notes”). The Notes were offered and sold by the Company to eligible purchasers in a private offering in reliance on the exemption from the registration requirements of Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) and the provisions of Regulation D promulgated thereunder (the “Private Placement”). The Notes have a ten -year term and, from and including the date of issuance to but excluding September 30, 2024, will bear interest at a fixed annual rate of 4.75%, payable semi-annually in arrears, for the first five years of the term. From and including September 30, 2024 to but excluding the maturity date or early redemption date, the interest rate shall reset quarterly to an interest rate per annum equal to a benchmark rate (which is expected to be Three-Month Term SOFR) plus 340.8 basis points, payable quarterly in arrears. As provided in the Notes, the interest rate on the Notes during the applicable floating rate period may be determined based on a rate other than Three-Month Term SOFR. The Notes are redeemable, in whole or in part, on September 30, 2024, on any interest payment date thereafter, and at any time upon the occurrence of certain events. The Purchase Agreement contains certain customary representations, warranties and covenants made by the Company, on the one hand, and the Purchasers, severally and not jointly, on the other hand. On September 30, 2019, in connection with the sale and issuance of the Notes, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the Purchasers. Under the terms of the Registration Rights Agreement, the Company has agreed to take certain actions to provide for the exchange of the Notes for subordinated notes that are registered under the Securities Act and have substantially the same terms as the Notes (the “Exchange Notes”). Under certain circumstances, if the Company fails to meet its obligations under the Registration Rights Agreement, it would be required to pay additional interest to the holders of the Notes. The Notes were issued under an Indenture, dated September 30, 2019 (the “Indenture”), by and between the Company and UMB Bank, National Association, as trustee. The Notes are not subject to any sinking fund and are not convertible into or, other than with respect to the Exchange Notes, exchangeable for any other securities or assets of the Company or any of its subsidiaries. The Notes are not subject to redemption at the option of the holder. The Notes are unsecured, subordinated obligations of the Company only and are not obligations of, and are not guaranteed by, any subsidiary of the Company. The Notes rank junior in right to payment to the Company’s current and future senior indebtedness. The Notes are intended to qualify as Tier 2 capital for regulatory capital purposes for the Company. NOTE 12 – Unused Lines of Credit At December 31, 2021, the Company had five lines of credit to purchase federal funds that totaled $ 118.5 million which were unused at December 31, 2021. The lines of credit are available on a one to 14 day basis for general corporate purposes of the Company. The lender has reserved the right to withdraw the line at their option. The Company has an additional line of credit with the FHLB to borrow funds, subject to a pledge of qualified collateral. The Company has collateral that would support approximately $ 580.7 million in additional borrowings with the FHLB at December 31, 2021. NOTE 13 – Derivative Financial Instruments The Company utilizes derivative financial instruments primarily to hedge its exposure to changes in interest rates. All derivative financial instruments are recognized as either assets or liabilities and measured at fair value. The Company accounts for all of its derivatives as free-standing derivatives and does not designate any of these instruments for hedge accounting. Therefore, the gain or loss resulting from the change in the fair value of the derivative is recognized in the Company’s statement of income during the period of change. The Company enters into commitments to originate residential mortgage loans held for sale, at specified interest rates and within a specified period of time, with clients who have applied for a loan and meet certain credit and underwriting criteria (interest rate lock commitments). These interest rate lock commitments (“IRLCs”) meet the definition of a derivative financial instrument and are reflected in the balance sheet at fair value with changes in fair value recognized in current period earnings. Unrealized gains and losses on the IRLCs are recorded as derivative assets and derivative liabilities, respectively, and are measured based on the value of the underlying mortgage loan, quoted mortgage-backed securities (“MBS”) prices and an estimate of the probability that the mortgage loan will fund within the terms of the interest rate lock commitment, net of estimated commission expenses. 95 Table of Contents The Company manages the interest rate and price risk associated with its outstanding IRLCs and mortgage loans held for sale by entering into derivative instruments such as forward sales of MBS. Management expects these derivatives will experience changes in fair value opposite to changes in fair value of the IRLCs and mortgage loans held for sale, thereby reducing earnings volatility. The Company takes into account various factors and strategies in determining the portion of the mortgage pipeline (IRLCs and mortgage loans held for sale) it wants to economically hedge. The following table summarizes the Company’s outstanding financial derivative instruments at December 31, 2021 and December 31, 2020.   December 31, 2021 Fair Value (dollars in thousands) Notional Balance Sheet Location Asset/(Liability) Mortgage loan interest rate lock commitments $ 32,478 Other assets $ 425 MBS forward sales commitments 21,000 Other liabilities ( 41 ) Total derivative financial instruments $ 53,478 $ 384   December 31, 2020 Fair Value Notional Balance Sheet Location Asset/(Liability) Mortgage loan interest rate lock commitments $ 107,569 Other assets $ 2,385 MBS forward sales commitments 75,500 Other liabilities ( 501 ) Total derivative financial instruments $ 183,069 $ 1,884 NOTE 14 – Fair Value Accounting FASB ASC 820, “Fair Value Measurement and Disclosures Topic,” 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. 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 following is a description of valuation methodologies used to estimate fair value for assets recorded at fair value. Fair value approximates carrying value for the following financial instruments due to the short-term nature of the instrument: cash and due from banks, federal funds sold, other investments, federal funds purchased, and securities sold under agreement to repurchase. 96 Table of Contents Investment Securities Securities available for sale are valued on a recurring basis at quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange or U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities and debentures issued by government sponsored entities, municipal bonds and corporate debt securities. In certain cases where there is limited activity or less transparency around inputs to valuations, securities are classified as Level 3 within the valuation hierarchy. Securities held to maturity are valued at quoted market prices or dealer quotes similar to securities available for sale. The carrying value of Other Investments, such as Federal Reserve Bank and FHLB stock, approximates fair value based on their redemption provisions. Mortgage Loans Held for Sale Loans held for sale include mortgage loans which are saleable into the secondary mortgage markets and their fair values are estimated using observable quoted market or contracted prices or market price equivalents, which would be used by other market participants. These saleable loans are considered Level 2. Impaired Loans The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan may be considered impaired and an allowance for loan losses may be established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the impairment in accordance with FASB ASC 310, “Receivables.” The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with FASB ASC 820, “Fair Value Measurement and Disclosures,” impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company considers the impaired loan as nonrecurring Level 2. The Company’s current loan and appraisal policies require the Company to obtain updated appraisals on an “as is” basis at renewal, or in the case of an impaired loan, on an annual basis, either through a new external appraisal or an appraisal evaluation. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company considers the impaired loan as nonrecurring Level 3. The fair value of impaired loans may also be estimated using the present value of expected future cash flows to be realized on the loan, which is also considered a Level 3 valuation. These fair value estimates are subject to fluctuations in assumptions about the amount and timing of expected cash flows as well as the choice of discount rate used in the present value calculation. Other Real Estate Owned OREO, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs (Level 2). At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. Gains or losses on sale and generally any subsequent adjustments to the value are recorded as a component of real estate owned activity. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company considers the OREO as nonrecurring Level 3. Derivative Financial Instruments The Company estimates the fair value of IRLCs based on the value of the underlying mortgage loan, quoted MBS prices and an estimate of the probability that the mortgage loan will fund within the terms of the IRLC, net of commission expenses (Level 2). The Company estimates the fair value of forward sales commitments based on quoted MBS prices (Level 2). 97 Table of Contents 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.   December 31, 2021 (dollars in thousands) Level 1 Level 2 Level 3 Total Assets Securities available for sale: Corporate bonds $ - 2,188 - 2,188 US treasuries - 992 - 992 US government agencies - 14,169 - 14,169 SBA securities - 438 - 438 State and political subdivisions - 25,176 - 25,176 Asset-backed securities - 10,164 - 10,164 Mortgage-backed securities - 67,154 - 67,154 Mortgage loans held for sale - 13,556 - 13,556 Mortgage loan interest rate lock commitments - 425 - 425 Total assets measured at fair value on a recurring basis $ - 134,262 - 134,262   Liabilities MBS forward sales commitments $ - 41 - 41 Total liabilities measured at fair value on a recurring basis $ - 41 - 41 December 31, 2020 (dollars in thousands) Level 1 Level 2 Level 3 Total Assets Securities available for sale: US government agencies $ - 6,493 - 6,493 SBA securities - 485 - 485 State and political subdivisions - 19,388 - 19,388 Asset-backed securities - 11,529 - 11,529 Mortgage-backed securities - 56,834 - 56,834 Mortgage loans held for sale - 60,257 - 60,257 Mortgage loan interest rate lock commitments - 2,385 - 2,385 Total assets measured at fair value on a recurring basis $ - 157,371 - 157,371   Liabilities MBS forward sales commitments $ - 501 - 501 Total liabilities measured at fair value on a recurring basis $ - 501 - 501 Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis The Company is predominantly an asset based lender with real estate serving as collateral on approximately 86% of loans as of December 31, 2021. Loans which are deemed to be impaired are valued net of the allowance for loan losses, and other real estate owned is valued at the lower of cost or net realizable value of the underlying real estate collateral. Such market values are generally obtained using independent appraisals, which the Company considers to be level 2 inputs. The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis.   December 31, 2021 (dollars in thousands) Level 1 Level 2 Level 3 Total Assets Impaired loans $ - 5,262 2,065 7,327 Total assets measured at fair value on a nonrecurring basis $ - 5,262 2,065 7,327 December 31, 2020 Level 1 Level 2 Level 3 Total Assets Impaired loans $ - 8,144 3,109 11,253 Other real estate owned - 1,169 - 1,169 Total assets measured at fair value on a nonrecurring basis $ - 9,313 3,109 12,422 98 Table of Contents The Company had no liabilities carried at fair value or measured at fair value on a nonrecurring basis. For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December 31, 2021 and 2020, the significant unobservable inputs used in the fair value measurements were as follows: Valuation Technique Significant Unobservable Inputs Range of Inputs Impaired 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 % Other real estate owned Appraised Value/Comparable Sales Discounts to appraisals for estimated holding or selling costs 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 following is a description of valuation methodologies used to estimate fair value for certain other financial instruments. Fair value approximates carrying value for the following financial instruments due to the short-term nature of the instrument: cash and due from banks, federal funds sold, other investments, federal funds purchased, and securities sold under agreement to repurchase. Loans – The valuation of loans held for investment is estimated using the exit price notion which incorporates factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach, using the eight categories as disclosed in Note 4 – Loans and Allowance for Loan Losses. Loans are considered a Level 3 classification. Deposits – Fair value for demand deposit accounts and interest-bearing accounts with no fixed maturity date is equal to the carrying value. The fair value of certificate of deposit accounts are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments. FHLB Advances and Other Borrowings – Fair value for FHLB advances and other borrowings are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments. Subordinated debentures – Fair value for subordinated debentures are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments. The Company has used management’s best estimate of fair value based on the above assumptions. Thus, the fair values presented may not be the amounts that could be realized in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses, which would be incurred in an actual sale or settlement, are not taken into consideration in the fair value presented. 99 Table of Contents The estimated fair values of the Company’s financial instruments at December 31, 2021 and 2020 are as follows:   December 31, 2021 (dollars in thousands) Carrying Amount Fair Value Level 1 Level 2 Level 3 Financial Assets: Other investments, at cost $ 4,021 4,021 - - 4,021 Loans (1) 2,451,306 2,422,621 - - 2,422,621 Financial Liabilities: Deposits 2,563,826 2,327,055 - 2,327,055 - Subordinated debentures 36,106 33,936 - 33,936 - December 31, 2020 (dollars in thousands) Carrying Amount Fair Value Level 1 Level 2 Level 3 Financial Assets: Other investments, at cost $ 3,635 3,635 - - 3,635 Loans (1) 2,085,756 2,060,698 - - 2,060,698 Financial Liabilities: Deposits 2,142,758 2,008,317 - 2,008,317 - FHLB and other borrowings 25,000 24,972 - 24,972 - Subordinated debentures 35,998 30,371 - 30,371 -   ​ (1) Carrying amount is net of the allowance for loan losses and previously presented impaired loans. NOTE 15 – Earnings Per Common Share The following schedule reconciles the numerators and denominators of the basic and diluted earnings per share computations for the years ended December 31, 2021, 2020 and 2019. Dilutive common shares arise from the potentially dilutive effect of the Company’s stock options and warrants that are outstanding. The assumed conversion of stock options and warrants can create a difference between basic and dilutive net income per common share. At December 31, 2021, 2020 and 2019, options totaling 9,000 , 318,825 , and 94,885 , respectively, were anti-dilutive in the calculation of earnings per share as their exercise price exceeded the fair market value. These options were therefore excluded from the diluted earnings per share calculation.   December 31, (dollars in thousands, except share data) 2021 2020 2019 Numerator: Net income $ 46,711 $ 18,328 $ 27,858 Net income available to common shareholders $ 46,711 $ 18,328 $ 27,858 Denominator: Weighted-average common shares outstanding - basic 7,843,692 7,718,615 7,528,283 Common stock equivalents 145,288 105,599 244,261 Weighted-average common shares outstanding - diluted 7,988,980 7,824,214 7,772,544 Earnings per common share: Basic $ 5.96 $ 2.37 $ 3.70 Diluted $ 5.85 $ 2.34 $ 3.58 NOTE 16 – Commitments and Contingencies The Company has entered into a three year employment agreement with its chief executive officer and a two year employment agreement with 13 executive vice presidents. These agreements also include a) an incentive program, b) a stock option plan, c) a one-year non-compete agreement upon termination and a severance payment equal to one year of compensation. The total estimated aggregate salary commitment is approximately $ 3.5 million. The Company has an agreement with a data processor which expires in 2023 to provide certain item processing, electronic banking, and general ledger processing services. Components of this contract vary based on transaction and account volume, monthly charges and certain termination fees. At December 31, 2021, the Company has a contract with a construction company for $ 30.3 million to construct a new bank headquarters in Greenville, South Carolina of which $ 21.8 million had been paid. 100 Table of Contents The Company has commitments with various investment partners under the Small Business Investment Company (“SBIC”) and the Rural Business Investment Company (“RBIC”) Programs for which we have committed to make capital contributions from time to time. These commitments totaled $ 2.25 million at December 31, 2021. The Company may be subject to litigation and claims in the normal course of business. As of December 31, 2021, management believes there is no material litigation pending. NOTE 17 – Income Taxes The components of income tax expense were as follows:   For the years ended December 31, (dollars in thousands) 2021 2020 2019 Current income taxes: Federal $ 10,414 10,244 6,791 State 2,088 841 1,250 Total current tax expense 12,502 11,085 8,041 Deferred income tax expense (benefit) 1,590 ( 5,594 ) ( 420 ) Income tax expense $ 14,092 5,491 7,621 The following is a summary of the items that caused recorded income taxes to differ from taxes computed using the statutory tax rate:   For the years ended December 31, (dollars in thousands) 2021 2020 2019 Tax expense at statutory rate $ 12,768 5,002 7,451 Effect of state income taxes, net of federal benefit 1,649 664 987 Exempt income ( 43 ) ( 27 ) ( 26 ) Effect of stock-based compensation ( 115 ) ( 30 ) ( 693 ) Other ( 167 ) ( 118 ) ( 98 ) Income tax expense $ 14,092 5,491 7,621 The components of the deferred tax assets and liabilities are as follows:   December 31, (dollars in thousands) 2021 2020 Deferred tax assets: Allowance for loan losses $ 6,386 9,271 Unrealized loss on securities available for sale 197 - Net deferred loan fees 1,054 812 Deferred compensation 1,930 1,728 Write-down of real estate owned - 216 Lease liabilities 5,883 4,102 Other 260 187 15,710 16,316 Deferred tax liabilities: Property and equipment 1,419 1,610 Unrealized gain on securities available for sale - 272 Hedging transactions 151 855 Prepaid expenses 148 120 ROU assets 5,595 3,941 7,313 6,798 Net deferred tax asset $ 8,397 9,518 The Company has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related to uncertain tax positions. 101 Table of Contents NOTE 18 – Related Party Transactions Certain directors, executive officers, and companies with which they are affiliated, are clients of and have banking transactions with the Company in the ordinary course of business. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to the lender. A summary of loan transactions with directors and executive officers, including their affiliates is as follows:   For the years ended December 31, (dollars in thousands) 2021 2020 Balance, beginning of year $ 5,790 10,891 New loans 11,629 4,389 Less loan payments ( 8,629 ) ( 9,490 ) Balance, end of year $ 8,790 5,790 Deposits by executive officers and directors and their related interests at December 31, 2021 and 2020, were $ 2.5 million and $ 5.1 million, respectively. The Company has a land lease with a director on the property for a branch office, with monthly payments of $ 9,311 . In addition, the Company periodically enters into various consulting agreements with the director for development, administration and advisory services related to the purchase of property and construction of current and future branch office sites, including the development of the new bank headquarters in Greenville, South Carolina. Payments totaling $ 300,000 and $ 600,000 were made to the director for these services during the years ended December 31, 2021 and 2020, respectively. The Company is of the opinion that the lease payments and consulting fees represent market costs that could have been obtained in similar “arms length” transactions. NOTE 19 – Financial Instruments With Off-Balance Sheet Risk In the ordinary course of business, and to meet the financing needs of its clients, the Company is a party to various financial instruments with off-balance sheet risk. These financial instruments, which include commitments to extend credit and standby letters of credit, involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheets. The contract amount of those instruments reflects the extent of involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a client as long as there is no violation of 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 December 31, 2021, unfunded commitments to extend credit were approximately $ 618.7 million, of which $ 205.4 million is at fixed rates and $ 413.3 million is at variable rates. At December 31, 2020, unfunded commitments to extend credit were approximately $ 480.1 million, of which $ 114.6 million is at fixed rates and $ 365.5 million is at variable rates. The Company evaluates each client’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate. 102 Table of Contents At December 31, 2021 and 2020, there was a $ 10.2 million and $ 8.7 million commitment, respectively, under letters of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. Collateral varies but may include accounts receivable, inventory, equipment, marketable securities and property. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements. The fair value of off balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties credit standing. The total fair value of such instruments is not material. NOTE 20 – Employee Benefit Plan On January 1, 2000, the Company adopted the Southern First Bancshares, Inc. Profit Sharing and 401(k) Plan for the benefit of all eligible employees. The Company contributes to the Plan annually upon approval by the Board of Directors. Contributions made to the Plan for the years ended December 31, 2021, 2020, and 2019 amounted to $ 905,000 , $ 881,000 , and $ 693,000 , respectively. The Company also provides a nonqualified deferred compensation plan for 24 executive officers in the form of a Supplemental Executive Retirement Plan (“SERP”). The SERP provides retirement income for these officers. As of December 31, 2021 and 2020, the Company had an accrued benefit obligation of $ 9.2 million and $ 8.2 million, respectively. The Company incurred expenses related to this plan of $ 1.0 million, $ 1.6 million, and $ 657,000 in 2021, 2020, and 2019, respectively. NOTE 21 – Stock-Based Compensation Compensation cost is recognized for stock options and restricted stock awards issued to employees and non-employee directors. Compensation cost is measured as the fair value of these awards on their date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used as the fair value of restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option and restricted stock awards. The Company’s stock incentive programs are long-term retention programs intended to attract, retain, and provide incentives for key employees and non-employee directors in the form of incentive and non-qualified stock options and restricted stock. Stock-based compensation expense was recorded as follows:   For the years ended December 31, (dollars in thousands) 2021 2020 2019 Stock option expense $ 1,148 1,017 1,270 Restricted stock grant expense 499 380 428 Total stock-based compensation expense $ 1,647 1,397 1,698 Stock Options The Company’s 2010 Incentive Plan, as amended, had available for issuance a total of 566,025 shares (adjusted for the 10 % stock dividends in 2013, 2012, and 2011). The Plan expired on March 16, 2020 and no further shares may be issued from the plan. On March 15, 2016, the Company adopted the 2016 Equity Incentive Plan, making available for issuance 400,000 stock options. The Plan expired on March 15, 2021 and no further shares may be issued from the plan. On March 17, 2020, the Company adopted the 2020 Equity Incentive Plan, making available for issuance up to 450,000 stock options. The options may be exercised at an exercise price per share based on the fair market value and determined on the date of grant and expire 10 years from the grant date. As of December 31, 2021, there were 422,550 shares available for grant under the 2020 Equity Incentive Plan. 103 Table of Contents A summary of the status of the stock option plan and changes for the period is presented below:   For the years ended December 31, 2021 2020 2019 Weighted Weighted Weighted Weighted Average Weighted Average Weighted Average average Remaining average Remaining average Remaining exercise Contractual exercise Contractual exercise Contractual Shares price Life Shares price Life Shares price Life Outstanding at beginning of year   495,195 $ 29.93 541,414 $ 26.65 648,311 $ 20.74 Granted 121,000 40.45 101,700 37.77 101,350 32.81 Exercised ( 127,871 ) 23.56 ( 93,870 ) 14.79 ( 191,497 ) 9.24 Forfeited or expired ( 23,600 ) 38.88 ( 54,049 ) 38.15 ( 16,750 ) 34.01 Outstanding at end of year 464,724 $ 33.97 6.6 years 495,195 $ 29.93 6.4 years 541,414 $ 26.65 6.3 years Options exercisable at year-end   239,340 $ 29.68 5.0 years 287,548 $ 24.93 5.0 years 305,991 $ 20.00 4.9 years Weighted average fair value of options granted during the year $ 16.40 $ 11.37 $ 11.81 Shares available for grant 422,550 136,339 183,990 The aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year and the exercise price, multiplied by the number of in-the-money options) of 464,724 and 495,570 stock options outstanding at December 31, 2021 and 2020 was $ 13.3 million and $ 3.7 million, respectively. The aggregate intrinsic value of 239,340 and 287,548 stock options exercisable at December 31, 2021 and 2020 was $ 7.9 million and $ 3.3 million, respectively. The fair value of the option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used for grants:   2021 2020 2019 Dividend yield - - - Expected life 7 years 7 years 7 years Expected volatility 38.48 % 25.51 % 28.21 % Risk-free interest rate .74 % 1.29 % 2.59 % At December 31, 2021, there was $ 2.1 million of total unrecognized compensation cost related to nonvested stock option grants. The cost is expected to be recognized over a weighted-average period of 2.7 years. The fair value of stock option grants that vested during 2021, 2020, and 2019 was $ 1.1 million, $ 1.2 million and $ 1.2 million, respectively. Restricted Stock Grants On May 17, 2016, the Company adopted the 2016 Equity Incentive Plan which included a provision for the issuance of 50,000 shares of common stock to be issuable as restricted stock grants. The Plan expired on March 17, 2021 and no further shares may be issued from the plan. On May 12, 2020, the Company adopted the 2020 Equity Incentive Plan which included a provision for the issuance of 450,000 shares of common stock to be issuable as either stock options or restricted stock grants. As of December 31, 2021, there were 422,550 shares available for grant under the 2020 Equity Incentive Plan. Shares of restricted stock granted to employees under the stock plans are subject to restrictions as to continuous employment for a specified time period following the date of grant. During this period, the holder is entitled to full voting rights and dividends. 104 Table of Contents A summary of the status of the Company’s nonvested restricted stock and changes for the years ended December 31, 2021, 2020, and 2019 is as follows:   December 31, 2021 2020 2019 Weighted Weighted Weighted Average Average Average Restricted Grant-Date Restricted Grant-Date Restricted Grant-Date Shares Fair Value Shares Fair Value Shares Fair Value Nonvested at beginning of year 26,099 $ 38.05 32,825 $ 34.78 29,625 $ 34.00 Granted 26,450 48.56 13,200 39.87 14,700 33.64 Vested ( 9,600 ) 38.03 ( 14,051 ) 32.06 ( 10,375 ) 31.61 Forfeited ( 1,250 ) 38.56 ( 5,875 ) 37.74 ( 1,125 ) 28.03 Nonvested at end of year 41,699 $ 44.71 26,099 $ 38.05 32,825 $ 34.78 At December 31, 2021, there was $ 1.4 million of total unrecognized compensation cost related to nonvested restricted stock grants. The cost is expected to be recognized over a weighted-average period of 3.0 years. NOTE 22 – Dividends The ability of the Company to pay cash dividends is dependent upon receiving cash in the form of dividends from the Bank. The dividends that may be paid by the Bank to the Company are subject to legal limitations and regulatory capital requirements. Also, the payment of cash dividends on the Company's common stock by the Company in the future will be subject to certain other legal and regulatory limitations (including the requirement that the Company’s capital be maintained at certain minimum levels) and will be subject to ongoing review by banking regulators. The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. NOTE 23 – Regulatory Matters The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. The capital rules require banks and bank holding companies (other than bank holding companies, such as the Company, that qualify under the Federal Reserve’s Small Bank Holding Company Policy Statement) to maintain a minimum total risked-based capital ratio of at least 8%, a total Tier 1 capital ratio of at least 6%, a minimum common equity Tier 1 capital ratio of at least 4.5%, and a leverage ratio of at least 4%. Bank holding companies and banks are also required to hold a capital conservation buffer of common equity Tier 1 capital of 2.5% to avoid limitations on capital distributions and discretionary executive compensation payments. The capital conservation buffer was phased in incrementally over time, becoming fully effective on January 1, 2019, and consists of an additional amount of common equity 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 December 31, 2021, our capital ratios exceed these ratios and we remain “well capitalized.” 105 Table of Contents The following table summarizes the capital amounts and ratios of the Bank and the Company and the regulatory minimum requirements at December 31, 2021 and 2020.   To be well capitalized For capital under prompt adequacy purposes corrective action Actual minimum provisions minimum (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio As of December 31, 2021 The Bank Total Capital (to risk weighted assets) $ 331,052 14.36 % $ 184,418 8.00 % $ 230,522 10.00 % Tier 1 Capital (to risk weighted assets) 302,217 13.11 % 138,313 6.00 % 184,418 8.00 % Common Equity Tier 1 Capital (to risk weighted assets) 302,217 13.11 % 103,735 4.50 % 149,839 6.50 % Tier 1 Capital (to average assets) 302,217 10.55 % 114,537 4.00 % 143,172 5.00 %   The Company (1) Total Capital (to risk weighted assets) 343,476 14.90 % 184,418 8.00 % n/a n/a Tier 1 Capital (to risk weighted assets) 291,641 12.65 % 138,313 6.00 % n/a n/a Common Equity Tier 1 Capital (to risk weighted assets) 278,641 12.09 % 103,735 4.50 % n/a n/a Tier 1 Capital (to average assets) 291,641 10.18 % 114,555 4.00 % n/a n/a   To be well capitalized For capital under prompt adequacy purposes corrective action Actual minimum provisions minimum (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio As of December 31, 2020 The Bank Total Capital (to risk weighted assets) $ 279,414 13.92 % $ 160,554 8.00 % $ 200,693 10.00 % Tier 1 Capital (to risk weighted assets) 254,092 12.66 % 120,416 6.00 % 160,554 8.00 % Common Equity Tier 1 Capital (to risk weighted assets) 254,092 12.66 % 90,312 4.50 % 130,451 6.50 % Tier 1 Capital (to average assets) 254,092 10.26 % 99,094 4.00 % 123,867 5.00 %   The Company (1) Total Capital (to risk weighted assets) 288,593 14.38 % 160,554 8.00 % n/a n/a Tier 1 Capital (to risk weighted assets) 240,271 11.97 % 120,416 6.00 % n/a n/a Common Equity Tier 1 Capital (to risk weighted assets) 227,271 11.32 % 90,312 4.50 % n/a n/a Tier 1 Capital (to average assets) 240,271 9.70 % 99,094 4.00 % n/a n/a   ​ (1) Under the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is not subject to the minimum capital adequacy and capital conservation buffer capital requirements at the holding company level, unless otherwise advised by the Federal Reserve (such capital requirements are applicable only at the Bank level). Although the minimum regulatory capital requirements are not applicable to the Company, we calculate these ratios for our own planning and monitoring purposes. 106 Table of Contents NOTE 24 – Reportable Segments The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning purposes by management. The three segments include Commercial and Retail Banking, Mortgage Banking, and Corporate Operations. The following schedule presents financial information for each reportable segment.   Year ended December 31, 2021 (dollars in thousands) Commercial and Retail Banking Mortgage Banking Corporate Operations Eliminations Consolidated Interest income $ 91,952 1,215 17 ( 17 ) 93,167 Interest expense 3,929 - 1,523 ( 17 ) 5,435 Net interest income (loss) 88,023 1,215 ( 1,506 ) - 87,732 Provision for loan losses ( 12,400 ) - - - ( 12,400 ) Noninterest income 5,725 11,376 - - 17,101 Noninterest expense 47,392 8,753 285 - 56,430 Net income (loss) before taxes 58,756 3,838 ( 1,791 ) - 60,803 Income tax provision (benefit) 13,662 806 ( 376 ) - 14,092 Net income (loss) $ 45,094 3,032 ( 1,415 ) - 46,711 Total assets $ 2,899,047 26,076 314,281 ( 313,856 ) 2,925,548 Year ended December 31, 2020 Commercial and Retail Banking Mortgage Banking Corporate Operations Eliminations Consolidated Interest income $ 93,640 1,178 17 ( 17 ) 94,818 Interest expense 13,317 - 1,708 ( 17 ) 15,008 Net interest income (loss) 80,323 1,178 ( 1,691 ) - 79,810 Provision for loan losses 29,600 - - - 29,600 Noninterest income 7,568 19,785 - - 27,353 Noninterest expense 43,563 9,898 283 - 53,744 Net income (loss) before taxes 14,728 11,065 ( 1,974 ) - 23,819 Income tax expense (benefit) 3,582 2,324 ( 415 ) - 5,491 Net income (loss) $ 11,146 8,741 ( 1,559 ) - 18,328 Total assets $ 2,419,245 62,910 264,566 ( 264,134 ) 2,482,587 Commercial and retail banking. The Company’s primary business is to provide traditional deposit and lending products and services to its commercial and retail banking clients. Mortgage banking. The mortgage banking segment provides mortgage loan origination services for loans that will be sold in the secondary market to investors. Corporate operations. Corporate operations is comprised primarily of compensation and benefits for certain members of management and interest on parent company debt. NOTE 25 – Parent Company Financial Information Following is condensed financial information of Southern First Bancshares, Inc. (parent company only): Condensed Balance Sheets   December 31, (dollars in thousands) 2021 2020 Assets Cash and cash equivalents $ 12,379 9,019 Investment in subsidiaries 301,880 255,518 Other assets 21 29 Total assets $ 314,280 264,566 Liabilities and Shareholders’ Equity Accounts payable and accrued expenses $ 274 274 Subordinated debentures 36,105 35,998 Shareholders’ equity 277,901 228,294 Total liabilities and shareholders’ equity $ 314,280 264,566 107 Table of Contents Condensed Statements of Income   For the years ended December 31, (dollars in thousands) 2021 2020 2019 Revenues Interest income $ 17 17 13 Total revenue 17 17 13 Expenses Interest expense 1,523 1,708 929 Other expenses 285 283 240 Total expenses 1,808 1,991 1,169 Income tax benefit 376 415 243 Loss before equity in undistributed net income of subsidiaries ( 1,415 ) ( 1,559 ) ( 913 ) Equity in undistributed net income of subsidiaries 48,126 19,887 28,771 Net income $ 46,711 18,328 27,858 Condensed Statements of Cash Flows   For the years ended December 31, (dollars in thousands) 2021 2020 2019 Operating activities Net income $ 46,711 18,328 27,858 Adjustments to reconcile net income to cash provided by (used for) operating activities Equity in undistributed net income of subsidiaries ( 48,126 ) ( 19,887 ) ( 28,771 ) Compensation expense related to stock options and restricted stock grants 1,647 1,397 1,698 (Increase) decrease in other assets 8 ( 23 ) 12 Increase (decrease) in accounts payable and accrued expenses 108 63 ( 202 ) Net cash provided by (used for) operating activities 348 ( 122 ) 595 Investing activities Investment in subsidiaries, net - - - Net cash used for investing activities - - - Financing activities Issuance of common stock - - - Proceeds from the exercise of stock options and warrants 3,012 1,388 1,769 Net cash provided by financing activities 3,012 1,388 1,769 Net increase in cash and cash equivalents 3,360 1,266 2,364 Cash and cash equivalents, beginning of year 9,019 7,753 5,389 Cash and cash equivalents, end of year $ 12,379 9,019 7,753 108 Table of Contents NOTE 26 – Selected Condensed Quarterly Financial Data (Unaudited)   2021 For the quarters ended (dollars in thousands, except share data) March 31 June 30 September 30 December 31 Interest income $ 22,813 22,731 23,486 24,137 Interest expense 1,540 1,301 1,314 1,280 Net interest income 21,273 21,430 22,172 22,857 Provision for loan losses ( 300 ) ( 1,900 ) ( 6,000 ) ( 4,200 ) Noninterest income 5,904 3,622 4,239 3,336 Noninterest expenses 14,162 13,495 14,039 14,734 Income before income tax expense 13,315 13,457 18,372 15,659 Income tax expense 2,949 3,134 4,355 3,654 Net income available to common shareholders $ 10,366 10,323 14,017 12,005 Earnings per common share Basic $ 1.33 1.32 1.78 1.52 Diluted $ 1.31 1.29 1.75 1.49 Weighted average common shares outstanding Basic 7,774,515 7,847,516 7,873,868 7,877,408 Diluted 7,908,537 7,987,615 8,001,028 8,056,977   2020 For the quarters ended March 31 June 30 September 30 December 31 Interest income $ 23,866 23,991 23,415 23,547 Interest expense 5,768 4,217 2,778 2,244 Net interest income 18,098 19,774 20,637 21,303 Provision for loan losses 6,000 10,200 11,100 2,300 Noninterest income 3,916 9,207 7,584 6,644 Noninterest expenses 12,372 12,644 14,183 14,544 Income before income tax expense 3,642 6,137 2,938 11,103 Income tax expense 810 1,459 721 2,502 Net income available to common shareholders $ 2,832 4,678 2,217 8,601 Earnings per common share Basic $ 0.37 0.61 0.29 1.11 Diluted $ 0.36 0.60 0.28 1.10 Weighted average common shares outstanding Basic 7,678,598 7,722,419 7,732,293 7,740,755 Diluted 7,827,173 7,818,651 7,815,265 7,835,739 109 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.