SOUTHERN FIRST BANCSHARES INC 10-Q

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2023 OR ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to Commission file number 000-27719 Southern First Bancshares, Inc. (Exact name of registrant as specified in its charter) South Carolina 58-2459561 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 6 Verdae Boulevard Greenville , S.C. 29607 (Address of principal executive offices) (Zip Code) 864 - 679-9000 (Registrant’s telephone number, including area code) Not Applicable (Former name, former address, and former fiscal year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock SFST The Nasdaq Global Market Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller Reporting Company ¨ Emerging growth company ¨ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 8,076,438 shares of common stock, par value $0.01 per share, were issued and outstanding as of July 28, 2023. Table of Contents SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY June 30, 2023 Form 10-Q INDEX Page PART I – CONSOLIDATED FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Comprehensive Income 5 Consolidated Statements of Shareholders’ Equity 6 Consolidated Statements of Cash Flows 7 Notes to Unaudited Consolidated Financial Statements 8 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28 Item 3. Quantitative and Qualitative Disclosures about Market Risk 44 Item 4. Controls and Procedures 44 PART II – OTHER INFORMATION Item 1. Legal Proceedings 45 Item 1A. Risk Factors 45 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 45 Item 3. Defaults upon Senior Securities 46 Item 4. Mine Safety Disclosures 46 Item 5. Other Information 46 Item 6. Exhibits 46 2 Table of Contents PART I. CONSOLIDATED FINANCIAL INFORMATION Item 1. CONSOLIDATED FINANCIAL STATEMENTS SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS June 30, December 31, (dollars in thousands, except share data) 2023 2022 (Unaudited) (Audited) ASSETS Cash and cash equivalents: Cash and due from banks $ 24,742 18,788 Federal funds sold 170,145 101,277 Interest-bearing deposits with banks 10,183 50,809 Total cash and cash equivalents 205,070 170,874 Investment securities: Investment securities available for sale 91,548 93,347 Other investments 12,550 10,833 Total investment securities 104,098 104,180 Mortgage loans held for sale 15,781 3,917 Loans 3,537,616 3,273,363 Less allowance for credit losses ( 41,105 ) ( 38,639 ) Loans, net 3,496,511 3,234,724 Bank owned life insurance 51,792 51,122 Property and equipment, net 96,964 99,183 Deferred income taxes, net 12,356 12,522 Other assets 19,535 15,459 Total assets $ 4,002,107 3,691,981 LIABILITIES Deposits $ 3,433,018 3,133,864 FHLB advances and related debt 180,000 175,000 Subordinated debentures 36,268 36,214 Other liabilities 51,307 52,391 Total liabilities 3,700,593 3,397,469 SHAREHOLDERS’ EQUITY Preferred stock, par value $ .01 per share, 10,000,000 shares authorized - - Common stock, par value $ .01 per share, 10,000,000 shares authorized, 8,058,438 and 8,011,045 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively 81 80 Nonvested restricted stock ( 4,051 ) ( 3,306 ) Additional paid-in capital 120,912 119,027 Accumulated other comprehensive loss ( 12,710 ) ( 13,410 ) Retained earnings 197,282 192,121 Total shareholders’ equity 301,514 294,512 Total liabilities and shareholders’ equity $ 4,002,107 3,691,981 See notes to consolidated financial statements that are an integral part of these consolidated statements. 3 Table of Contents SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the three months For the six months ended June 30, ended June 30, (dollars in thousands, except share data) 2023 2022 2023 2022 Interest income Loans $ 41,089 26,610 77,837 50,541 Investment securities 706 448 1,318 922 Federal funds sold and interest-bearing deposits with banks 891 180 1,860 239 Total interest income 42,686 27,238 81,015 51,702 Interest expense Deposits 21,937 1,844 39,115 2,752 Borrowings 1,924 510 2,651 902 Total interest expense 23,861 2,354 41,766 3,654 Net interest income 18,825 24,884 39,249 48,048 Provision for credit losses 910 1,775 2,735 2,880 Net interest income after provision for credit losses 17,915 23,109 36,514 45,168 Noninterest income Mortgage banking income 1,337 1,184 1,959 2,678 Service fees on deposit accounts 331 327 656 631 ATM and debit card income 536 548 1,091 1,062 Income from bank owned life insurance 338 315 670 630 Loss on disposal of fixed assets - ( 394 ) - ( 394 ) Other income 194 285 404 587 Total noninterest income 2,736 2,265 4,780 5,194 Noninterest expenses Compensation and benefits 10,287 9,915 20,643 19,371 Occupancy 2,518 2,219 4,975 3,997 Outside service and data processing costs 1,705 1,528 3,334 3,062 Insurance 897 367 1,586 628 Professional fees 751 693 1,410 1,292 Marketing 335 329 701 596 Other 900 737 1,848 1,528 Total noninterest expenses 17,393 15,788 34,497 30,474 Income before income tax expense 3,258 9,586 6,797 19,888 Income tax expense 800 2,346 1,636 4,678 Net income $ 2,458 7,240 5,161 15,210 Earnings per common share Basic $ 0.31 0.91 0.64 1.91 Diluted 0.31 0.90 0.64 1.88 Weighted average common shares outstanding Basic 8,051,131 7,957,631 8,038,642 7,944,814 Diluted 8,069,028 8,054,910 8,080,521 8,075,496 See notes to consolidated financial statements that are an integral part of these consolidated statements. 4 Table of Contents SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) For the three months ended June 30, For the six months ended June 30, (dollars in thousands) 2023 2022 2023 2022 Net income $ 2,458 7,240 5,161 15,210 Other comprehensive income (loss): Unrealized gain (loss) on securities available for sale: Unrealized holding gain (loss) arising during the period, pretax ( 1,183 ) ( 4,749 ) 888 ( 11,890 ) Tax benefit (expense) 248 997 ( 188 ) 2,497 Reclassification of realized gain (loss) - 3 - ( 12 ) Tax (expense) benefit - ( 1 ) - 2 Other comprehensive income (loss) ( 935 ) ( 3,750 ) 700 ( 9,403 ) Comprehensive income $ 1,523 3,490 5,861 5,807 See notes to consolidated financial statements that are an integral part of these consolidated statements. 5 Table of Contents SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited) For the three months ended June 30, Common stock Preferred stock Nonvested restricted Additional paid-in Accumulated other comprehensive Retained (dollars in thousands, except share data) Shares Amount Shares Amount stock capital income (loss) earnings Total March 31, 2022 7,980,519 $ 80 - - $ ( 3,425 ) $ 117,286 $ ( 6,393 ) $ 170,976 $ 278,524 Net income Retained earnings - - - - - - - 7,240 7,240 Proceeds from exercise of stock options 3,625 - - - - 128 - - 128 Issuance of restricted stock 1,500 - - - ( 71 ) 71 - - - Compensation expense related to restricted stock, net of tax - - - - 266 - - - 266 Compensation expense related to stock options, net of tax - - - - - 229 - - 229 Other comprehensive loss - - - - - - ( 3,750 ) - ( 3,750 ) June 30, 2022 7,985,644 $ 80 - $ - $ ( 3,230 ) $ 117,714 $ ( 10,143 ) $ 178,216 $ 282,637 March 31, 2023 8,047,975 $ 80 - $ - $ ( 4,462 ) $ 120,683 $ ( 11,775 ) $ 194,824 $ 299,350 Net income - - - - - - - 2,458 2,458 Proceeds from exercise of stock options 10,000 1 - - - 168 - - 169 Issuance of restricted stock, net of forfeitures 463 - - - 85 ( 85 ) - - - Compensation expense related to restricted stock, net of tax - - - - 326 - - - 326 Compensation expense related to stock options, net of tax - - - - - 146 - - 146 Other comprehensive loss - - - - - - ( 935 ) - ( 935 ) June 30, 2023 8,058,438 $ 81 - $ - $ ( 4,051 ) $ 120,912 $ ( 12,710 ) $ 197,282 $ 301,514 For the six months ended June 30, Common stock Preferred stock Nonvested restricted Additional paid-in Accumulated other comprehensive Retained (dollars in thousands, except share data) Shares Amount Shares Amount stock capital income (loss) earnings Total December 31, 2021 7,925,819 $ 79 - - $ ( 1,435 ) $ 114,226 $ ( 740 ) $ 165,771 $ 277,901 Net income Common stock - - - - - - - 15,210 15,210 Proceeds from exercise of stock options 21,750 1 - - - 706 - - 707 Issuance of restricted stock 38,075 - - - ( 2,305 ) 2,305 - - - Adoption of ASU 2016-13 - - - - - - - ( 2,765 ) ( 2,765 ) Compensation expense related to restricted stock, net of tax - - - - 510 - - - 510 Compensation expense related to stock options, net of tax - - - - - 477 - - 477 Other comprehensive loss - - - - - - ( 9,403 ) - ( 9,403 ) June 30, 2022 Preferred stock 7,985,644 $ 80 - $ - $ ( 3,230 ) $ 117,714 $ ( 10,143 ) $ 178,216 $ 282,637 December 31, 2022 8,011,045 $ 80 - $ - $ ( 3,306 ) $ 119,027 $ ( 13,410 ) $ 192,121 $ 294,512 Net income - - - - - - - 5,161 5,161 Proceeds from exercise of stock options 11,000 1 - - - 184 - - 185 Issuance of restricted stock 36,393 - - - ( 1,436 ) 1,436 - - - Compensation expense related to restricted stock, net of tax - - - - 691 - - - 691 Compensation expense related to stock options, net of tax - - - - - 265 - - 265 Other comprehensive income - - - - - - 700 - 700 Accumulated other comprehensive income (loss) Additional paid-in capital June 30, 2023 8,058,438 $ 81 - $ - $ ( 4,051 ) $ 120,912 $ ( 12,710 ) $ 197,282 $ 301,514 See notes to consolidated financial statements that are an integral part of these consolidated statements. 6 Table of Contents SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the six months ended June 30, (dollars in thousands) 2023 2022 Operating activities Net income $ 5,161 15,210 Adjustments to reconcile net income to cash provided by operating activities: Provision for credit losses 2,735 2,880 Depreciation and other amortization 2,397 1,341 Accretion and amortization of securities discounts and premium, net 259 399 Loss on sale of fixed assets - 394 Gain on sale of securities - ( 12 ) Net change in operating leases 133 172 Compensation expense related to stock options and restricted stock grants 956 987 Gain on sale of loans held for sale ( 1,636 ) ( 1,446 ) Loans originated and held for sale ( 70,422 ) ( 145,513 ) Proceeds from sale of loans held for sale 60,194 142,185 Increase in cash surrender value of bank owned life insurance ( 670 ) ( 630 ) Decrease in deferred tax asset ( 21 ) ( 3,446 ) (Increase) decrease in other assets ( 4,076 ) 452 Increase (decrease) in other liabilities ( 359 ) 1,400 Net cash (used for) provided by operating activities ( 5,349 ) 14,373 Investing activities Increase (decrease) in cash realized from: Increase in loans, net ( 264,737 ) ( 355,594 ) Purchase of property and equipment ( 767 ) ( 8,989 ) Purchase of investment securities: - Available for sale - ( 10,094 ) Other investments ( 42,518 ) ( 11,078 ) Payments and maturities, calls and repayments of investment securities: Available for sale 2,427 19,095 Other investments 40,801 10,034 Proceeds from sale of fixed assets - 95 Net cash used for investing activities ( 264,794 ) ( 356,531 ) Financing activities Increase in cash realized from: Increase in deposits, net 299,154 306,332 Increase in Federal Home Loan Bank advances and other borrowings, net 5,000 50,000 Proceeds from the exercise of stock options 185 707 Net cash provided by financing activities 304,339 357,039 Net increase in cash and cash equivalents 34,196 14,881 Cash and cash equivalents at beginning of the period 170,874 167,209 Cash and cash equivalents at end of the period $ 205,070 182,090 Supplemental information Nonvested restricted stock Cash paid for Interest $ 38,612 3,745 Income taxes 541 5,950 Schedule of non-cash transactions Unrealized gain (loss) on securities, net of income taxes 700 ( 9,393 ) See notes to consolidated financial statements that are an integral part of these consolidated statements. 7 Table of Contents SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – Summary of Significant Accounting Policies Nature of Business Southern First Bancshares, Inc. (the “Company”) is a South Carolina corporation that owns all of the capital stock of Southern First Bank (the “Bank”) and all of the stock of Greenville First Statutory Trusts I and II (collectively, the “Trusts”). The Trusts are special purpose non-consolidated entities organized for the sole purpose of issuing trust preferred securities. The Bank's primary federal regulator is the Federal Deposit Insurance Corporation (the “FDIC”). The Bank is also regulated and examined by the South Carolina Board of Financial Institutions. The Bank is primarily engaged in the business of accepting demand deposits and savings deposits insured by the FDIC, and providing commercial, consumer and mortgage loans to the general public. Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six-month period ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 13, 2023. The consolidated financial statements include the accounts of the Company and the Bank. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation,” the financial statements related to the Trusts have not been consolidated. Business Segments The Company, through the Bank, provides a broad range of financial services to individuals and companies in South Carolina, North Carolina, and Georgia. These services include demand, time and savings deposits; lending services; ATM processing and mortgage banking services. While the Company’s management periodically reviews limited production information for these revenue streams, that information is not complete as it does not include a full allocation of revenue, costs and capital from key corporate functions. Management will continue to evaluate these lines of business for separate reporting as facts and circumstances change. Accordingly, the Company’s various banking operations are not considered by management to constitute more than one reportable operating segment. Risk and Uncertainties There were three significant bank failures in the first five months of 2023, primarily due to the failed banks’ lack of liquidity as depositors sought to withdraw their deposits. Due to rising interest rates, the failed banks were unable to sell investment securities held to meet liquidity needs without realizing substantial losses. As a result of the March 2023 bank closures and in an effort to strengthen public confidence in the banking system and protect depositors, regulators have announced that any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law, which has and could continue to increase the cost of our FDIC insurance assessments. Additionally, the Federal Reserve announced the creation of a new Bank Term Funding Program in an effort to minimize the need for banks to sell securities at a loss in times of stress. The future impact of these failures on the economy, financial institutions and their depositors, as well as any governmental regulatory responses or actions resulting from the same, is difficult to predict at this time. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of income and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are 8 Table of Contents particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses, real estate acquired in the settlement of loans, fair value of financial instruments, and valuation of deferred tax assets. Reclassifications Certain amounts, previously reported, have been reclassified to state all periods on a comparable basis and had no effect on shareholders’ equity or net income. Subsequent Events Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Adoption of New Accounting Standard In January 2023, the Company adopted ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”), which eliminated the accounting guidance for troubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, for public business entities, the guidance requires disclosure of current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20. The Company adopted the guidance using the modified retrospective method. Upon adoption of this guidance, the Company no longer establishes a specific reserve for modifications to borrowers experiencing financial difficulty. Instead, these modifications are included in their respective cohort and a historical loss rate is applied to the current loan balance to arrive at the quantitative baseline portion of the allowance. The difference between the allowance previously determined and the current allowance was not material to the Company’s financial statements. In January 2023, the Company adopted ASU 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method”, which intended to better align hedge accounting with an organization’s risk management strategies. The ASU became applicable to the Company in the second quarter of 2023 when we entered into a fair value hedge using the portfolio layer method. Newly Issued, But Not Yet Effective Accounting Standards In December 2022, the FASB issued amendments to defer the sunset date of the Reference Rate Reform Topic of the Accounting Standards Codification from December 31, 2022 to December 31, 2024, because the current relief in Reference Rate Reform Topic may not cover a period of time during which a significant number of modifications may take place. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements. 9 Table of Contents NOTE 2 – Investment Securities The amortized costs and fair value of investment securities are as follows: Schedule of amortized costs and fair value of investment securities June 30, 2023 Amortized Gross Unrealized Fair (dollars in thousands) Cost Gains Losses Value Available for sale Corporate bonds $ 2,160 - 286 1,874 US treasuries US treasuries [Member] 999 - 124 875 US government agencies 13,009 - 2,199 10,810 State and political subdivisions 22,774 - 3,435 19,339 Asset-backed securities 5,697 - 129 5,568 Mortgage-backed securities FHLMC FHLMC [Member] 23,628 - 3,730 19,898 FNMA FNMA [Member] 34,028 - 5,417 28,611 GNMA GNMA [Member] 5,341 - 768 4,573 Total mortgage-backed securities 62,997 - 9,915 53,082 Total investment securities available for sale $ 107,636 - 16,088 91,548 December 31, 2022 Amortized Gross Unrealized Fair Cost Gains Losses Value Available for sale Corporate bonds $ 2,172 - 289 1,883 US treasuries 999 - 128 871 US government agencies 13,007 - 2,390 10,617 State and political subdivisions 22,910 - 4,004 18,906 Asset-backed securities 6,435 - 206 6,229 Mortgage-backed securities FHLMC 24,086 - 3,745 20,341 FNMA 35,141 - 5,520 29,621 GNMA 5,573 - 694 4,879 Total mortgage-backed securities 64,800 - 9,959 54,841 Total investment securities available for sale $ 110,323 - 16,976 93,347 Contractual maturities and yields on the Company’s investment securities at June 30, 2023 and December 31, 2022 are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. 10 Table of Contents Schedule of maturities and yields on the Company’s investment securities June 30, 2023 Less than one year One to five years Five to ten years Over ten years Total (dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Available for sale Corporate bonds Corporate bonds [Member] $ - - $ - - $ 1,874 2.00 % $ - - $ 1,874 2.00 % US treasuries US treasuries [Member] - - 875 1.27 % - - - - 875 1.27 % US government agencies US government agencies [Member] - - 3,253 0.85 % 7,557 1.55 % - - 10,810 1.34 % State and political subdivisions State and political subdivisions [Member] - - 885 1.95 % 5,079 1.81 % 13,375 2.17 % 19,339 2.06 % Asset-backed securities Asset-backed securities [Member] - - - - 392 5.74 % 5,176 6.23 % 5,568 6.20 % Mortgage-backed securities Mortgage-backed securities [Member] - - 4,780 1.17 % 5,320 1.59 % 42,982 1.97 % 53,082 1.86 % Total investment securities Total investment securities [Member] $ - - $ 9,793 1.14 % $ 20,222 1.75 % $ 61,533 2.37 % $ 91,548 2.10 % December 31, 2022 Less than one year One to five years Five to ten years Over ten years Total (dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Available for sale Corporate bonds Corporate bonds [Member] $ - - $ - - $ 1,883 2.00 % $ - - $ 1,883 2.00 % US treasuries US treasuries [Member] - - - - 871 1.27 % - - 871 1.27 % US government agencies US government agencies [Member] - - 3,223 0.85 % 7,394 1.55 % - - 10,617 1.34 % State and political subdivisions State and political subdivisions [Member] - - 460 2.13 % 5,382 1.80 % 13,064 2.16 % 18,906 2.05 % Asset-backed securities Asset-backed securities [Member] - - - - 554 4.77 % 5,675 5.14 % 6,229 5.10 % Mortgage-backed securities Asset-backed securities [Member] - - 4,594 1.13 % 3,959 1.60 % 46,288 1.90 % 54,841 1.82 % Total investment securities Total investment securities [Member] $ - - $ 8,277 1.08 % $ 20,043 1.75 % $ 65,027 2.24 % $ 93,347 2.03 % The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities at June 30, 2023 and December 31, 2022, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position. Schedule of gross unrealized losses on investment securities and fair market value of related securities June 30, 2023 Less than 12 months 12 months or longer Total (dollars in thousands) # Fair value Unrealized losses # Fair value Unrealized losses # Fair value Unrealized losses Available for sale Corporate bonds - $ - $ - 1 $ 1,874 $ 286 1 $ 1,874 $ 286 US treasuries - - - 1 875 124 1 875 124 US government agencies - - - 10 10,810 2,199 10 10,810 2,199 State and political subdivisions 3 1,216 24 29 18,123 3,411 32 19,339 3,435 Asset-backed 1 393 1 7 5,175 128 8 5,568 129 Mortgage-backed securities Mortgage-backed securities [Member] FHLMC FHLMC [Member] 2 2,863 62 26 17,035 3,668 28 19,898 3,730 FNMA FNMA [Member] 1 5 1 29 28,606 5,416 30 28,611 5,417 GNMA GNMA [Member] - - - 7 4,573 768 7 4,573 768 Total investment securities 7 $ 4,477 $ 88 110 $ 87,071 $ 16,000 117 $ 91,548 $ 16,088 11 Table of Contents December 31, 2022 Less than 12 months 12 months or longer Total (dollars in thousands) # Fair value Unrealized losses # Fair value Unrealized losses # Fair value Unrealized losses Available for sale Corporate bonds - $ - $ - 1 $ 1,883 $ 289 1 $ 1,883 $ 289 US treasuries - - - 1 871 128 1 871 128 US government agencies - - - 10 10,617 2,390 10 10,617 2,390 State and political subdivisions 10 5,101 763 22 13,805 3,241 32 18,906 4,004 Asset-backed 5 4,291 135 3 1,938 71 8 6,229 206 Mortgage-backed securities FHLMC 4 3,712 155 17 16,629 3,590 21 20,341 3,745 FNMA 9 2,208 201 28 27,413 5,319 37 29,621 5,520 GNMA 1 103 7 6 4,776 687 7 4,879 694 Total investment securities 29 $ 15,415 $ 1,261 88 $ 77,932 $ 15,715 117 $ 93,347 $ 16,976 At June 30, 2023 the Company had 117 individual investments that were in an unrealized loss position. The unrealized losses were primarily attributable to changes in interest rates, rather than deterioration in credit quality. The individual securities are each investment grade securities. The Company considers factors such as the financial condition of the issuer including credit ratings and specific events affecting the operations of the issuer, volatility of the security, underlying assets that collateralize the debt security, and other industry and macroeconomic conditions. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell these securities before recovery of the amortized cost. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. As such, there is no allowance for credit losses on available for sale securities recognized as of June 30, 2023 . Other investments are comprised of the following and are recorded at cost which approximates fair value. Schedule of other investments (dollars in thousands) June 30, 2023 December 31, 2022 Federal Home Loan Bank stock $ 9,890 9,250 Other nonmarketable investments 2,257 1,180 Investment in Trust Preferred subsidiaries 403 403 Total other investments $ 12,550 10,833 The Company has evaluated other investments for impairment and determined that the other investments are not impaired as of June 30, 2023 and that ultimate recoverability of the par value of the investments is probable. All of the FHLB stock is used to collateralize advances with the FHLB. NOTE 3 – Mortgage Loans Held for Sale Mortgage loans originated and intended for sale in the secondary market are reported as loans held for sale and carried at fair value under the fair value option with changes in fair value recognized in current period earnings. At the date of funding of the mortgage loan held for sale, the funded amount of the loan, the related derivative asset or liability of the associated interest rate lock commitment, less direct loan costs becomes the initial recorded investment in the loan held for sale. Such amount approximates the fair value of the loan. At June 30 2023, mortgage loans held for sale totaled $ 15.8 million compared to $ 3.9 million at December 31, 2022. NOTE 4 – Loans and Allowance for Credit Losses The following table summarizes the composition of our loan portfolio. Total gross loans are recorded net of deferred loan fees and costs, which totaled $ 7.4 million as of June 30, 2023 and $ 7.3 million as of December 31, 2022. 12 Table of Contents Schedule of composition of our loan portfolio   June 30, 2023 December 31, 2022 (dollars in thousands) Commercial [Member] Amount % of Total Amount % of Total Commercial Owner occupied RE Owner occupied RE [Member] $ 613,874 17.4 % $ 612,901 18.7 % Non-owner occupied RE Non-owner occupied RE [Member] 951,536 26.9 % 862,579 26.3 % Construction Construction [Member] 115,798 3.3 % 109,726 3.4 % Business Business [Member] 511,719 14.5 % 468,112 14.3 % Total commercial loans Consumer [Member] 2,192,927 62.1 % 2,053,318 62.7 % Consumer Real estate Real estate [Member] 1,047,904 29.6 % 931,278 28.4 % Home equity Home equity [Member] 185,584 5.2 % 179,300 5.5 % Construction Construction [Member] 61,044 1.7 % 80,415 2.5 % Other Other [Member] 50,157 1.4 % 29,052 0.9 % Total consumer loans 1,344,689 37.9 % 1,220,045 37.3 % Total gross loans, net of deferred fees 3,537,616 100.0 % 3,273,363 100.0 % Less—allowance for credit losses ( 41,105 ) ( 38,639 ) Total loans, net $ 3,496,511 $ 3,234,724 Maturities and Sensitivity of Loans to Changes in Interest Rates The information in the following tables summarizes the loan maturity distribution by type and related interest rate characteristics based on the contractual maturities of individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below, because borrowers have the right to prepay obligations with or without prepayment penalties. Schedule of loan maturity distribution by type and related interest rate June 30, 2023 (dollars in thousands) One year or less After one but within five years After five but within fifteen years After fifteen years Total Commercial Owner occupied RE $ 9,511 155,585 406,974 41,804 613,874 Non-owner occupied RE 61,846 487,268 377,281 25,141 951,536 Construction 10,643 35,648 68,916 591 115,798 Business 103,829 211,107 192,332 4,451 511,719 Total commercial loans 185,829 889,608 1,045,503 71,987 2,192,927 Consumer Real estate 7,672 48,115 299,705 692,412 1,047,904 Home equity 620 21,841 157,853 5,270 185,584 Construction 244 314 36,816 23,670 61,044 Other 9,347 21,779 18,266 765 50,157 Total consumer loans 17,883 92,049 512,640 722,117 1,344,689 Total gross loans, net of deferred fees $ 203,712 981,657 1,558,143 794,104 3,537,616 13 Table of Contents December 31, 2022 (dollars in thousands) One year or less After one but within five years After five but within fifteen years After fifteen years Total Commercial Owner occupied RE $ 10,574 133,017 420,881 48,429 612,901 Non-owner occupied RE 44,570 419,976 371,208 26,825 862,579 Construction 5,509 36,537 61,009 6,671 109,726 Business 96,157 194,489 173,259 4,207 468,112 Total commercial loans 156,810 784,019 1,026,357 86,132 2,053,318 Consumer Real estate 12,137 38,948 260,005 620,188 931,278 Home equity 1,336 20,933 151,696 5,335 179,300 Construction 665 182 23,788 55,780 80,415 Other 3,926 21,890 2,458 778 29,052 Total consumer loans 18,064 81,953 437,947 682,081 1,220,045 Total gross loans, net of deferred fees $ 174,874 865,972 1,464,304 768,213 3,273,363 The following table summarizes the loans due after one year by category. Schedule of composition of gross loans by rate type June 30, 2023 December 31, 2022 Interest Rate Interest Rate (dollars in thousands) Fixed Floating or Adjustable Fixed Floating or Adjustable Commercial Commercial [Member] Owner occupied RE Owner occupied RE [Member] $ 600,648 3,715 598,513 3,814 Non-owner occupied RE Non-owner occupied RE [Member] 792,099 97,591 742,763 75,246 Construction Construction [Member] 90,403 14,752 90,246 13,971 Business Business [Member] 313,001 94,889 298,866 73,089 Total commercial loans 1,796,151 210,947 1,730,388 166,120 Consumer Consumer [Member] Real estate Real estate [Member] 1,040,232 - 919,130 11 Home equity Home equity [Member] 13,525 171,439 14,173 163,791 Construction Construction [Member] 60,800 - 79,750 - Other Other [Member] 16,830 23,980 19,113 6,013 Total consumer loans 1,131,387 195,419 1,032,166 169,815 Total gross loans, net of deferred fees $ 2,927,538 406,366 2,762,554 335,935 Credit Quality Indicators The Company tracks credit quality based on its internal risk ratings. Upon origination, a loan is assigned an initial risk grade, which is generally based on several factors such as the borrower’s credit score, the loan-to-value ratio, the debt-to-income ratio, etc. After loans are initially graded, they are monitored regularly for credit quality based on many factors, such as payment history, the borrower’s financial status, and changes in collateral value. Loans can be downgraded or upgraded depending on management’s evaluation of these factors. Internal risk-grading policies are consistent throughout each loan type. A description of the general characteristics of the risk grades is as follows: · Pass— A pass loan ranges from minimal to average credit risk; however, still has acceptable credit risk. · Watch—A watch loan exhibits above average credit risk due to minor weaknesses and warrants closer scrutiny by management. 14 Table of Contents · Special mention—A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date. · Substandard—A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, which may jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. · Doubtful—A doubtful loan has all of the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable. The following table presents loan balances classified by credit quality indicators by year of origination as of June 30, 2023. 15 Table of Contents Schedule of breakdown of outstanding loans by risk category June 30, 2023 (dollars in thousands) 2023 2022 2021 2020 2019 Prior Revolving Revolving Converted to Term Total Commercial Owner occupied RE Pass $ 32,634 157,619 139,472 68,570 62,877 118,738 - 168 580,078 Watch - 3,510 469 16,170 3,585 6,489 - - 30,223 Special Mention - 191 - - - 3,100 - - 3,291 Substandard - - - - - 282 - - 282 Total Owner occupied RE 32,634 161,320 139,941 84,740 66,462 128,609 - 168 613,874 Non-owner occupied RE Pass 75,513 305,006 174,325 110,120 54,654 182,840 222 - 902,680 Watch 775 966 9,468 - 10,737 6,396 - - 28,342 Special Mention - - 200 - 9,028 965 - - 10,193 Substandard - - - - 7,974 2,347 - - 10,321 Total Non-owner occupied RE 76,288 305,972 183,993 110,120 82,393 192,548 222 - 951,536 Construction Pass 9,046 71,909 24,939 8,397 242 - - - 114,533 Watch - 1,265 - - - - - - 1,265 Special Mention - - - - - - - - - Substandard - - - - - - - - - Total Construction 9,046 73,174 24,939 8,397 242 - - - 115,798 Business Pass 34,799 142,869 52,202 20,565 19,229 55,100 151,640 1,162 477,566 Watch 139 14,342 1,998 1,511 987 4,178 5,751 - 28,906 Special Mention 102 1,232 226 459 245 416 - 98 2,778 Substandard - 492 - 27 174 1,314 462 - 2,469 Total Business 35,040 158,935 54,426 22,562 20,635 61,008 157,853 1,260 511,719 Total Commercial loans 153,008 699,401 403,299 225,819 169,732 382,165 158,075 1,428 2,192,927 Consumer Real estate Pass 103,913 263,435 282,239 181,201 68,138 110,151 - - 1,009,077 Watch 491 5,715 7,936 3,974 2,069 4,156 - - 24,341 Special Mention - 2,329 1,673 2,133 2,422 2,921 - - 11,478 Substandard - 187 640 - 327 1,854 - - 3,008 Total Real estate 104,404 271,666 292,488 187,308 72,956 119,082 - - 1,047,904 Home equity Pass - - - - - - 172,802 - 172,802 Watch - - - - - - 7,052 - 7,052 Special Mention - - - - - - 3,967 - 3,967 Substandard - - - - - - 1,763 - 1,763 Total Home equity - - - - - - 185,584 - 185,584 Construction Pass 6,231 40,707 14,106 - - - - - 61,044 Watch - - - - - - - - - Special Mention - - - - - - - - - Substandard - - - - - - - - - Total Construction 6,231 40,707 14,106 - - - - - 61,044 Other Pass 4,535 3,140 2,707 1,586 1,359 3,016 32,462 - 48,805 Watch 44 37 356 7 3 177 95 - 719 Special Mention - 336 - - 33 87 83 - 539 Substandard - - 84 - 2 - 8 - 94 Total Other 4,579 3,513 3,147 1,593 1,397 3,280 32,648 - 50,157 Total Consumer loans 115,214 315,886 309,741 188,901 74,353 122,362 218,232 - 1,344,689 Total loans $ 268,222 1,015,287 713,040 414,720 244,085 504,527 376,307 1,428 3,537,616 Current period gross write-offs ( 200 ) ( 1 ) ( 9 ) ( 391 ) ( 601 ) 16 Table of Contents The following table presents loan balances classified by credit quality indicators by year of origination as of December 31, 2022. December 31, 2022 (dollars in thousands) 2022 2021 2020 2019 2018 Prior Revolving Revolving Converted to Term Total Commercial Owner occupied RE Pass $ 169,083 122,654 85,867 66,299 36,718 93,915 - - 574,536 Watch 14,648 479 9,339 3,658 - 6,792 - - 34,916 Special Mention 200 - - - - 2,960 - - 3,160 Substandard - - - - 289 - - - 289 Total Owner occupied RE 183,931 123,133 95,206 69,957 37,007 103,667 - - 612,901 Non-owner occupied RE Pass 281,890 169,599 113,264 59,550 79,722 106,967 604 137 811,733 Watch 1,061 9,491 - 10,683 1,408 11,660 - - 34,303 Special Mention - 202 - 6,087 - 930 - - 7,219 Substandard - 134 - 7,992 327 871 - - 9,324 Total Non-owner occupied RE 282,951 179,426 113,264 84,312 81,457 120,428 604 137 862,579 Construction Pass 48,420 55,129 4,811 247 - - - - 108,607 Watch 1,119 - - - - - - - 1,119 Special Mention - - - - - - - - - Substandard - - - - - - - - - Total Construction 49,539 55,129 4,811 247 - - - - 109,726 Business Pass 136,489 57,804 29,864 21,808 35,249 28,914 136,337 709 447,174 Watch 3,186 2,058 1,318 1,282 179 3,074 3,783 439 15,319 Special Mention 1,137 260 386 210 - 252 115 642 3,002 Substandard 498 - 188 233 315 911 472 - 2,617 Total Business 141,310 60,122 31,756 23,533 35,743 33,151 140,707 1,790 468,112 Total Commercial loans 657,731 417,810 245,037 178,049 154,207 257,246 141,311 1,927 2,053,318 Consumer Real estate Pass 243,589 269,565 189,075 72,499 39,042 76,172 - - 889,942 Watch 6,196 8,256 3,847 2,278 494 3,671 - - 24,742 Special Mention 3,114 1,938 2,644 2,258 955 2,639 - - 13,548 Substandard - 648 227 341 408 1,422 - - 3,046 Total Real estate 252,899 280,407 195,793 77,376 40,899 83,904 - - 931,278 Home equity Pass - - - - - - 165,847 - 165,847 Watch - - - - - - 7,226 - 7,226 Special Mention - - - - - - 4,055 - 4,055 Substandard - - - - - - 2,172 - 2,172 Total Home equity - - - - - - 179,300 - 179,300 Construction Pass 41,138 34,039 4,923 - - - - - 80,100 Watch - - - - - - - - - Special Mention - - - 315 - - - - 315 Substandard - - - - - - - - - Total Construction 41,138 34,039 4,923 315 - - - - 80,415 Other Pass 3,894 3,038 1,702 1,534 341 3,015 14,465 - 27,989 Watch 46 367 15 5 16 175 93 - 717 Special Mention 94 - - 44 75 23 97 - 332 Substandard - - - 5 - - 9 - 14 Total Other 4,034 3,405 1,717 1,588 432 3,213 14,663 - 29,052 Total Consumer loans 298,071 317,851 202,433 79,279 41,331 87,117 193,963 - 1,220,045 Total loans $ 955,802 735,661 447,470 257,328 195,538 344,363 335,274 1,927 3,273,363 17 Table of Contents The following tables present loan balances by age and payment status. Schedule of loan balances by payment status June 30, 2023 (dollars in thousands) Accruing 30- 59 days past due Accruing 60-89 days past due Accruing 90 days or more past due Nonaccrual loans Accruing current Total Commercial Owner occupied RE $ 6 - - - 613,868 613,874 Non-owner occupied RE 83 104 - 754 950,595 951,536 Construction - - - - 115,798 115,798 Business 184 5 - 137 511,393 511,719 Consumer Real estate 132 583 - 1,053 1,046,136 1,047,904 Home equity 29 - - 1,072 184,483 185,584 Construction - - - - 61,044 61,044 Other 6 - - - 50,151 50,157 Total loans $ 440 692 - 3,016 3,533,468 3,537,616 Total loans over 90 days past due - - - - - 1,072 December 31, 2022 (dollars in thousands) Accruing 30- 59 days past due Accruing 60-89 days past due Accruing 90 days or more past due Nonaccrual loans Accruing current Total Commercial Owner occupied RE $ - - - - 612,901 612,901 Non-owner occupied RE 119 757 - 247 861,456 862,579 Construction - - - - 109,726 109,726 Business 24 1 - 182 467,905 468,112 Consumer Real estate 330 - - 1,099 929,849 931,278 Home equity 50 - - 1,099 178,151 179,300 Construction - - - - 80,415 80,415 Other 88 - - - 28,964 29,052 Total loans $ 611 758 - 2,627 3,269,367 3,273,363 Total loans over 90 days past due - - - - - 402 As of June 30, 2023 and December 31, 2022, loans 30 days or more past due represented 0.07 % and 0.11 % of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.01 % and 0.03 % of the Company’s total loan portfolio as of June 30, 2023 and December 31, 2022, respectively. Consumer loans 30 days or more past due were 0.05 % and 0.08 % of total loans as of June 30, 2023 and December 31, 2022, respectively. 18 Table of Contents The table below summarizes nonaccrual loans by major categories for the periods presented. Schedule nonaccrual loans by major categories June 30, 2023 December 31, 2022 Nonaccrual Nonaccrual Nonaccrual Nonaccrual loans loans Total loans loans Total with no with an nonaccrual with no with an nonaccrual (dollars in thousands) allowance allowance loans allowance allowance loans Commercial Owner occupied RE - - - - - - Non-owner occupied RE - 754 754 114 133 247 Construction - - - - - - Business - 137 137 - 182 182 Total commercial - 891 891 114 315 429 Consumer Real estate - 1,053 1,053 - 1,099 1,099 Home equity 185 887 1,072 194 905 1,099 Construction - - - - - - Other - - - - - - Total consumer 185 1,940 2,125 194 2,004 2,198 Total nonaccrual loans 185 2,831 3,016 308 2,319 2,627 We did not recognize interest income on nonaccrual loans for the three months ended June 30, 2023 and June 30, 2022. The accrued interest reversed during the three months ended June 30, 2023 and June 30, 2022 was not material. We did not recognize interest income on nonaccrual loans for the six months ended June 30, 2023 and June 30, 2022. Accrued interest of $ 23,000 was reversed during the six months ended June 30, 2023 and $ 3,000 was reversed during the six months ended June 30, 2022. The table below summarizes information regarding nonperforming assets. Schedule of nonperforming assets, including nonaccruing TDRs (dollars in thousands) June 30, 2023 December 31, 2022 Nonaccrual loans $ 3,016 2,627 Other real estate owned - - Total nonperforming assets $ 3,016 2,627 Nonperforming assets as a percentage of: Total assets 0.08 % 0.07 % Gross loans 0.09 % 0.08 % Total loans over 90 days past due $ 1,072 402 Loans over 90 days past due and still accruing - - Accruing troubled debt restructurings - 4,503 Modifications to Borrowers Experiencing Financial Difficulty The Company adopted Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty. There were no loan modifications to borrowers experiencing financial difficulty during the three months and six months ended June 30, 2023. Allowance for Credit Losses The Company maintains an allowance for credit losses to provide for expected credit losses. Losses are charged against the allowance when management believes that the principal is uncollectable. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance are made for specific loans and for pools of similar types of loans, although the entire allowance is available for any loan that, in management’s judgment, should be charged against the allowance. A provision for credit losses is taken based on management’s ongoing evaluation of the appropriate allowance balance. 19 Table of Contents A formal evaluation of the adequacy of the credit loss allowance is conducted quarterly. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management's evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay a loan, the estimated value of any underlying collateral, composition of the loan portfolio, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. Management believes the level of the allowance for credit losses is adequate to absorb all expected future losses inherent in the loan portfolio at the balance sheet date. The allowance is increased through provision for credit losses and decreased by charge-offs, net of recoveries of amounts previously charged-off. The Company uses a lifetime probability of default and loss given default modeling approach to estimate the allowance for credit losses on loans. This method uses historical correlations between default experience and the age of loans to forecast defaults and losses, assuming that a loan in a pool shares similar risk characteristics such as loan product type, risk rating and loan age, and demonstrates similar default characteristics as other loans in that pool, as the loan progresses through its lifecycle. The Company calculates lifetime probability of default and loss given default rates based on historical loss experience, which is used to calculate expected losses based on the pool’s loss rate and the age of loans in the pool. Management believes that the Company’s historical loss experience provides the best basis for its assessment of expected credit losses to determine the allowance for credit losses. The Company uses its own internal data to measure historical credit loss experience within the pools with similar risk characteristics over an economic cycle. The probability of default and loss given default method also includes assumptions of observed migration over the lifetime of the underlying loan data. Loans that do not share risk characteristics are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Management also considers further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that exist for the period over which historical information is evaluated as well as other changes in qualitative factors not inherently considered in the quantitative analyses. The Company generally utilizes a four-quarter forecast period in evaluating the appropriateness of the reasonable and supportable forecast scenarios which are incorporated through qualitative adjustments. There is immediate reversion to historical loss rates. The qualitative categories and the measurements used to quantify the risks within each of these categories are subjectively selected by management but measured by objective measurements period over period. The data for each measurement may be obtained from internal or external sources. The current period measurements are evaluated and assigned a factor commensurate with the current level of risk relative to past measurements over time. The resulting qualitative adjustments are applied to the relevant collectively evaluated loan pools. These adjustments are based upon quarterly trend assessments in certain economic factors such as labor, inflation, consumer sentiment and real disposable income, as well as associate retention and turnover, portfolio concentrations, and growth characteristics. The qualitative analysis increases or decreases the allowance allocation for each loan pool based on the assessment of factors described above. The following tables summarize the activity related to the allowance for credit losses for the three and six months ended June 30, 2023 and June 30, 2022 under the CECL methodology. Schedule of activity related to the allowance for credit losses Three months ended June 30, 2023 Commercial Consumer (dollars in thousands) Owner occupied RE Non- owner occupied RE Construction Business Real Estate Home Equity Construction Other Total Balance, beginning of period $ 5,984 11,285 1,110 8,022 10,079 2,663 810 482 40,435 Provision for credit losses ( 88 ) 347 221 118 316 245 ( 126 ) 62 1,095 Loan charge-offs - ( 48 ) - - - ( 389 ) - ( 2 ) ( 439 ) Loan recoveries - - - 12 - 2 - - 14 Net loan recoveries (charge-offs) - ( 48 ) - 12 - ( 387 ) - ( 2 ) ( 425 ) Balance, end of period $ 5,896 11,584 1,331 8,152 10,395 2,521 684 542 41,105 Net charge-offs to average loans (annualized) 0.05 % Allowance for credit losses to gross loans 1.16 % Allowance for credit losses to nonperforming loans 1,363.11 % 20 Table of Contents Three months ended June 30, 2022 Commercial Consumer (dollars in thousands) Owner occupied RE Non- owner occupied RE Construction Business Real Estate Home Equity Construction Other Total Balance, beginning of period $ 4,898 9,973 929 6,217 7,602 2,197 844 284 32,944 Provision for credit losses ( 69 ) 37 131 524 390 407 7 98 1,525 Loan charge-offs - - - ( 55 ) - ( 170 ) - ( 91 ) ( 316 ) Loan recoveries - - - 31 - 8 - - 39 Net loan recoveries (charge-offs) - - - ( 24 ) - ( 162 ) - ( 91 ) ( 277 ) Balance, end of period $ 4,829 10,010 1,060 6,717 7,992 2,442 851 291 34,192 Net charge-offs to average loans (annualized) 0.04 % Allowance for credit losses to gross loans 1.20 % Allowance for credit losses to nonperforming loans 1,166.70 % Six months ended June 30, 2023 Commercial Consumer (dollars in thousands) Owner occupied RE Non- owner occupied RE Construction Business Real Estate Home Equity Construction Other Total Balance, beginning of period $ 5,867 10,376 1,292 7,861 9,487 2,551 893 312 38,639 Provision for credit losses 29 1,385 39 268 908 298 ( 209 ) 232 2,950 Loan charge-offs - ( 209 ) - ( 1 ) - ( 389 ) - ( 2 ) ( 601 ) Loan recoveries - 32 - 24 - 61 - - 117 Net loan recoveries (charge-offs) - ( 177 ) - 23 - ( 328 ) - ( 2 ) ( 484 ) Balance, end of period $ 5,896 11,584 1,331 8,152 10,395 2,521 684 542 41,105 Net charge-offs to average loans (annualized) 0.03 % Allowance for credit losses to gross loans 1.16 % Allowance for credit losses to nonperforming loans 1,363.11 % Six months ended June 30, 2022 Commercial Consumer (dollars in thousands) Owner occupied RE Non- owner occupied RE Construction Business Real Estate Home Equity Construction Other Total Balance, beginning of period $ 4,700 10,518 625 4,887 7,083 1,697 578 320 30,408 Adjustment for CECL ( 313 ) 333 154 1,057 ( 294 ) 438 130 ( 5 ) 1,500 Provision for credit losses 442 ( 841 ) 281 683 1,203 572 143 67 2,550 Loan charge-offs - - - ( 55 ) - ( 339 ) - ( 91 ) ( 485 ) Loan recoveries - - - 145 - 74 - - 219 Net loan recoveries (charge-offs) - - - 90 - ( 265 ) - ( 91 ) ( 266 ) Balance, end of period $ 4,829 10,010 1,060 6,717 7,992 2,442 851 291 34,192 Net charge-offs to average loans (annualized) 0.02 % Allowance for credit losses to gross loans 1.20 % Allowance for credit losses to nonperforming loans 1,166.70 % The $ 1.1 million provision for credit losses for the three months ended June 30, 2023 was driven by $ 119.7 million in loan growth combined with net charge-offs of $ 425,000 for the quarter. The $ 3 .0 million provision for credit losses for the six months ended June 30, 2023 was driven by $ 264.3 million in loan growth for the period. In addition to loan growth, the provision for credit losses was impacted by slightly lower expected loss rates due to continued low charge-offs during the first half of 2023, while minor adjustments to an internal qualitative factor increased the qualitative component of the allowance and related provision expense. Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. The Company reviews individually evaluated loans for designation as collateral dependent loans, as well as other loans that management 21 Table of Contents of the Company designates as having higher risk. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. The following tables present an analysis of collateral-dependent loans of the Company. June 30, 2023 Schedule of analysis of collateral-dependent loans of the company Real Business (dollars in thousands) estate assets Other Total Commercial Owner occupied RE $ - - - - Non-owner occupied RE 31 - - 31 Construction - - - - Business 42 - - 42 Total commercial 73 - - 73 Consumer Real estate 195 - - 195 Home equity 185 - - 185 Construction - - - - Other - - - - Total consumer 380 - - 380 Total $ 453 - - 453 December 31, 2022 Real Business (dollars in thousands) estate assets Other Total Commercial Owner occupied RE $ - - - - Non-owner occupied RE 114 - - 114 Construction - - - - Business 30 - - 30 Total commercial 144 - - 144 Consumer Real estate 207 - - 207 Home equity 194 - - 194 Construction - - - - Other - - - - Total consumer 401 - - 401 Total $ 545 - - 545 Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required. Allowance for Credit Losses - Unfunded Loan Commitments The allowance for credit losses for unfunded loan commitments was $ 2.6 million at June 30, 2023 and is separately classified on the balance sheet within other liabilities. The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the three and six months ended June 30, 2023 and June 30, 2022. 22 Table of Contents Schedule of allowance for credit losses for unfunded loan commitments Three months ended Three months ended (dollars in thousands) June 30, 2023 June 30, 2022 Balance, beginning of period $ 2,750 2,080 Adjustment for adoption of CECL - - Provision for (reversal of) credit losses ( 185 ) 250 Balance, end of period $ 2,565 2,330 Unfunded Loan Commitments $ 849,977 738,791 Reserve for Unfunded Commitments to Unfunded Loan Commitments 0.30 % 0.32 % Six months ended Six months ended (dollars in thousands) June 30, 2023 June 30, 2022 Balance, beginning of period $ 2,780 - Adjustment for adoption of CECL - 2,000 Provision for (reversal of) credit losses ( 215 ) 330 Balance, end of period $ 2,565 2,330 Unfunded Loan Commitments $ 849,977 738,791 Reserve for Unfunded Commitments to Unfunded Loan Commitments 0.30 % 0.32 % NOTE 5 – Derivative Financial Instruments The Company utilizes derivative financial instruments primarily to manage its exposure to changes in interest rates. All derivative financial instruments are recognized as either assets or liabilities and measured at fair value. The Company enters into commitments to originate residential mortgage loans held for sale, at specified interest rates and within a specified period of time, with clients who have applied for a loan and meet certain credit and underwriting criteria (interest rate lock commitments). These interest rate lock commitments (“IRLCs”) meet the definition of a derivative financial instrument and are reflected in the balance sheet at fair value with changes in fair value recognized in current period earnings. Unrealized gains and losses on the IRLCs are recorded as derivative assets and derivative liabilities, respectively, and are measured based on the value of the underlying mortgage loan, quoted mortgage-backed securities (“MBS”) prices and an estimate of the probability that the mortgage loan will fund within the terms of the interest rate lock commitment, net of estimated commission expenses. The Company manages the interest rate and price risk associated with its outstanding IRLCs and mortgage loans held for sale by entering into derivative instruments such as forward sales of MBS. These derivatives are free- standing derivatives and are not designated as instruments for hedge accounting. Management expects these derivatives will experience changes in fair value opposite to changes in fair value of the IRLCs and mortgage loans held for sale, thereby reducing earnings volatility. The Company takes into account various factors and strategies in determining the portion of the mortgage pipeline (IRLCs and mortgage loans held for sale) it wants to economically hedge. The gain or loss resulting from the change in the fair value of the derivative is recognized in the Company’s statement of income during the period of change. The Company entered into a pay-fixed portfolio layer method fair value swap, designated as a hedging instrument, with a total notional amount of $ 200.0 million in the second quarter of 2023. The Company is designating the fair value swap under the portfolio layer method (“PLM”). Under this method, the hedged item is designated as a hedged layer of a closed portfolio of financial loans that is anticipated to remain outstanding for the designated hedged period. Adjustments will be made to record the swap at fair value on the consolidated balance sheets, with changes in fair value recognized in interest income. The carrying value of the fair value swap on the consolidated balance sheets will also be adjusted through interest income, based on changes in fair value attributable to changes in the hedged risk. The following table represents the carrying value of the portfolio layer method hedged asset and the cumulative fair value hedging adjustment included in the carrying value of the hedged asset as of June 30, 2023 and December 31, 2022. 23 Table of Contents Schedule of carrying value of hedged asset and cumulative fair value hedging adjustment June 30, 2023 December 31, 2022 (dollars in thousands) Carrying Amount Hedged Asset Carrying Amount Hedged Asset Fixed Rate Asset 1 202,750 2,750 - - 1 These amounts included the amortized cost basis of closed portfolios of fixed rate loans used to designate hedging relationships in which the hedged item is the stated amount of the assets in the closed portfolio anticipated to be outstanding for the designated hedged period. As of June 30, 2023, the amortized cost basis of the closed portfolio used in this hedging relationship was $ 741.4 million, the cumulative basis adjustment associated with this hedging relationship was $ 2.8 million, and the amount of the designated hedged item was $ 200.0 million. The following table summarizes the Company’s outstanding financial derivative instruments at June 30, 2023 and December 31, 2022. Schedule of outstanding financial derivative instruments June 30, 2023 Fair Value (dollars in thousands) Notional Balance Sheet Location Asset/(Liability) Derivatives designated as hedging instruments: Fair value swap Fair value swap [Member] $ 200,000 Other assets $ 2,750 Derivatives not designated as hedging instruments: Mortgage loan interest rate lock commitments 24,630 Other assets 177 MBS forward sales commitments 17,500 Other assets 59 Total derivative financial instruments $ 242,130 $ 2,986 Total derivative financial instruments [Member] Mortgage loan interest rate lock commitments [Member] December 31, 2022 MBS forward sales commitments [Member] Fair Value (dollars in thousands) Notional Balance Sheet Location Asset/(Liability) Derivatives not designated as hedging instruments: Mortgage loan interest rate lock commitments $ 6,793 Other assets 49 MBS forward sales commitments 5,750 Other assets 27 Total derivative financial instruments $ 12,543 $ 76 Accrued interest receivable related to the interest rate swap as of June 30, 2023 totaled $ 248 ,000 and is excluded from the fair value presented in the table above. The Company assesses the effectiveness of the fair value swap hedge with a regression analysis that compares the changes in forward curves to determine the value. The effective portion of changes in fair value of derivatives designated as fair value hedges is recorded through interest income. The Company does not offset derivative assets and derivative liabilities for financial statement presentation purposes. The following table summarizes the effect of the fair value hedging relationship recognized in the consolidated statements of income for the three and six months ended June 30, 2023 and June 30, 2022. Schedule of summarize the effect of fair value hedging relationship recognized in consolidated statement of income Three months ended June 30, Six months ended June 30, (dollars in thousands) 2023 2022 2023 2022 Gain (loss) on fair value hedging relationship: Hedged asset $ 2,750 - 2,750 - Fair value derivative designated as hedging instrument ( 2,784 ) - ( 2,784 ) - Total gain (loss) recognized in interest income on loans $ ( 34 ) - ( 34 ) - 24 Table of Contents NOTE 6 – Fair Value Accounting FASB ASC 820, “Fair Value Measurement and Disclosures,” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1 – Quoted market price in active markets Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include certain debt and equity securities that are traded in an active exchange market. Level 2 – Significant other observable inputs Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include fixed income securities and mortgage-backed securities that are held in the Company’s available-for-sale portfolio and valued by a third-party pricing service, as well as certain impaired loans. Level 3 – Significant unobservable inputs Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. These methodologies may result in a significant portion of the fair value being derived from unobservable data. The methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed in Note 14 of the Company’s 2022 Annual Report on Form 10-K. See Note 5 for how the derivative asset fair value is determined. The Company’s loan portfolio is initially fair valued using a segmented approach, using the eight categories of loans as disclosed in Note 4 – Loans and Allowance for Credit Losses. Loans are considered a Level 3 classification. Assets and Liabilities Recorded at Fair Value on a Recurring Basis The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022. Schedule of assets and liabilities measured at fair value on a recurring basis June 30, 2023 (dollars in thousands) Level 1 Level 2 Level 3 Total Assets Securities available for sale Level 1 [Member] Corporate bonds Level 2 [Member] $ - 1,874 - 1,874 US treasuries Level 3 [Member] - 875 - 875 US government agencies - 10,810 - 10,810 State and political subdivisions - 19,339 - 19,339 Asset-backed securities - 5,568 - 5,568 Mortgage-backed securities - 53,082 - 53,082 Mortgage loans held for sale - 15,781 - 15,781 Mortgage loan interest rate lock commitments - 177 - 177 MBS forward sales commitments - 59 - 59 Derivative asset - 2,750 - 2,750 Total assets measured at fair value on a recurring basis $ - 110,315 - 110,315 25 Table of Contents December 31, 2022 (dollars in thousands) Level 1 Level 2 Level 3 Total Assets Securities available for sale: Corporate bonds $ - 1,883 - 1,883 US treasuries - 871 - 871 US government agencies - 10,617 - 10,617 State and political subdivisions - 18,906 - 18,906 Asset-backed securities - 6,229 - 6,229 Mortgage-backed securities - 54,841 - 54,841 Mortgage loans held for sale - 3,917 - 3,917 Mortgage loan interest rate lock commitments - 49 - 49 MBS forward sales commitments - 27 - 27 Total assets measured at fair value on a recurring basis $ - 97,340 - 97,340 The Company had no liabilities recorded at fair value on a recurring basis as of June 30, 2023 and December 31, 2022. Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2023 and December 31, 2022. Schedule of assets and liabilities measured at fair value on a nonrecurring basis As of June 30, 2023 (dollars in thousands) Level 1 Level 2 Level 3 Total Assets Individually evaluated $ - 306 3,636 3,942 Total assets measured at fair value on a nonrecurring basis $ - 306 3,636 3,942 As of December 31, 2022 (dollars in thousands) Level 1 Level 2 Level 3 Total Assets Individually evaluated $ - 429 4,071 4,500 Total assets measured at fair value on a nonrecurring basis $ - 429 4,071 4,500 The Company had no liabilities carried at fair value or measured at fair value on a nonrecurring basis. For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of June 30, 2023 and December 31, 2022, the significant unobservable inputs used in the fair value measurements were as follows: Schedule of unobservable inputs used in the fair value measurements Valuation Technique Significant Unobservable Inputs Range of Inputs Individually evaluated loans Appraised Value/ Discounted Cash Flows Discounts to appraisals or cash flows for estimated holding and/or selling costs or age of appraisal 0 - 25 % Fair Value of Financial Instruments Financial instruments require disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical to estimate the fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash. Certain items are specifically excluded from the disclosure requirements, including the Company’s common stock, premises and equipment and other assets and liabilities. 26 Table of Contents The estimated fair values of the Company’s financial instruments at June 30, 2023 and December 31, 2022 are as follows: Schedule of estimated fair values of the company's financial instruments June 30, 2023 (dollars in thousands) Carrying Amount Fair Value Level 1 Level 2 Level 3 Financial Assets: Other investments, at cost $ 12,550 12,550 - - 12,550 Loans 1 3,491,664 3,231,892 - - 3,231,892 Financial Liabilities: Deposits 3,433,018 3,013,696 - 3,013,696 - Subordinated debentures 36,268 40,767 - 40,767 - December 31, 2022 (dollars in thousands) Carrying Amount Fair Value Level 1 Level 2 Level 3 Financial Assets: Other investments, at cost $ 10,833 10,833 - - 10,833 Loans 1 3,227,455 3,057,891 - - 3,057,891 Financial Liabilities: Deposits 3,133,864 2,717,900 - 2,717,900 - Subordinated debentures 36,214 39,885 - 39,885 - 1 Carrying amount is net of the allowance for credit losses and individually evaluated loans. NOTE 7 – Leases The Company had operating right-of-use assets, included in property and equipment, of $ 22.9 million and $ 23.6 million as of June 30, 2023 and December 31, 2022, respectively. The Company had lease liabilities, included in other liabilities, of $ 25.3 million and $ 25.8 million as of June 30, 2023 and December 31, 2022, respectively. We maintain operating leases on land and buildings for various office spaces. The lease agreements have maturity dates ranging from April 2025 to February 2032, some of which include options for multiple five-year extensions. The weighted average remaining life of the lease term for these leases was 6.40 years as of June 30, 2023. The ROU asset and lease liability are recognized at lease commencement by calculating the present value of lease payments over the lease term. The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease term at implementation of the accounting standard and as of the lease commencement date for leases subsequently entered into. The weighted average discount rate for leases was 2.29 % as of June 30, 2023. The total operating lease costs were $ 604,000 and $ 768,000 for the three months ended June 30, 2023 and 2022, respectively, and $ 1.2 million and $ 1.5 million for the six months ended June 30, 2023 and 2022, respectively. Operating lease payments due as of June 30, 2023 were as follows: 27 Table of Contents Schedule of maturities of lease liabilities Operating (dollars in thousands) Leases 2023 $ 1,027 2024 2,099 2025 2,157 2026 2,210 2027 2,268 Thereafter 22,202 Total undiscounted lease payments 31,963 Discount effect of cash flows 6,646 Total lease liability $ 25,317 NOTE 8 – Earnings Per Common Share The following schedule reconciles the numerators and denominators of the basic and diluted earnings per share computations for the three-month periods ended June 30, 2023 and 2022. Dilutive common shares arise from the potentially dilutive effect of the Company’s stock options that were outstanding at June 30, 2023. The assumed conversion of stock options can create a difference between basic and dilutive net income per common share. At June 30, 2023 and 2022, there were 386,003 and 162,366 options, respectively, that were not considered in computing diluted earnings per common share because they were anti-dilutive. Schedule of earnings per share computations Three months ended June 30, Six months ended June 30, (dollars in thousands, except share data) 2023 2022 2023 2022 Numerator: Net income available to common shareholders $ 2,458 7,240 5,161 15,210 Denominator: Weighted-average common shares outstanding – basic 8,051,131 7,957,631 8,038,642 7,944,814 Common stock equivalents 17,897 97,279 41,879 130,682 Weighted-average common shares outstanding – diluted 8,069,028 8,054,910 8,080,521 8,075,496 Earnings per common share: Basic $ 0.31 0.91 0.64 1.91 Diluted $ 0.31 0.90 0.64 1.88 Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion reviews our results of operations for the three and six month periods ended June 30, 2023 as compared to the three and six month periods ended June 30, 2022 and assesses our financial condition as of June 30, 2023 as compared to December 31, 2022. You should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements and the related notes and the consolidated financial statements and the related notes for the year ended December 31, 2022 included in our Annual Report on Form 10-K for that period. Results for the three and six month periods ended June 30, 2023 are not necessarily indicative of the results for the year ending December 31, 2023 or any future period. Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” or similar references mean Southern First Bancshares, Inc. and its consolidated subsidiary. References to the “Bank” refer to Southern First Bank. Cautionary warning regarding forward-looking statements This report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements may relate to our financial condition, results of operations, plans, objectives, or future 28 Table of Contents performance. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “seek to,” “strive,” “focus,” “expect,” “anticipate,” “predict,” “project,” “potential,” “believe,” “continue,” “assume,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in any forward-looking statements include, but are not limited to: ● Restrictions or conditions imposed by our regulators on our operations; ● Increases in competitive pressure in the banking and financial services industries; ● Changes in access to funding or increased regulatory requirements with regard to funding, which could impair our liquidity; ● Changes in deposit flows, which may be negatively affected by a number of factors, including rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to clients on alternative investments and general economic or industry conditions; ● Credit losses as a result of declining real estate values, increasing interest rates, increasing unemployment, changes in payment behavior or other factors; ● Credit losses due to loan concentration; ● Changes in the amount of our loan portfolio collateralized by real estate and weaknesses in the real estate market; ● Our ability to successfully execute our business strategy; ● Our ability to attract and retain key personnel; ● The success and costs of our expansion into the Charlotte, North Carolina, Greensboro, North Carolina and Atlanta, Georgia markets and into potential new markets; ● Risks with respect to future mergers or acquisitions, including our ability to successfully expand and integrate the businesses and operations that we acquire and realize the anticipated benefits of the mergers or acquisitions; ● Changes in the interest rate environment which could reduce anticipated or actual margins; ● Changes in political conditions or the legislative or regulatory environment, including new governmental initiatives affecting the financial services industry; ● Changes in economic conditions resulting in, among other things, a deterioration in credit quality; ● Changes occurring in business conditions and inflation; ● Increased cybersecurity risk, including potential business disruptions or financial losses; ● Changes in technology; ● The adequacy of the level of our allowance for credit losses and the amount of loan loss provisions required in future periods; ● Examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for credit losses or write-down assets; ● Changes in U.S. monetary policy, the level and volatility of interest rates, the capital markets and other market conditions that may affect, among other things, our liquidity and the value of our assets and liabilities; ● Any increase in FDIC assessments which will increase our cost of doing business; ● Risks associated with complex and changing regulatory environments, including, among others, with respect to data privacy, artificial intelligence, information security, climate change or other environmental, social and governance matters, and labor matters, relating to our operations; ● The rate of delinquencies and amounts of loans charged-off; ● The rate of loan growth in recent years and the lack of seasoning of a portion of our loan portfolio; 29 Table of Contents ● Our ability to maintain appropriate levels of capital and to comply with our capital ratio requirements; ● Adverse changes in asset quality and resulting credit risk-related losses and expenses; ● Changes in accounting standards, rules and interpretations and the related impact on our financial statements; ● Risks associated with actual or potential litigation or investigations by customers, regulatory agencies or others; ● Adverse effects of failures by our vendors to provide agreed upon services in the manner and at the cost agreed; ● The potential effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics (including COVID-19), war or terrorist activities, disruptions in our customers’ supply chains, disruptions in transportation, essential utility outages or trade disputes and related tariffs; and ● Other risks and uncertainties detailed in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022, in Part II, Item 1A, “Risk Factors” of our Quarterly Reports on Form 10-Q, and in our other filings with the SEC. If any of these risks or uncertainties materialize, or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from those expressed in, implied or projected by, such forward-looking statements. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q. We make these forward-looking statements as of the date of this document and we do not intend, and assume no obligation, to update the forward-looking statements or to update the reasons why actual results could differ from those expressed in, or implied or projected by, the forward-looking statements, except as required by law. OVERVIEW Our business model continues to be client-focused, utilizing relationship teams to provide our clients with a specific banker contact and support team responsible for all of their banking needs. The purpose of this structure is to provide a consistent and superior level of professional service, and we believe it provides us with a distinct competitive advantage. We consider exceptional client service to be a critical part of our culture, which we refer to as "ClientFIRST." At June 30, 2023, we had total assets of $4.00 billion, an 8.4% increase from total assets of $3.69 billion at December 31, 2022. The largest component of our total assets is loans which were $3.54 billion and $3.27 billion at June 30, 2023 and December 31, 2022, respectively. Our liabilities and shareholders’ equity at June 30, 2023 totaled $3.70 billion and $301.5 million, respectively, compared to liabilities of $3.40 billion and shareholders’ equity of $294.5 million at December 31, 2022. The principal component of our liabilities is deposits which were $3.43 billion and $3.13 billion at June 30, 2023 and December 31, 2022, respectively. Like most community banks, we derive the majority of our income from interest received on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities, which is called our net interest spread. In addition to earning interest on our loans and investments, we earn income through fees and other charges to our clients. Our net income to common shareholders was $2.5 million and $7.2 million for the three months ended June 30, 2023 and 2022, respectively. Diluted earnings per share (“EPS”) was $0.31 for the second quarter of 2023 as compared to $0.90 for the same period in 2022. The decrease in net income was primarily driven by a decrease in net interest income resulting from higher costs on our deposit accounts related to the Federal Reserve’s cumulative 500 basis point interest rate increase during the past 16 months, combined with an increase in non-interest expenses. 30 Table of Contents Our net income to common shareholders was $5.2 million and $15.2 million for the six months ended June 30, 2023 and 2022, respectively. Diluted EPS was $0.64 for the six months ended June 30, 2023 as compared to $1.88 for the same period in 2022. The decrease in net income was primarily driven by the increase in interest expense on our deposit accounts. RESULTS OF OPERATIONS Net Interest Income and Margin Our level of net interest income is determined by the level of earning assets and the management of our net interest margin. Our net interest income was $18.8 million for the second quarter of 2023, a 24.3% decrease over net interest income of $24.9 million for the second quarter of 2022, driven primarily by the increase in interest expense on our deposit accounts. In addition, our net interest margin, on a tax-equivalent basis (TE), was 2.05% for the second quarter of 2023 compared to 3.35% for the same period in 2022. We have included a number of tables to assist in our description of various measures of our financial performance. For example, the “Average Balances, Income and Expenses, Yields and Rates” table reflects the average balance of each category of our assets and liabilities as well as the yield we earned or the rate we paid with respect to each category during the three and six month periods ended June 30, 2023 and 2022. A review of this table shows that our loans typically provide higher interest yields than do other types of interest-earning assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” tables demonstrate the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables to illustrate our interest rate sensitivity with respect to interest-earning accounts and interest-bearing accounts. The following tables entitled “Average Balances, Income and Expenses, Yield and Rates” set forth information related to our average balance sheets, average yields on assets, and average costs of liabilities. We derived these yields by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. During the same periods, we had no securities purchased with agreements to resell. All investments owned have an original maturity of over one year. Nonaccrual loans are included in the following tables. Loan yields have been reduced to reflect the negative impact on our earnings of loans on nonaccrual status. The net of capitalized loan costs and fees are amortized into interest income on loans. 31 Table of Contents Average Balances, Income and Expenses, Yields and Rates For the Three Months Ended June 30, 2023 2022 (dollars in thousands) Average Balance Income/ Expense Yield/ Rate (1) Average Balance Income/ Expense Yield/ Rate (1) Interest-earning assets Federal funds sold and interest-bearing deposits with banks $ 71,004 $ 891 5.03 % $ 80,909 $ 180 0.89 % Investment securities, taxable 93,922 623 2.66 % 98,527 404 1.64 % Investment securities, nontaxable (2) 10,200 108 4.24 % 10,382 56 2.16 % Loans (3) 3,511,225 41,089 4.69 % 2,795,274 26,610 3.82 % Total interest-earning assets 3,686,351 42,711 4.65 % 2,985,092 27,250 3.66 % Noninterest-earning assets 155,847 154,659 Total assets $ 3,842,198 $ 3,139,751 Interest-bearing liabilities NOW accounts $ 297,234 537 0.72 % $ 389,563 144 0.15 % Savings & money market 1,727,009 15,298 3.55 % 1,267,174 1,200 0.38 % Time deposits 573,095 6,102 4.27 % 278,101 500 0.72 % Total interest-bearing deposits 2,597,338 21,937 3.39 % 1,934,838 1,844 0.38 % FHLB advances and other borrowings 135,922 1,382 4.08 % 53,179 105 0.79 % Subordinated debentures 36,251 542 6.00 % 36,143 405 4.49 % Total interest-bearing liabilities 2,769,511 23,861 3.46 % 2,024,160 2,354 0.47 % Noninterest-bearing liabilities 771,388 833,943 Shareholders’ equity 301,299 281,648 Total liabilities and shareholders’ equity $ 3,842,198 $ 3,139,751 Net interest spread 1.19 % 3.19 % Net interest income (tax equivalent) / margin $ 18,850 2.05 % $ 24,896 3.35 % Less: tax-equivalent adjustment (2) (25 ) (12 ) Net interest income $ 18,825 $ 24,884 (1) Annualized for the three month period. (2) The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis. (3) Includes mortgage loans held for sale. Our net interest margin (TE) decreased 130 basis points to 2.05% during the second quarter of 2023, compared to the second quarter of 2022, primarily due to higher costs on our interest-bearing liabilities. Our average interest-bearing liabilities grew by $745.4 million during the second quarter of 2023, while the rate on these liabilities increased 299 basis points to 3.46%. In contrast, our average interest-earning assets grew by $701.3 million during the second quarter of 2023 while the average yield on these assets increased by 99 basis points to 4.65% during the same period. The increase in our average interest-bearing liabilities during the second quarter of 2023 resulted primarily from a $662.5 million increase in our interest-bearing deposits, while the 299-basis point increase in rate on our interest-bearing liabilities was driven by a 301 basis point increase in deposit rates. The increase in average interest-earning assets for the second quarter of 2023 related primarily to an increase of $716.0 million in our average loan balances. The 99 basis point increase in yield on our interest-earning assets was driven by an 87 basis point increase in loan yield as our loan portfolio has repriced at rates higher than historical rates for the majority of the past 12 months. Our net interest spread was 1.19% for the second quarter of 2023 compared to 3.19% for the same period in 2022. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The 299 basis point increase in the rate on our interest-bearing liabilities was partially offset by a 99 basis point increase in yield on our interest-bearing assets, resulting in a 200 basis point decrease in our net interest spread for the 2023 period. We anticipate continued pressure on our net interest spread and net interest margin in future periods as a significant portion of our loan portfolio is at fixed rates which do not move with the Federal Reserve’s interest rate increases, while our deposit accounts reprice much more quickly. To 32 Table of Contents partially address this continued pressure, we entered into a pay-fixed portfolio layer method fair value swap, designated as a hedging instrument, with a total notional amount of $200.0 million in the second quarter of 2023. The financial implication of this swap is described in further detail in “NOTE 5 – Derivative Financial Instruments” above. Average Balances, Income and Expenses, Yields and Rates For the Six Months Ended June 30, 2023 2022 (dollars in thousands) Average Balance Income/ Expense Yield/ Rate (1) Average Balance Income/ Expense Yield/ Rate (1) Interest-earning assets Federal funds sold and interest-bearing deposits with banks $ 78,445 $ 1,860 4.78 % $ 84,980 $ 239 0.57 % Investment securities, taxable 90,739 1,152 2.56 % 105,771 829 1.58 % Investment securities, nontaxable (2) 10,233 216 4.25 % 11,139 121 2.19 % Loans (3) 3,423,365 77,837 4.59 % 2,685,237 50,541 3.80 % Total interest-earning assets 3,602,782 81,065 4.54 % 2,887,127 51,730 3.61 % Noninterest-earning asset s 158,5 63 153,618 Total assets $ 3,761,345 $ 3,040,745 Interest-bearing liabilities NOW accounts $ 300,189 977 0.66 % $ 397,763 259 0.13 % Savings & money market 1,694,624 27,290 3.25 % 1,254,768 1,818 0.29 % Time deposits 558,341 10,848 3.92 % 218,741 675 0.62 % Total interest-bearing deposits 2,553,154 39,115 3.09 % 1,871,272 2,752 0.30 % FHLB advances and other borrowings 77,408 1,582 4.12 % 35,004 118 0.68 % Subordinated debentures 36,237 1,069 5.95 % 36,130 784 4.38 % Total interest-bearing liabilities 2,666,799 41,766 3.16 % 1,942,406 3,654 0.38 % Noninterest-bearing liabilities 794,627 818,207 Shareholders’ equity 299,919 280,132 Total liabilities and shareholders’ equity $ 3,761,345 $ 3,040,745 Net interest spread 1.38 % 3.23 % Net interest income (tax equivalent) / margin $ 39,298 2.20 % $ 48,076 3.36 % Less: tax-equivalent adjustment (2) (49 ) (28 ) Net interest income $ 39,249 $ 48,048 (1) Annualized for the six month period. (2) The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis. (3) Includes mortgage loans held for sale. During the first six months of 2023, our net interest margin (TE) decreased by 116 basis points to 2.20%, compared to 3.36% for the first six months of 2022, driven by the increase in yield on our interest-bearing liabilities. Our average interest-bearing liabilities grew by $724.4 million from the prior year, with the average yield increasing by 278 basis points to 3.16%. In contrast, our average interest-earning assets grew by $715.7 million, while the rate on these assets increased 93 basis points to 4.54%. The increase in average interest-bearing liabilities for the first half of 2023 was driven by an increase in interest-bearing deposits of $681.9 million and a $42.4 million increase in FHLB advances and other borrowings, while the increase in cost was driven by a 279 basis point increase on our interest-bearing deposits. The increase in average interest-earning assets for the first half of 2023 related primarily to a $738.1 million increase in our average loan balances. The increase in yield on our interest-earning assets was driven by a 79 basis point increase in our loan yield. Our net interest spread was 1.38% for the first half of 2023 compared to 3.23% for the same period in 2022. The 185 basis point decrease in our net interest spread was driven by the 278 basis point increase in yield on our interest-bearing liabilities. 33 Table of Contents Rate/Volume Analysis Net interest income can be analyzed in terms of the impact of changing interest rates and changing volume. The following tables set forth the effect which the varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented. Three Months Ended June 30, 2023 vs. 2022 June 30, 2022 vs. 2021 Increase (Decrease) Due to Increase (Decrease) Due to (dollars in thousands) Volume Rate Rate/ Volume Total Volume Rate Rate/ Volume Total Interest income Loans $ 6,888 6,030 1,561 14,479 $ 5,417 (979 ) (237 ) 4,201 Investment securities (20 ) 291 (13 ) 258 33 130 16 179 Federal funds sold and interest-bearing deposits with banks (22 ) 835 (102 ) 711 (17 ) 212 (68 ) 127 Total interest income 6,846 7,156 1,446 15,448 5,433 (637 ) (289 ) 4,507 Interest expense Deposits 403 16,159 3,531 20,093 195 602 127 924 FHLB advances and other borrowings 165 435 676 1,276 2,415 (2 ) (2,309 ) 104 Subordinated debentures 4 133 1 138 1 24 - 25 Total interest expense 572 16,727 4,208 21,507 2,611 624 (2,182 ) 1,053 Net interest income $ 6,274 (9,571 ) (2,762 ) (6,059 ) $ 2,822 (1,261 ) 1,893 3,454 Net interest income, the largest component of our income, was $18.8 million for the second quarter of 2023 and $24.9 million for the second quarter of 2022, a $6.1 million, or 24.3%, decrease year over year. The decrease during 2023 was driven by a $21.5 million increase in interest expense primarily due to higher rates on our interest-bearing deposits. Partially offsetting the increase in interest expense was a $15.4 million increase in interest income primarily due to an increase in volume of loans and the rates on loans. Six Months Ended June 30, 2023 vs. 2022 June 30, 2022 vs. 2021 Increase (Decrease) Due to Increase (Decrease) Due to (dollars in thousands) Volume Rate Rate/ Volume Total Volume Rate Rate/ Volume Total Interest income Loans $ 14,084 10,333 2,879 27,296 $ 9,012 (2,786 ) (560 ) 5,666 Investment securities (126 ) 604 (82 ) 396 120 191 41 352 Federal funds sold and interest-bearing deposits with banks (18 ) 1,776 (137 ) 1,621 (18 ) 195 (37 ) 140 Total interest income 13,940 12,713 2,660 29,313 9,114 (2,400 ) (556 ) 6,158 Interest expense Deposits 682 28,597 7,084 36,363 400 232 45 677 FHLB advances and other borrowings 143 597 725 1,465 70 2 40 112 Subordinated debentures 2 281 1 284 2 22 - 24 Total interest expense 827 29,475 7,810 38,112 472 256 85 813 Net interest income $ 13,113 (16,762 ) (5,150 ) (8,799 ) $ 8,642 (2,656 ) (641 ) 5,345 Net interest income for the first half of 2023 was $39.2 million compared to $48.0 million for 2022, a $8.8 million, or 18.3%, decrease. The decrease in net interest income during 2023 was driven by a $38.1 million increase in interest expense, related primarily to higher rates on our interest-bearing deposits. Provision for Credit Losses The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the allowance for credit losses and reserve for unfunded commitments at levels consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date. We review the adequacy of the allowance for credit losses on a quarterly basis. Please see the discussion included in Note 4 – Loans and Allowance for Credit Losses for a description of the factors we consider in determining the amount of the provision we expense each period to maintain this allowance. 34 Table of Contents We recorded a $910,000 provision for credit losses in the second quarter of 2023, compared to a $1.8 million provision for credit losses in the second quarter of 2022. We recorded a provision expense of $2.7 million and $2.9 million for the six months ended June 30, 2023 and June 30, 2022, respectively. The $910,000 provision in 2023, which included a $1.1 million provision for credit losses and a $185,000 reversal for unfunded commitments, was driven by $119.7 million in loan growth during the second quarter. The $2.7 million provision expense for the first half of 2023 included a $3.0 million provision for credit losses and a $215,000 reversal for unfunded commitments. Noninterest Income The following table sets forth information related to our noninterest income. Three months ended June 30, Six months ended June 30, (dollars in thousands) 2023 2022 2023 2022 Mortgage banking income $ 1,337 1,184 1,959 2,678 Service fees on deposit accounts 331 327 656 631 ATM and debit card income 536 548 1,091 1,062 Income from bank owned life insurance 338 315 670 630 Loss on disposal of fixed assets - (394 ) - (394 ) Other income 194 285 404 587 Total noninterest income $ 2,736 2,265 4,780 5,194 Noninterest income increased $471,000, or 20.8%, for the second quarter of 2023 as compared to the same period in 2022. The increase in total noninterest income resulted primarily from the following: ● Mortgage banking income increased by $153,000, or 12.9%, from the second quarter of 2022 driven by an increase in gain on sale of loans and an increase in the unrealized gain from the related derivative. ● The second quarter of 2022 included a loss on disposal of fixed assets from our prior headquarters building. Noninterest income decreased $414,000, or 8.0%, during the first half of 2023 as compared to 2022. The decrease in total noninterest income resulted primarily from the following: ● Mortgage banking income decreased by $719,000, or 26.8%, from the first half of 2022 driven by lower mortgage volume and less income recorded on the related derivative. ● Other income decreased $183,000, or 31.2%, primarily due to a decrease in various loan and appraisal fees reported as income. Noninterest expenses The following table sets forth information related to our noninterest expenses. Three months ended June 30, Six months ended June 30, (dollars in thousands) 2023 2022 2023 2022 Compensation and benefits $ 10,287 9,915 20,643 19,371 Occupancy 2,518 2,219 4,975 3,997 Outside service and data processing costs 1,705 1,528 3,334 3,062 Insurance 897 367 1,586 628 Professional fees 751 693 1,410 1,292 Marketing 335 329 701 596 Other 900 737 1,848 1,528 Total noninterest expense $ 17,393 15,788 34,497 30,474 35 Table of Contents Noninterest expense was $17.4 million for the second quarter of 2023, a $1.6 million, or 10.2%, increase from noninterest expense of $15.8 million for the second quarter of 2022. The increase in noninterest expense was driven primarily by the following: ● Compensation and benefits expense increased $372,000, or 3.8%, relating primarily to annual salary increases and hiring of new team members as well as higher benefit related expenses. ● Occupancy costs increased $299,000, or 13.5%, driven by increased depreciation, maintenance and property tax expenses on our new headquarters building. ● Insurance costs increased $530,000, or 144.4%, as a result of higher FDIC insurance premiums. Noninterest expense was $34.5 million for the first half of 2023, a $4.0 million, or 13.2%, increase from noninterest expense of $30.5 million for the first half of 2022. The increase in noninterest expense was driven primarily by increases in compensation and benefits, occupancy, and insurance expense as discussed above. Our efficiency ratio was 80.7% for the second quarter of 2023, compared to 58.2% for the second quarter of 2022. The efficiency ratio represents the percentage of one dollar of expense required to be incurred to earn a full dollar of revenue and is computed by dividing noninterest expense by the sum of net interest income and noninterest income. The higher ratio during the second quarter of 2023, compared to the second quarter of 2022, relates primarily to the decrease in net interest income and noninterest income, combined with higher noninterest expenses. We incurred income tax expense of $800,000 and $2.3 million for the three months ended June 30, 2023 and 2022, respectively, and $1.6 million and $4.7 million for the six months ended June 30, 2023 and 2022, respectively. Our effective tax rate was 24.1% and 23.5% for the six months ended June 30, 2023 and 2022, respectively. The higher tax rate during the first six months of 2023 relates to the lesser impact of equity compensation transactions during the period. Balance Sheet Review Investment Securities At June 30, 2023, the $104.1 million in our investment securities portfolio represented approximately 2.6% of our total assets. Our available for sale investment portfolio included corporate bonds, US treasuries, US government agency securities, state and political subdivisions, asset-backed securities and mortgage-backed securities with a fair value of $91.5 million and an amortized cost of $107.6 million, resulting in an unrealized loss of $16.1 million. At December 31, 2022, the $104.2 million in our investment securities portfolio represented approximately 2.8% of our total assets, including investment securities with a fair value of $93.3 million and an amortized cost of $110.3 million for an unrealized loss of $17.0 million. Loans Since loans typically provide higher interest yields than other types of interest earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. Average loans, excluding mortgage loans held for sale, for the six months ended June 30, 2023 and 2022 were $3.42 billion and $2.67 billion, respectively. Before the allowance for credit losses, total loans outstanding at June 30, 2023 and December 31, 2022 were $3.54 billion and $3.27 billion, respectively. The principal component of our loan portfolio is loans secured by real estate mortgages. As of June 30, 2023, our loan portfolio included $3.0 billion, or 84.1%, of real estate loans, compared to $2.78 billion, or 84.8%, at December 31, 2022. Most of our real estate loans are secured by residential or commercial property. We obtain a security interest in real estate, in addition to any other available collateral, in order to increase the likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans to coincide with the appropriate regulatory guidelines. We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral and business types. Home equity lines of credit totaled $185.6 million as of June 30, 2023, of which approximately 47% were in a first lien position, while the remaining balance was second liens. At December 31, 2022, our home equity lines of credit totaled $179.3 million, of which approximately 48% were in first lien positions, while the remaining balance was in second liens. The average home equity loan 36 Table of Contents had a balance of approximately $85,000 and a loan to value of 75% as of June 30, 2023, compared to an average loan balance of $84,000 and a loan to value of approximately 73% as of December 31, 2022. Further, 0.6% of our total home equity lines of credit were over 30 days past due as of both June 30, 2023 and December 31, 2022. Following is a summary of our loan composition at June 30, 2023 and December 31, 2022. During the first six months of 2023, our loan portfolio increased by $264.2 million, or 8.1%, with a 7.0% increase in commercial loans while consumer loans increased by 10.2% during the period. The majority of the increase was in loans secured by real estate. Our level of non-owner occupied commercial real estate and multi-family loans represents 273.2% of the Bank’s total risk-based capital at June 30, 2023. Our consumer real estate portfolio grew by $116.6 million and includes high quality 1-4 family consumer real estate loans. Our average consumer real estate loan currently has a principal balance of $470,000, a term of 25 years, and an average rate of 3.98% as of June 30, 2023, compared to a principal balance of $468,000, a term of 22 years, and an average rate of 3.71% as of December 31, 2022. June 30, 2023 December 31, 2022 (dollars in thousands) Amount % of Total Amount % of Total Commercial Owner occupied RE $ 613,874 17.4 % $ 612,901 18.7 % Non-owner occupied RE 951,536 26.9 % 862,579 26.3 % Construction 115,798 3.3 % 109,726 3.4 % Business 511,719 14.5 % 468,112 14.3 % Total commercial loans 2,192,927 62.1 % 2,053,318 62.7 % Consumer Real estate 1,047,904 29.6 % 931,278 28.4 % Home equity 185,584 5.2 % 179,300 5.5 % Construction 61,044 1.7 % 80,415 2.5 % Other 50,157 1.4 % 29,052 0.9 % Total consumer loans 1,344,689 37.9 % 1,220,045 37.3 % Total gross loans, net of deferred fees 3,537,616 100.0 % 3,273,363 100.0 % Less—allowance for credit losses (41,105 ) (38,639 ) Total loans, net $ 3,496,511 $ 3,234,724 Nonperforming assets Nonperforming assets include real estate acquired through foreclosure or deed taken in lieu of foreclosure and loans on nonaccrual status. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms and to show capacity to continue performing into the future before that loan can be placed back on accrual status. As of June 30, 2023 and December 31, 2022, we had no loans 90 days past due and still accruing. Following is a summary of our nonperforming assets. (dollars in thousands) June 30, 2023 December 31, 2022 Commercial $ 891 429 Consumer 2,125 2,198 Total nonaccrual loans 3,016 2,627 Other real estate owned - - Total nonperforming assets $ 3,016 2,627 At June 30, 2023, nonperforming assets were $3.0 million, or 0.08% of total assets and 0.09% of gross loans. Comparatively, nonperforming assets were $2.6 million, or 0.07% of total assets and 0.08% of gross loans at 37 Table of Contents December 31, 2022. Nonaccrual loans increased $389,000 during the first six months of 2023 due primarily to one commercial relationship totaling $733,000, which is secured by real estate, that was added to nonaccrual status offset by $360,000 of paydowns on the nonaccrual loans. The amount of foregone interest income on nonaccrual loans in the first six months of 2023 and 2022 was not material. At June 30, 2023 and December 31, 2022, the allowance for credit losses represented 1,363.11% and 1,1470.70% of the total amount of nonperforming loans, respectively. A significant portion of the nonperforming loans at June 30, 2023 were secured by real estate. We have evaluated the underlying collateral on these loans and believe that the collateral on these loans is sufficient to minimize future losses. As a general practice, most of our commercial loans and a portion of our consumer loans are originated with relatively short maturities of less than ten years. As a result, when a loan reaches its maturity we frequently renew the loan and thus extend its maturity using similar credit standards as those used when the loan was first originated. Due to these loan practices, we may, at times, renew loans which are classified as nonaccrual after evaluating the loan’s collateral value and financial strength of its guarantors. Nonaccrual loans are renewed at terms generally consistent with the ultimate source of repayment and rarely at reduced rates. In these cases, we will generally seek additional credit enhancements, such as additional collateral or additional guarantees to further protect the loan. When a loan is no longer performing in accordance with its stated terms, we will typically seek performance under the guarantee. In addition, at June 30, 2023, 84.1% of our loans were collateralized by real estate and 78.6% of our individually evaluated loans were secured by real estate. We utilize third party appraisers to determine the fair value of collateral dependent loans. Our current loan and appraisal policies require us to obtain updated appraisals on an annual basis, either through a new external appraisal or an appraisal evaluation. Individually evaluated loans are reviewed on a quarterly basis to determine the level of impairment. As of June 30, 2023, we did not have any individually evaluated real estate loans carried at a value in excess of the appraised value. We typically charge-off a portion or create a specific reserve for impaired loans when we do not expect repayment to occur as agreed upon under the original terms of the loan agreement. At June 30, 2023, individually evaluated loans totaled $4.8 million with a reserve of approximately $905,000 allocated in the allowance for credit losses. During the first six months of 2023, the average recorded investment in individually evaluated loans was approximately $6.0 million. Comparatively, individually evaluated loans totaled $7.1 million at December 31, 2022 for which $6.8 million of these loans had a reserve of approximately $1.3 million allocated in the allowance for credit losses. During 2022, the average recorded investment in individually evaluated loans was approximately $7.6 million. Allowance for Credit Losses The allowance for credit losses was $41.1 million, representing 1.16% of outstanding loans and providing coverage of 1,363.11%, of nonperforming loans at June 30, 2023 compared to $38.6 million, or 1.18% of outstanding loans and 1470.84% of nonperforming loans at December 31, 2022. At June 30, 2022, the allowance for credit losses was $34.2 million, or 1.20% of outstanding loans and 1,166.70% of nonperforming loans. Deposits and Other Interest-Bearing Liabilities Our primary source of funds for loans and investments is our deposits and advances from the FHLB. In the past, we have chosen to obtain a portion of our certificates of deposits from areas outside of our market in order to obtain longer term deposits than are readily available in our local market. Our internal guidelines regarding the use of brokered CDs limit our brokered CDs to 20% of total deposits, which allows us to take advantage of the attractive terms that wholesale funding can offer while mitigating the related inherent risk. Our retail deposits represented $3.01 billion, or 87.7% of total deposits, while our wholesale deposits represented $421.6 million, or 12.3%, of total deposits at June 30, 2023. At December 31, 2022, retail deposits represented $2.90 billion, or 92.5%, of our total deposits. Wholesale deposits were $236.2 million, representing 7.5% of our total deposits, at December 31, 2022. Our loan-to-deposit ratio was 103% at June 30, 2023 and 104% at December 31, 2022. The following is a detail of our deposit accounts: 38 Table of Contents June 30, December 31, (dollars in thousands) 2023 2022 Non-interest bearing $ 698,084 804,115 Interest bearing: NOW accounts 308,762 318,030 Money market accounts 1,692,900 1,506,418 Savings 36,243 40,673 Time, less than $250,000 114,691 89,876 Time and out-of-market deposits, $250,000 and over 582,338 374,752 Total deposits $ 3,433,018 3,133,864 During the past 12 months, we continued our focus on increasing core deposits, which exclude out-of-market deposits and time deposits of $250,000 or more, in order to provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were $2.88 billion and $2.76 billion at June 30, 2023, and December 31, 2022, respectively. In addition, at June 30, 2023 and December 31, 2022, we estimate that we have approximately $968.1 million and $1.1 billion, or 28.2% and 36.6% of total deposits, respectively, in uninsured and uncollateralized deposits, including related interest accrued and unpaid. Uninsured deposits alone represented $1.4 billion and $1.5 billion at June 30, 2023 and December 31, 2022, respectively. Since it is not reasonably practicable to provide a precise measure of uninsured deposits, the amounts above are estimates and are based on the same methodologies and assumptions used by the FDIC for the Bank’s regulatory reporting requirements. The following table shows the average balance amounts and the average rates paid on deposits. Six months ended June 30, 2023 2022 (dollars in thousands) Amount Rate Amount Rate Noninterest-bearing demand deposits $ 742,274 0.00 % $ 769,844 0.00 % Interest-bearing demand deposits 300,189 0.66 % 397,763 0.13 % Money market accounts 1,655,878 3.32 % 1,214,062 0.30 % Savings accounts 38,746 0.08 % 40,707 0.05 % Time deposits less than $250,000 85,325 3.75 % 23,406 0.30 % Time deposits greater than $250,000 473,017 1.12 % 195,334 0.66 % Total deposits $ 3,295,429 1.99 % $ 2,641,116 0.21 % During the first six months of 2023, our average transaction account balances increased by $314.7 million, or 13.0%, from the prior year, while our average time deposit balances increased by $340,000, or 155.3%. We have experienced record growth in new account openings throughout our footprint during the first half of 2023. In addition, we have added $234.1 million in wholesale time deposits. All of our time deposits are certificates of deposits. The maturity distribution of our time deposits $250,000 or more at June 30, 2023 was as follows: (dollars in thousands) June 30, 2023 Three months or less $ 154,755 Over three through six months 145,315 Over six through twelve months 194,951 Over twelve months 87,317 Total $ 582,338 Time deposits that meet or exceed the FDIC insurance limit of $250,000 at June 30, 2023 and December 31, 2022 were $582.3 million and $374.8 million, respectively. We have a relationship with IntraFi Promontory Network, allowing us to provide deposit customers with access to aggregate FDIC insurance in amounts exceeding $250,000. This gives us the ability, as and when needed, to attract and retain large deposits from insurance conscious 39 Table of Contents customers. With IntraFi, we have the option to keep deposits on balance sheet or sell them to other members of the network. Liquidity and Capital Resources Liquidity is our ability to fund operations, to meet depositor withdrawals, to provide for customers’ credit needs, and to meet maturing obligations and existing commitments. Our liquidity principally depends on our cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and our ability to borrow funds. The bank failures in the first five months of 2023 exemplify the potential serious results of the unexpected inability of insured depository institutions to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in an institutions ability to satisfy its obligations to depositors. We seek to ensure our funding needs are met by maintaining a level of liquidity through asset and liability management. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control. At June 30, 2023 and December 31, 2022 our cash and cash equivalents totaled $205.1 million and $170.9 million, respectively, or 5.1% and 4.6% of total assets, respectively. Our investment securities at June 30, 2023 and December 31, 2022 amounted to $104.1 million and $104.2 million, respectively, or 2.6% and 2.8% of total assets, respectively. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity. We plan to meet our future cash needs through the liquidation of temporary investments, the generation of deposits, loan payoffs, and from additional borrowings. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. We maintain five federal funds purchased lines of credit with correspondent banks totaling $118.5 million for which there were no borrowings against the lines of credit at June 30, 2023. We are also a member of the FHLB, from which applications for borrowings can be made. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. The unused borrowing capacity currently available from the FHLB at June 30, 2023 was $609.0 million, based primarily on the Bank’s qualifying mortgages available to secure any future borrowings. However, we are able to pledge additional securities to the FHLB in order to increase our available borrowing capacity. In addition, at June 30, 2023 and December 31, 2022 we had $392.9 million and $341.5 million, respectively, of letters of credit outstanding with the FHLB to secure client deposits. Further, in July 2023, we enrolled in the Federal Reserve’s Bank Term Funding Program which offer loans of up to one year in length if we pledge collateral eligible for purchase by the Federal Reserve Banks in open market operations, such as U.S. Treasuries, U.S. agency securities, and U.S. agency mortgage-backed securities. We have a relationship with IntraFi Promontory Network, allowing us to provide deposit customers with access to aggregate FDIC insurance in amounts exceeding $250,000. This gives us the ability, as and when needed, to attract and retain large deposits from insurance conscious customers. With IntraFi, we have the option to keep deposits on balance sheet or sell them to other members of the network. Additionally, subject to certain limits, the Bank can use IntraFi to purchase cost-effective funding without collateralization and in lieu of generating funds through traditional brokered CDs or the FHLB. In this manner, IntraFi can provide us with another funding option. Thus, it serves as a deposit-gathering tool and an additional liquidity management tool. Under the Economic Growth, Regulatory Relief, and Consumer Protection Act, a well capitalized bank with a CAMELS rating of 1 or 2 may hold reciprocal deposits up to the lesser of 20% of its total liabilities or $5 billion without those deposits being treated as brokered deposits. 40 Table of Contents We also have a line of credit with another financial institution for $15.0 million, which was unused at June 30, 2023. The line of credit was renewed on December 21, 2021 at an interest rate of One Month CME Term SOFR plus 3.5% and a maturity date of December 20, 2023. As of June 30, 2023, we were in violation of one particular loan covenant and have subsequently received a waiver from the lender regarding this violation. We believe that our existing stable base of core deposits, federal funds purchased lines of credit with correspondent banks, and borrowings from the FHLB will enable us to successfully meet our long-term liquidity needs. However, as short-term liquidity needs arise, we have the ability to sell a portion of our investment securities portfolio to meet those needs. Total shareholders’ equity was $301.5 million at June 30, 2023 and $294.5 million at December 31, 2022. The $7.0 million increase from December 31, 2022 is primarily related to net income of $5.2 million during the first six months of 2023, stock option exercises and equity compensation expenses of $956,000, and a decrease in the unrealized loss on securities available for sale of $700,000. The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), equity to assets ratio (average equity divided by average assets), and tangible common equity ratio (total equity less preferred stock divided by total assets) annualized for the six months ended June 30, 2023 and the year ended December 31, 2022. Since our inception, we have not paid cash dividends. June 30, 2023 December 31, 2022 Return on average assets 0.26 % 0.90 % Return on average equity 3.27 % 10.20 % Return on average common equity 3.27 % 10.20 % Average equity to average assets ratio 7.97 % 8.85 % Tangible common equity to assets ratio 7.53 % 7.98 % Under the capital adequacy guidelines, regulatory capital is classified into two tiers. These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital to risk-weighted assets. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available for sale, minus certain intangible assets. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks believed to be inherent in the type of asset. Tier 2 capital consists of Tier 1 capital plus the general reserve for credit losses, subject to certain limitations. We are also required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio. Regulatory capital rules, which we refer to Basel III, impose minimum capital requirements for bank holding companies and banks. The Basel III rules apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies other than “small bank holding companies,” generally holding companies with consolidated assets of less than $3 billion. In order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a “capital conservation buffer” on top of our minimum risk-based capital requirements. This buffer must consist solely of common equity Tier 1, but the buffer applies to all three measurements (common equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer consists of an additional amount of CET1 equal to 2.5% of risk-weighted assets. To be considered “well-capitalized” for purposes of certain rules and prompt corrective action requirements, the Bank must maintain a minimum total risked-based capital ratio of at least 10%, a total Tier 1 capital ratio of at least 8%, a common equity Tier 1 capital ratio of at least 6.5%, and a leverage ratio of at least 5%. As of June 30, 2023, our capital ratios exceed these ratios and we remain “well capitalized.” The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements. 41 Table of Contents June 30, 2023 Actual For capital adequacy purposes minimum plus the capital conservation buffer To be well capitalized under prompt corrective action provisions minimum (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Total Capital (to risk weighted assets) $ 380,560 12.10 % $ 251,669 8.00 % $ 314,586 10.00 % Tier 1 Capital (to risk weighted assets) 341,215 10.85 % 188,751 6.00 % 251,669 8.00 % Common Equity Tier 1 Capital (to risk weighted assets) 341,215 10.85 % 141,564 4.50 % 204,481 6.50 % Tier 1 Capital (to average assets) 341,215 8.85 % 154,264 4.00 % 192,830 5.00 % December 31, 2022 Actual For capital adequacy purposes minimum plus the capital conservation buffer To be well capitalized under prompt corrective action provisions minimum (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Total Capital (to risk weighted assets) $ 366,988 12.45 % $ 235,892 8.00 % $ 294,865 10.00 % Tier 1 Capital (to risk weighted assets) 330,108 11.20 % 176,919 6.00 % 235,892 8.00 % Common Equity Tier 1 Capital (to risk weighted assets) 330,108 11.20 % 132,689 4.50 % 191,662 6.50 % Tier 1 Capital (to average assets) 330,108 9.43 % 140,040 4.00 % 175,050 5.00 % The following table summarizes the capital amounts and ratios of the Company and the minimum regulatory requirements. June 30, 2023 Actual For capital adequacy purposes minimum plus the capital conservation buffer (1) To be well capitalized under prompt corrective action provisions minimum (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Total Capital (to risk weighted assets) $ 389,514 12.40 % $ 251,322 8.00 % N/A N/A Tier 1 Capital (to risk weighted assets) 327,224 10.42 % 188,491 6.00 % N/A N/A Common Equity Tier 1 Capital (to risk weighted assets) 314,224 10.00 % 141,369 4.50 % N/A N/A Tier 1 Capital (to average assets) 327,224 8.48 % 154,286 4.00 % N/A N/A December 31, 2022 Actual For capital adequacy purposes minimum plus the capital conservation buffer (1) To be well capitalized under prompt corrective action provisions minimum (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Total Capital (to risk weighted assets) $ 380,802 12.91 % $ 235,892 8.00 % N/A N/A Tier 1 Capital (to risk weighted assets) 320,922 10.88 % 176,919 6.00 % N/A N/A Common Equity Tier 1 Capital (to risk weighted assets) 307,922 10.44 % 132,689 4.50 % N/A N/A Tier 1 Capital (to average assets) 320,922 9.17 % 140,057 4.00 % N/A N/A (1) The prompt corrective action provisions are only applicable at the Bank level. The Bank exceeded the general minimum regulatory requirements to be considered “well capitalized.” The ability of the Company to pay cash dividends to shareholders is dependent upon receiving cash in the form of dividends from the Bank. The dividends that may be paid by the Bank to the Company are subject to legal limitations and regulatory capital requirements. Since our inception, we have not paid cash dividends to shareholders. 42 Table of Contents Effect of Inflation and Changing Prices The effect of relative purchasing power over time due to inflation has not been taken into account in our consolidated financial statements. Rather, our financial statements have been prepared on an historical cost basis in accordance with generally accepted accounting principles. Unlike most industrial companies, our assets and liabilities are primarily monetary in nature. Therefore, the effect of changes in interest rates will have a more significant impact on our performance than will the effect of changing prices and inflation in general. In addition, interest rates may generally increase as the rate of inflation increases, although not necessarily in the same magnitude. As discussed previously, we seek to manage the relationships between interest sensitive assets and liabilities in order to protect against wide rate fluctuations, including those resulting from inflation. Off-Balance Sheet Risk Commitments to extend credit are agreements to lend money to a client as long as the client has not violated any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At June 30, 2023 unfunded commitments to extend credit were $850.0 million, of which $238.5 million were at fixed rates and $611.5 million were at variable rates. At December 31, 2022, unfunded commitments to extend credit were $878.3 million, of which approximately $318.9 million were at fixed rates and $559.4 million were at variable rates. A significant portion of the unfunded commitments related to commercial business loans and consumer home equity lines of credit. We evaluate each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. The type of collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate. As of June 30, 2023, the reserve for unfunded commitments was $2.6 million or 0.30% of total unfunded commitments. As of December 31, 2022, the reserve for unfunded commitments was $2.8 million or 0.32% of total unfunded commitments. At June 30, 2023 and December 31, 2022, there were commitments under letters of credit for $14.8 million and $14.3 million, respectively. The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements. Except as disclosed in this report, we are not involved in off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements or transactions that could result in liquidity needs or other commitments that significantly impact earnings. Critical Accounting Estimates We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements. Certain accounting policies inherently involve a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported, which could have a material impact on the carrying values of our assets and liabilities and our results of operations. Of the significant accounting policies used in the preparation of our consolidated financial statements, we have identified certain items as critical accounting policies based on the associated estimates, assumptions, judgments and complexity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2022, for a description our significant accounting policies that use critical accounting estimates. 43 Table of Contents Accounting, Reporting, and Regulatory Matters See Note 1 – Summary of Significant Accounting Policies in the accompanying notes to consolidated financial statements included elsewhere in this report for details of recently issued accounting pronouncements and their expected impact on our consolidated financial statements. Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risk is the risk of loss from adverse changes in market prices and rates, which principally arises from interest rate risk inherent in our lending, investing, deposit gathering, and borrowing activities. Other types of market risks, such as foreign currency exchange rate risk and commodity price risk, do not generally arise in the normal course of our business. We actively monitor and manage our interest rate risk exposure in order to control the mix and maturities of our assets and liabilities utilizing a process we call asset/liability management. The essential purposes of asset/liability management are to seek to ensure adequate liquidity and to maintain an appropriate balance between interest sensitive assets and liabilities in order to minimize potentially adverse impacts on earnings from changes in market interest rates. Our asset/liability management committee (“ALCO”) monitors and considers methods of managing exposure to interest rate risk. We have both an internal ALCO consisting of senior management that meets at various times during each month and a board ALCO that meets monthly. The ALCOs are responsible for maintaining the level of interest rate sensitivity of our interest sensitive assets and liabilities within board-approved limits. As of June 30, 2023, the following table summarizes the forecasted impact on net interest income using a base case scenario given upward and downward movements in interest rates of 100, 200, and 300 basis points based on forecasted assumptions of prepayment speeds, nominal interest rates and loan and deposit repricing rates. Estimates are based on current economic conditions, historical interest rate cycles and other factors deemed to be relevant. However, underlying assumptions may be impacted in future periods which were not known to management at the time of the issuance of the Consolidated Financial Statements. Therefore, management’s assumptions may or may not prove valid. No assurance can be given that changing economic conditions and other relevant factors impacting our net interest income will not cause actual occurrences to differ from underlying assumptions. In addition, this analysis does not consider any strategic changes to our balance sheet which management may consider as a result of changes in market conditions. Interest rate scenario Change in net interest income from base Up 300 basis points (17.55 )% Up 200 basis points (11.67 )% Up 100 basis points (5.86 )% Base - Down 100 basis points 7.60 % Down 200 basis points 14.60 % Down 300 basis points 21.12 % Item 4. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and 44 Table of Contents reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control over Financial Reporting There has been no change in the Company’s internal control over financial reporting during the six months ended June 30, 2023, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS. We are a party to claims and lawsuits arising in the course of normal business activities. Management is not aware of any material pending legal proceedings against the Company which, if determined adversely, would have a material adverse impact on the company’s financial position, results of operations or cash flows. Item 1A. RISK FACTORS. Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as well as cautionary statements contained in this Quarterly Report on Form 10-Q, including those under the caption “Cautionary Warning Regarding Forward-Looking Statements” set forth in Part I, Item 2 of this Form 10-Q, risks and matters described elsewhere in this Form 10-Q, and in our other filings with the SEC. We are providing these additional risk factors to supplement the risk factors contained in Item 1A. of our (i) Annual Report on Form 10-K for the year ended December 31, 2022 and (ii) Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023. Our enterprise risk management framework may not be effective in mitigating risk and reducing the potential for losses. Our enterprise risk management framework seeks to mitigate risk and loss to us. We have established comprehensive policies and procedures and an internal control framework designed to provide a sound operational environment for the types of risk to which we are subject, including credit risk, market risk (interest rate and price risks), liquidity risk, operational risk, compliance risk, legal risk, strategic risk, and reputational risk. However, as with any risk management framework, there are inherent limitations to our current and future risk management strategies, including risks that we have not appropriately anticipated or identified. In addition, our businesses and the markets in which we operate are continuously evolving. We may fail to adequately or timely enhance our enterprise risk framework to address those changes. If our enterprise risk framework is ineffective, either because it fails to keep pace with changes in the financial markets, regulatory requirements, our businesses, our counterparties, clients or service providers or for other reasons, we could incur losses, suffer reputational damage or find ourselves out of compliance with applicable regulatory or contractual mandates. In addition to our executive committee, the Risk Committee of the Board, the Audit Committee of the Board, as well as the Company’s Chief Risk Officer are all responsible for the “risk management framework” of the Company. These committees each meet regularly, with the authority to convene additional meetings, as circumstances require. Our interest rate risk is overseen by the Risk Committee which monitors our compliance with regulatory guidance in the formulation and implementation of our interest rate risk program. The Risk Committee reviews the results of our interest rate risk modeling quarterly to assess whether we have appropriately measured our interest rate risk, mitigated our exposures appropriately and any residual risk is acceptable. In addition to our annual review of this policy, our Board of Directors reviews the interest rate risk policy limits at least annually. Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. (a) Not applicable. (b) Not applicable. (c) Not applicable. 45 Table of Contents Item 3. DEFAULTS UPON SENIOR SECURITIES. None. Item 4. MINE SAFETY DISCLOSURES. Not applicable. Item 5. OTHER INFORMATION. None. Item 6. EXHIBITS. The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Index to Exhibits attached hereto and are incorporated herein by reference. 46 Table of Contents INDEX TO EXHIBITS Exhibit Number Description 3.1 Amended and Restated Articles, as amended, of Southern First Bancshares, Inc. (effective May 19, 2023) 3.1.1 Amended and Restated Articles, as amended, of Southern First Bancshares, Inc. (effective May 19, 2023) (redline version of amended sections) 10.1 Employment Agreement by and between Southern First Bank and Calvin C. Hurst, dated March 21, 2019.* 31.1 Rule 13a-14(a) Certification of the Principal Executive Officer. 31.2 Rule 13a-14(a) Certification of the Principal Financial Officer. 32 Section 1350 Certifications. 101 The following materials from the Quarterly Report on Form 10-Q of Southern First Bancshares, Inc. for the quarter ended June 30, 2023, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statement of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Unaudited Consolidated Financial Statements. 104 Cover Page Interactive Data File (embedded within the Inline XBRL document) * Management contract or compensatory plan or arrangement. 47 Table of Contents SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.   SOUTHERN FIRST BANCSHARES, INC. Registrant Date: August 1, 2023 /s/R. Arthur Seaver, Jr. R. Arthur Seaver, Jr. Chief Executive Officer (Principal Executive Officer) Date: August 1, 2023 /s/D. Andrew Borrmann D. Andrew Borrmann Chief Financial Officer (Principal Financial and Accounting Officer) 48