SOUTHERN FIRST BANCSHARES INC 10-Q

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2024 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 ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller Reporting Company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 8,155,097 shares of common stock, par value $0.01 per share, were issued and outstanding as of July 25, 2024. Table of Contents SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY June 30, 2024 Form 10-Q INDEX Page PART I – CONSOLIDATED FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Comprehensive Income 5 Consolidated Statements of Shareholders’ Equity 6 Consolidated Statements of Cash Flows 7 Notes to Unaudited Consolidated Financial Statements 8 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29 Item 3. Quantitative and Qualitative Disclosures about Market Risk 45 Item 4. Controls and Procedures 46 PART II – OTHER INFORMATION Item 1. Legal Proceedings 46 Item 1A. Risk Factors 46 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 46 Item 3. Defaults upon Senior Securities 47 Item 4. Mine Safety Disclosures 47 Item 5. Other Information 47 Item 6. Exhibits 47 2 Table of Contents PART I. CONSOLIDATED FINANCIAL INFORMATION Item 1. CONSOLIDATED FINANCIAL STATEMENTS SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS June 30, December 31, (dollars in thousands, except share data) 2024 2023 (Unaudited) (Audited) ASSETS Cash and cash equivalents: Cash and due from banks $ 21,567 28,020 Federal funds sold 164,432 119,349 Interest-bearing deposits with banks 8,828 8,801 Total cash and cash equivalents 194,827 156,170 Investment securities: Investment securities available for sale 121,353 134,702 Other investments 18,653 19,939 Total investment securities 140,006 154,641 Mortgage loans held for sale 14,759 7,194 Loans 3,622,521 3,602,627 Less allowance for credit losses ( 40,157 ) ( 40,682 ) Loans, net 3,582,364 3,561,945 Bank owned life insurance 53,263 52,501 Property and equipment, net 91,533 94,301 Deferred income taxes, net 12,339 12,200 Other assets 20,758 16,837 Total assets $ 4,109,849 4,055,789 LIABILITIES Deposits $ 3,459,869 3,379,564 FHLB advances and related debt 240,000 275,000 Subordinated debentures 36,376 36,322 Other liabilities 54,856 52,436 Total liabilities 3,791,101 3,743,322 SHAREHOLDERS’ EQUITY Preferred stock, par value $ .01 per share, 10,000,000 shares authorized - - Common stock, par value $ .01 per share, 20,000,000 shares authorized, 8,155,097 shares issued and outstanding at June 30, 2024; 10,000,000 shares authorized, 8,088,186 shares issued and outstanding at December 31, 2023 82 81 Nonvested restricted stock ( 4,710 ) ( 3,596 ) Additional paid-in capital 124,174 121,777 Accumulated other comprehensive loss ( 11,866 ) ( 11,342 ) Retained earnings 211,068 205,547 Total shareholders’ equity 318,748 312,467 Total liabilities and shareholders’ equity $ 4,109,849 4,055,789 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) 2024 2023 2024 2023 Interest income Loans $ 46,545 41,089 92,150 77,837 Investment securities 1,418 706 2,896 1,318 Federal funds sold and interest-bearing deposits with banks 2,583 891 3,863 1,860 Total interest income 50,546 42,686 98,909 81,015 Interest expense Deposits 28,216 21,937 55,148 39,115 Borrowings 2,802 1,924 5,588 2,651 Total interest expense 31,018 23,861 60,736 41,766 Net interest income 19,528 18,825 38,173 39,249 Provision for credit losses 500 910 325 2,735 Net interest income after provision for credit losses 19,028 17,915 37,848 36,514 Noninterest income Mortgage banking income 1,923 1,337 3,087 1,959 Service fees on deposit accounts 416 331 810 656 ATM and debit card income 587 536 1,131 1,091 Income from bank owned life insurance 384 338 762 670 Other income 213 194 397 404 Total noninterest income 3,523 2,736 6,187 4,780 Noninterest expenses Compensation and benefits 11,290 10,287 22,147 20,643 Occupancy 2,552 2,518 5,109 4,975 Outside service and data processing costs 1,962 1,705 3,808 3,334 Insurance 965 897 1,920 1,586 Professional fees 582 751 1,200 1,410 Marketing 389 335 758 701 Other 903 900 1,801 1,848 Total noninterest expenses 18,643 17,393 36,743 34,497 Income before income tax expense 3,908 3,258 7,292 6,797 Income tax expense 909 800 1,771 1,636 Net income $ 2,999 2,458 5,521 5,161 Earnings per common share Basic $ 0.37 0.31 0.68 0.64 Diluted 0.37 0.31 0.68 0.64 Weighted average common shares outstanding Basic 8,125,869 8,051,131 8,118,059 8,038,642 Diluted 8,140,822 8,069,028 8,141,371 8,080,521 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) 2024 2023 2024 2023 Net income $ 2,999 2,458 5,521 5,161 Other comprehensive income (loss): Unrealized gain (loss) on securities available for sale: Unrealized holding gain (loss) arising during the period, pretax ( 86 ) ( 1,183 ) ( 664 ) 888 Tax benefit (expense) 17 248 140 ( 188 ) Other comprehensive income (loss) ( 69 ) ( 935 ) ( 524 ) 700 Comprehensive income $ 2,930 1,523 4,997 5,861 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, 2023 8,047,975 $ 80 - $ - $ ( 4,462 ) $ 120,683 $ ( 11,775 ) $ 194,824 $ 299,350 Net income Preferred stock - - - - - - - 2,458 2,458 Proceeds from exercise of stock options 10,000 1 - - - 168 - - 169 Issuance of restricted stock, net of forfeitures Retained earnings 463 - - - 85 ( 85 ) - - - Compensation expense related to restricted stock, net of tax - - - - 326 - - - 326 Compensation expense related to stock options, net of tax Common stock - - - - - 146 - - 146 Other comprehensive loss - - - - - - ( 935 ) - ( 935 ) Additional paid-in capital June 30, 2023 8,058,438 $ 81 - $ - $ ( 4,051 ) $ 120,912 $ ( 12,710 ) $ 197,282 $ 301,514 March 31, 2024 8,156,109 $ 82 - $ - $ ( 5,257 ) $ 124,159 $ ( 11,797 ) $ 208,069 $ 315,256 Net income - - - - - - - 2,999 2,999 Proceeds from exercise of stock options - - - - - - - - - Issuance of restricted stock, net of forfeitures ( 1,012 ) - - - 78 ( 78 ) - - - Compensation expense related to restricted stock, net of tax - - - - 469 - - - 469 Compensation expense related to stock options, net of tax - - - - - 93 - - 93 Other comprehensive loss - - - - - - ( 69 ) - ( 69 ) June 30, 2024 8,155,097 $ 82 - $ - $ ( 4,710 ) $ 124,174 $ ( 11,866 ) $ 211,068 $ 318,748 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, 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, net of forfeitures 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) June 30, 2023 8,058,438 $ 81 - $ - $ ( 4,051 ) $ 120,912 $ ( 12,710 ) $ 197,282 $ 301,514 December 31, 2023 8,088,186 $ 81 - $ - $ ( 3,596 ) $ 121,777 $ ( 11,342 ) $ 205,547 $ 312,467 Net income - - - - - - - 5,521 5,521 Proceeds from exercise of stock options 11,000 - - - - 167 - - 167 Issuance of restricted stock, net of forfeitures 55,911 1 - - ( 2,035 ) 2,034 - - - Compensation expense related to restricted stock, net of tax - - - - 921 - - - 921 Compensation expense related to stock options, net of tax - - - - - 196 - - 196 Other comprehensive loss - - - - - - ( 524 ) - ( 524 ) June 30, 2024 8,155,097 $ 82 - $ - $ ( 4,710 ) $ 124,174 $ ( 11,866 ) $ 211,068 $ 318,748 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) 2024 2023 Operating activities Net income $ 5,521 5,161 Adjustments to reconcile net income to cash provided by operating activities: Provision for credit losses 325 2,735 Depreciation and other amortization 2,418 2,397 Accretion and amortization of securities discounts and premium, net 281 259 Net change in operating leases 78 133 Compensation expense related to stock options and restricted stock grants 1,117 956 Gain on sale of loans held for sale ( 2,757 ) ( 1,636 ) Loans originated and held for sale ( 100,884 ) ( 70,422 ) Proceeds from sale of loans held for sale 96,076 60,194 Increase in cash surrender value of bank owned life insurance ( 762 ) ( 670 ) Decrease in deferred tax asset - ( 21 ) Increase in other assets ( 3,921 ) ( 4,076 ) Increase (decrease) in other liabilities 3,543 ( 359 ) Net cash provided by (used for) operating activities 1,035 ( 5,349 ) Investing activities Increase (decrease) in cash realized from: Increase in loans, net ( 21,169 ) ( 264,737 ) Purchase of property and equipment ( 372 ) ( 767 ) Purchase of investment securities: Available for sale ( 5,191 ) - Other investments ( 4,301 ) ( 42,518 ) Payments and maturities, calls and repayments of investment securities: Available for sale 17,596 2,427 Other investments 5,587 40,801 Net cash used for investing activities ( 7,850 ) ( 264,794 ) Financing activities Increase in cash realized from: Increase in deposits, net 80,305 299,154 Increase (decrease) in Federal Home Loan Bank advances and other borrowings, net ( 35,000 ) 5,000 Proceeds from the exercise of stock options 167 185 Net cash provided by financing activities 45,472 304,339 Net increase in cash and cash equivalents 38,657 34,196 Cash and cash equivalents at beginning of the period 156,170 170,874 Cash and cash equivalents at end of the period $ 194,827 205,070 Supplemental information Cash paid for Interest $ 57,297 38,612 Income taxes 1,190 541 Schedule of non-cash transactions Unrealized gain (loss) on securities, net of income taxes ( 524 ) 700 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 periods ended June 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024. 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, 2023 as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 5, 2024. The consolidated financial statements include the accounts of the Company and the Bank. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation,” the financial statements related to the Trusts have not been consolidated. Business Segments The Company, through the Bank, provides a broad range of financial services to individuals and companies in South Carolina, North Carolina, and Georgia. These services include demand, time and savings deposits, lending services and ATM processing and mortgage banking services. While the Company’s management periodically reviews limited production information for these revenue streams, that information is not complete as it does not include a full allocation of revenue, costs and capital from key corporate functions. Management will continue to evaluate these lines of business for separate reporting as facts and circumstances change. Accordingly, the Company’s various banking operations are not considered by management to constitute more than one reportable operating segment. Risk and Uncertainties In the normal course of its business, the Company encounters two significant types of risks: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different bases, than its interest-earning assets. Credit risk is the risk of default within the Company’s loan portfolio that results from borrowers’ inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of real estate held by the Company. 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 recent bank failures and in an effort to strengthen public confidence in the banking system and protect depositors, regulators announced that any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law, which has and could continue to increase the cost of our FDIC insurance assessments. The ultimate impact of these bank failures on the economy, financial institutions and their depositors, as well as any governmental regulatory responses or actions resulting from the same, remains difficult to predict at this time. 8 Table of Contents The Company is subject to the regulations of various governmental agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject the Company to changes with respect to the valuation of assets, the amount of required credit loss allowance and operating restrictions resulting from the regulators’ judgments based on information available to them at the time of their examinations. The Bank makes loans to individuals and businesses in the Upstate, Midlands, and Lowcountry regions of South Carolina as well as the Triangle, Triad and Charlotte regions of North Carolina and Atlanta, Georgia for various personal and commercial purposes. The Bank’s loan portfolio has a concentration of real estate loans. As of June 30, 2024 and 2023, real estate loans represented 84.3 % and 84.1 %, respectively, of total loans. However, borrowers’ ability to repay their loans is not dependent upon any specific economic sector. As of June 30, 2024, the Company’s and the Bank’s capital ratios were in excess of all regulatory requirements. While management believes that we have sufficient capital to withstand an extended economic recession, our reported and regulatory capital ratios could be adversely impacted by future credit losses. The Company maintains access to multiple sources of liquidity, including a $ 15.0 million holding company line of credit with another bank which could be used to support capital ratios at the subsidiary bank. As of June 30, 2024, the $ 15.0 million line was unused. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of income and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses, real estate acquired in the settlement of loans, fair value of financial instruments, 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. 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. In December 2023, the FASB amended the Income Taxes topic in the Accounting Standards Codification to improve the transparency of income tax disclosures. The amendments are effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for 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, 2024 Amortized Gross Unrealized Fair (dollars in thousands) Corporate bonds [Member] Cost Gains Losses Value Available for sale Asset-backed securities [Member] Corporate bonds US treasuries [Member] $ 2,134 - 247 1,887 US treasuries 999 - 109 890 US government agencies US government agencies [Member] 19,600 - 1,900 17,700 State and political subdivisions State and political subdivisions [Member] 22,514 - 3,191 19,323 Asset-backed securities Mortgage-backed securities [Member] 31,555 78 58 31,575 Mortgage-backed securities 59,571 - 9,593 49,978 Total investment securities available for sale $ 136,373 78 15,098 121,353 December 31, 2023 Amortized Gross Unrealized Fair Cost Gains Losses Value Available for sale Corporate bonds $ 2,147 - 237 1,910 US treasuries 9,495 1 102 9,394 US government agencies 20,594 - 1,938 18,656 State and political subdivisions 22,642 11 2,912 19,741 Asset-backed securities 33,450 2 216 33,236 Mortgage-backed securities 60,730 - 8,965 51,765 Total investment securities available for sale $ 149,058 14 14,370 134,702 Contractual maturities and yields on the Company’s investment securities at June 30, 2024 and December 31, 2023 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. Schedule of maturities and yields on the company’s investment securities June 30, 2024 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] $ - - $ - - $ 1,887 2.02 % $ - - $ 1,887 2.02 % US treasuries - - 890 1.27 % - - - - 890 1.27 % US government agencies US government agencies [Member] 992 0.45 % 2,389 1.00 % 14,319 4.29 % - - 17,700 3.63 % State and political subdivisions State and political subdivisions [Member] - - 904 1.94 % 5,729 1.89 % 12,690 2.16 % 19,323 2.07 % Asset-backed securities Asset-backed securities [Member] - - 132 3.88 % - - 31,443 6.68 % 31,575 6.67 % Mortgage-backed securities Mortgage-backed securities [Member] - - 6,547 1.29 % 3,411 1.54 % 40,020 2.10 % 49,978 1.96 % Total investment securities Total investment securities [Member] $ 992 0.45 % $ 10,862 1.31 % $ 25,346 3.21 % $ 84,153 3.82 % $ 121,353 3.44 % December 31, 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 $ - - $ - - $ 1,910 2.01 % $ - - $ 1,910 2.01 % US treasuries 8,497 5.42 % 897 1.27 % - - - - 9,394 5.02 % US government agencies 970 0.45 % 2,385 1.00 % 15,301 4.41 % - - 18,656 3.77 % State and political subdivisions - - 906 1.94 % 5,769 1.89 % 13,066 2.15 % 19,741 2.06 % Asset-backed securities - - 296 ( 6.13 )% - - 32,940 6.63 % 33,236 6.57 % Mortgage-backed securities - - 4,795 1.15 % 5,400 1.59 % 41,570 2.00 % 51,765 1.87 % Total investment securities $ 9,467 4.91 % $ 9,279 0.98 % $ 28,380 3.20 % $ 87,576 3.76 % $ 134,702 3.55 % 10 Table of Contents The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities at June 30, 2024 and December 31, 2023, 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, 2024 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 $ 1,887 $ 247 1 $ 1,887 $ 247 US treasuries - - - 1 890 109 1 890 109 US government agencies - - - 12 17,700 1,900 12 17,700 1,900 State and political subdivisions 2 748 13 30 18,575 3,178 32 19,323 3,191 Asset-backed 3 11,479 42 7 3,708 16 10 15,187 58 Mortgage-backed securities 1 1,161 1 63 48,817 9,592 64 49,978 9,593 Total investment securities 6 $ 13,388 $ 56 114 $ 91,577 $ 15,042 120 $ 104,965 $ 15,098 December 31, 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 $ 1,910 $ 237 1 $ 1,910 $ 237 US treasuries - - - 1 897 102 1 897 102 US government agencies 2 7,533 50 10 11,123 1,888 12 18,656 1,938 State and political subdivisions - - - 30 18,964 2,912 30 18,964 2,912 Asset-backed 8 26,746 145 7 4,866 71 15 31,612 216 Mortgage-backed securities Mortgage-backed securities [Member] 2 2,869 36 62 48,896 8,929 64 51,765 8,965 Total investment securities 12 $ 37,148 $ 231 111 $ 86,656 $ 14,139 123 $ 123,804 $ 14,370 At June 30, 2024, the Company had 120 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, 2024 . 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, 2024 December 31, 2023 Federal Home Loan Bank stock $ 14,633 16,063 Other nonmarketable investments 3,617 3,473 Investment in Trust Preferred subsidiaries 403 403 Total other investments $ 18,653 19,939 The Company has evaluated other investments for impairment and determined that the other investments are not impaired as of June 30, 2024 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. At June 30, 2024, there were no securities pledges as collateral for repurchase agreements from brokers. 11 Table of Contents 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, 2024, mortgage loans held for sale totaled $ 14.8 million compared to $ 7.2 million at December 31, 2023. NOTE 4 – Loans and Allowance for Credit Losses The following table summarizes the composition of our loan portfolio. Total gross loans are recorded net of deferred loan fees and costs, which totaled $ 6.8 million as of June 30, 2024 and $ 7 .0 million as of December 31, 2023. Schedule of composition of our loan portfolio   June 30, 2024 December 31, 2023 (dollars in thousands) Commercial [Member] Amount % of Total Amount % of Total Commercial Owner occupied RE Owner occupied RE [Member] $ 642,008 17.7 % $ 631,657 17.5 % Non-owner occupied RE 917,034 25.3 % 942,529 26.2 % Construction Construction [Member] 144,968 4.0 % 150,680 4.2 % Business Business [Member] 527,017 14.5 % 500,161 13.9 % Total commercial loans Consumer [Member] 2,231,027 61.5 % 2,225,027 61.8 % Consumer Real estate Real estate [Member] 1,126,155 31.1 % 1,082,429 30.0 % Home equity Home equity [Member] 189,294 5.3 % 183,004 5.1 % Construction Non-owner occupied RE [Member] 32,936 0.9 % 63,348 1.7 % Other Other [Member] 43,109 1.2 % 48,819 1.4 % Total consumer loans 1,391,494 38.5 % 1,377,600 38.2 % Total gross loans, net of deferred fees 3,622,521 100.0 % 3,602,627 100.0 % Less—allowance for credit losses ( 40,157 ) ( 40,682 ) Total loans, net $ 3,582,364 $ 3,561,945 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. 12 Table of Contents Schedule of loan maturity distribution by type and related interest rate June 30, 2024 (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 $ 14,444 191,243 395,013 41,308 642,008 Non-owner occupied RE 95,160 499,411 300,272 22,191 917,034 Construction 27,588 69,004 48,376 - 144,968 Business 114,676 245,232 162,789 4,320 527,017 Total commercial loans 251,868 1,004,890 906,450 67,819 2,231,027 Consumer Real estate 17,847 59,442 306,892 741,974 1,126,155 Home equity 2,768 31,447 150,681 4,398 189,294 Construction 2,084 1,246 19,953 9,653 32,936 Other 5,017 34,340 2,963 789 43,109 Total consumer loans 27,716 126,475 480,489 756,814 1,391,494 Total gross loans, net of deferred fees $ 279,584 1,131,365 1,386,939 824,633 3,622,521 December 31, 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 $ 17,358 177,203 395,130 41,966 631,657 Non-owner occupied RE 68,601 517,622 331,727 24,579 942,529 Construction 26,762 64,432 59,486 - 150,680 Business 114,432 194,416 186,927 4,386 500,161 Total commercial loans 227,153 953,673 973,270 70,931 2,225,027 Consumer Real estate 10,593 51,956 301,095 718,785 1,082,429 Home equity 2,716 27,578 147,855 4,855 183,004 Construction - 252 39,459 23,637 63,348 Other 11,157 33,592 3,265 805 48,819 Total consumer loans 24,466 113,378 491,674 748,082 1,377,600 Total gross loans, net of deferred fees $ 251,619 1,067,051 1,464,944 819,013 3,602,627 13 Table of Contents The following table summarizes the loans due after one year by category. Schedule of loans due after one year by category June 30, 2024 December 31, 2023 Interest Rate Interest Rate (dollars in thousands) Fixed Floating or Adjustable Fixed Floating or Adjustable Commercial Owner occupied RE $ 607,993 19,571 605,199 9,100 Non-owner occupied RE 730,091 91,783 768,048 105,880 Construction 84,955 32,425 81,326 42,592 Business 288,076 124,265 293,920 91,809 Total commercial loans 1,711,115 268,044 1,748,493 249,381 Consumer Real estate 1,108,308 - 1,071,836 - Home equity 10,791 175,735 11,441 168,847 Construction 30,852 - 63,348 - Other 11,463 26,629 11,525 26,137 Total consumer loans 1,161,414 202,364 1,158,150 194,984 Total gross loans, net of deferred fees $ 2,872,529 470,408 2,906,643 444,365 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. · 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. 14 Table of Contents The following table presents loan balances classified by credit quality indicators by year of origination as of June 30, 2024. Schedule of classified by credit quality indicators by year of origination June 30, 2024 (dollars in thousands) 2024 2023 2022 2021 2020 Prior Revolving Revolving Converted to Term Total Commercial Owner occupied RE Pass $ 23,203 44,004 179,234 139,629 69,627 157,231 85 240 613,253 Watch 501 - 3,400 1,483 8,947 10,562 - - 24,893 Special Mention - - 172 - - 2,866 - - 3,038 Substandard - - - - - 824 - - 824 Total Owner occupied RE 23,704 44,004 182,806 141,112 78,574 171,483 85 240 642,008 Non-owner occupied RE Pass 18,752 78,134 307,936 163,811 106,253 200,283 348 - 875,517 Watch - 997 2,363 444 522 11,614 - - 15,940 Special Mention - - - 7,662 - 8,999 - - 16,661 Substandard - - 967 304 - 7,645 - - 8,916 Total Non-owner occupied RE 18,752 79,131 311,266 172,221 106,775 228,541 348 - 917,034 Current period gross write-offs - - - - - ( 1,029 ) - - ( 1,029 ) Construction Pass 11,547 27,377 84,630 20,016 - - - - 143,570 Watch - - 1,398 - - - - - 1,398 Total Construction 11,547 27,377 86,028 20,016 - - - - 144,968 Business Pass 14,126 48,209 137,919 42,732 17,134 57,525 172,528 230 490,403 Watch - 152 16,870 1,965 1,448 4,394 6,985 146 31,960 Special Mention 662 223 827 80 131 1,812 - - 3,735 Substandard - - - 148 361 410 - - 919 Total Business 14,788 48,584 155,616 44,925 19,074 64,141 179,513 376 527,017 Current period gross write-offs - - - - ( 347 ) ( 18 ) - - ( 365 ) Total Commercial loans 68,791 199,096 735,716 378,274 204,423 464,165 179,946 616 2,231,027 Consumer Real estate Pass 47,322 148,130 287,524 271,998 166,714 165,723 - - 1,087,411 Watch - 487 5,590 7,305 4,764 5,813 - - 23,959 Special Mention - 142 2,472 1,509 993 5,104 - - 10,220 Substandard - 275 341 1,220 978 1,751 - - 4,565 Total Real estate 47,322 149,034 295,927 282,032 173,449 178,391 - - 1,126,155 Home equity Pass - - - - - - 175,981 - 175,981 Watch - - - - - - 8,094 - 8,094 Special Mention - - - - - - 3,724 - 3,724 Substandard - - - - - - 1,495 - 1,495 Total Home equity - - - - - - 189,294 - 189,294 Construction Pass 2,638 10,263 15,424 4,611 - - - - 32,936 Total Construction 2,638 10,263 15,424 4,611 - - - - 32,936 Other Pass 2,411 1,066 2,316 2,034 1,320 3,053 29,800 - 42,000 Watch - 8 20 341 - 150 55 - 574 Special Mention 5 31 327 69 - 68 30 - 530 Substandard - - - - - - 5 - 5 Total Other 2,416 1,105 2,663 2,444 1,320 3,271 29,890 - 43,109 Current period gross write-offs - - - - - ( 38 ) ( 41 ) - ( 79 ) Total Consumer loans 52,376 160,402 314,014 289,087 174,769 181,662 219,184 - 1,391,494 Total loans $ 121,167 359,498 1,049,730 667,361 379,192 645,827 399,130 616 3,622,521 Total Current period gross write-offs - - - - ( 347 ) ( 1,085 ) ( 41 ) - ( 1,473 ) 15 Table of Contents The following table presents loan balances classified by credit quality indicators by year of origination as of December 31, 2023. December 31, 2023 (dollars in thousands) 2023 2022 2021 2020 2019 Prior Revolving Revolving Converted to Term Total Commercial Owner occupied RE Pass $ 42,846 180,654 138,549 64,818 59,880 110,502 85 166 597,500 Watch - 3,460 460 15,997 3,525 6,616 - - 30,058 Special Mention - 181 - - - 3,057 - - 3,238 Substandard - - - - - 861 - - 861 Total Owner occupied RE 42,846 184,295 139,009 80,815 63,405 121,036 85 166 631,657 Non-owner occupied RE Pass 84,617 298,063 162,697 107,364 59,260 163,990 9,249 - 885,240 Watch 1,007 3,260 9,914 533 5,545 10,630 - - 30,889 Special Mention - - 7,759 - 8,252 879 - - 16,890 Substandard - - 313 - 8,088 1,109 - - 9,510 Total Non-owner occupied RE 85,624 301,323 180,683 107,897 81,145 176,608 9,249 - 942,529 Current period gross write-offs - ( 200 ) - - - ( 42 ) - - ( 242 ) Construction Pass 27,262 86,161 24,399 11,459 - - - - 149,281 Watch - 1,399 - - - - - - 1,399 Total Construction 27,262 87,560 24,399 11,459 - - - - 150,680 Business Pass 48,705 134,999 48,557 18,868 17,292 47,708 146,745 1,431 464,305 Watch 127 15,867 1,833 1,010 842 3,584 7,570 506 31,339 Special Mention 241 961 98 857 184 447 150 97 3,035 Substandard - - 155 - 132 1,195 - - 1,482 Total Business 49,073 151,827 50,643 20,735 18,450 52,934 154,465 2,034 500,161 Current period gross write-offs - - - ( 28 ) - - ( 15 ) ( 22 ) ( 65 ) Total Commercial loans 204,805 725,005 394,734 220,906 163,000 350,578 163,799 2,200 2,225,027 Consumer Real estate Pass 144,179 273,585 278,138 176,395 66,087 105,383 - - 1,043,767 Watch 490 5,658 8,230 3,917 2,051 3,890 - - 24,236 Special Mention 143 2,499 1,657 1,291 2,220 3,360 - - 11,170 Substandard - - 635 817 318 1,486 - - 3,256 Total Real estate 144,812 281,742 288,660 182,420 70,676 114,119 - - 1,082,429 Home equity Pass - - - - - - 171,003 - 171,003 Watch - - - - - - 6,393 - 6,393 Special Mention - - - - - - 4,283 - 4,283 Substandard - - - - - - 1,325 - 1,325 Total Home equity - - - - - - 183,004 - 183,004 Current period gross write-offs - - - - - - ( 438 ) - ( 438 ) Construction Pass 14,339 39,893 9,116 - - - - - 63,348 Total Construction 14,339 39,893 9,116 - - - - - 63,348 Other Pass 1,278 2,551 2,361 1,457 803 2,604 36,549 - 47,603 Watch 9 29 348 - 15 163 58 - 622 Special Mention 33 333 - - 23 82 41 - 512 Substandard - - 75 - - - 7 - 82 Total Other 1,320 2,913 2,784 1,457 841 2,849 36,655 - 48,819 Current period gross write-offs - - - - - - ( 16 ) - ( 16 ) Total Consumer loans 160,471 324,548 300,560 183,877 71,517 116,968 219,659 - 1,377,600 Total loans $ 365,276 1,049,553 695,294 404,783 234,517 467,546 383,458 2,200 3,602,627 Total Current period gross write-offs - ( 200 ) - ( 28 ) - ( 42 ) ( 469 ) ( 22 ) ( 761 ) 16 Table of Contents The following tables present loan balances by age and payment status. Schedule of loan balances by payment status June 30, 2024 (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 $ - - - - 642,008 642,008 Non-owner occupied RE 115 - - 7,949 908,970 917,034 Construction - - - - 144,968 144,968 Business 622 - - 829 525,566 527,017 Consumer Real estate 124 871 - 1,876 1,123,284 1,126,155 Home equity 352 45 - 564 188,333 189,294 Construction - - - - 32,936 32,936 Other - - - - 43,109 43,109 Total loans $ 1,213 916 - 11,218 3,609,174 3,622,521 Total loans over 90 days past due - - - - - 1,527 December 31, 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 $ 74 - - - 631,583 631,657 Non-owner occupied RE 8,102 - - 1,423 933,004 942,529 Construction - - - - 150,680 150,680 Business 567 - - 319 499,275 500,161 Consumer Real estate 1,750 - - 985 1,079,694 1,082,429 Home equity 601 30 - 1,236 181,137 183,004 Construction - - - - 63,348 63,348 Other 25 25 - - 48,769 48,819 Total loans $ 11,119 55 - 3,963 3,587,490 3,602,627 Total loans over 90 days past due - - - - - 1,300 As of June 30, 2024 and December 31, 2023, loans 30 days or more past due represented 0.30 % and 0.37 % of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.23 % and 0.27 % of the Company’s total loan portfolio as of June 30, 2024 and December 31, 2023, respectively. Consumer loans 30 days or more past due were 0.07 % and 0.09 % of total loans as of June 30, 2024 and December 31, 2023, respectively. 17 Table of Contents The table below summarizes nonaccrual loans by major categories for the periods presented. Schedule nonaccrual loans by major categories June 30, 2024 December 31, 2023 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 5,454 2,495 7,949 653 770 1,423 Construction - - - - - - Business - 829 829 164 155 319 Total commercial 5,454 3,324 8,778 817 925 1,742 Consumer Real estate 1,148 728 1,876 - 985 985 Home equity 489 75 564 343 893 1,236 Construction - - - - - - Other - - - - - - Total consumer 1,637 803 2,440 343 1,878 2,221 Total nonaccrual loans $ 7,091 4,127 11,218 $ 1,160 2,803 3,963 The Company did no t recognize interest income on nonaccrual loans for the three months ended June 30, 2024 and June 30, 2023. The accrued interest reversed during the three months ended June 30, 2024 was $ 76,000 . Accrued interest reversed during the three months ended June 30, 2023 was no t material. Foregone interest income on the nonaccrual loans for the three-month period ended June 30, 2024 and June 30, 2023 was no t material. We did no t recognize interest income on nonaccrual loans for the six months ended June 30, 2024 and June 30, 2023. Accrued interest of $ 82,000 was reversed during the six months ended June 30, 2024 and $ 23,000 was reversed during the six months ended June 30, 2023. The table below summarizes information regarding nonperforming assets. Schedule of nonperforming assets (dollars in thousands) June 30, 2024 December 31, 2023 Nonaccrual loans $ 11,218 3,963 Other real estate owned - - Total nonperforming assets $ 11,218 3,963 Nonperforming assets as a percentage of: Total assets 0.27 % 0.10 % Gross loans 0.31 % 0.11 % Total loans over 90 days past due $ 1,527 1,300 Loans over 90 days past due and still accruing - - Modifications to Borrowers Experiencing Financial Difficulty The Company adopted Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty. The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. 18 Table of Contents Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Loan modifications to borrowers experiencing financial difficulty were not material for the three and six months ended June 30, 2024 and 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. 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, 2024 and June 30, 2023 under the CECL methodology. 19 Table of Contents Schedule of activity related to the allowance for credit losses Three months ended June 30, 2024 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 $ 6,118 11,167 1,594 7,054 10,647 2,719 677 465 40,441 Provision for credit losses ( 651 ) 424 ( 263 ) 190 1,750 ( 244 ) ( 399 ) ( 57 ) 750 Loan charge-offs - ( 1,029 ) - ( 19 ) - - - ( 1 ) ( 1,049 ) Loan recoveries - - - 11 - 4 - - 15 Net loan recoveries (charge-offs) - ( 1,029 ) - ( 8 ) - 4 - ( 1 ) ( 1,034 ) Balance, end of period $ 5,467 10,562 1,331 7,236 12,397 2,479 278 407 40,157 Net charge-offs to average loans (annualized) 0.11 % Allowance for credit losses to gross loans 1.11 % Allowance for credit losses to nonperforming loans 357.95 % 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 Six months ended June 30, 2024 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 $ 6,118 11,167 1,594 7,385 10,647 2,600 677 494 40,682 Provision for credit losses ( 651 ) 424 ( 263 ) 190 1,750 ( 244 ) ( 399 ) ( 57 ) 750 Loan charge-offs - ( 1,029 ) - ( 365 ) - - - ( 79 ) ( 1,473 ) Loan recoveries - - - 26 - 123 - 49 198 Net loan recoveries (charge-offs) - ( 1,029 ) - ( 339 ) - 123 - ( 30 ) ( 1,275 ) Balance, end of period $ 5,467 10,562 1,331 7,236 12,397 2,479 278 407 40,157 Net charge-offs to average loans (annualized) 0.07 % Allowance for credit losses to gross loans 1.11 % Allowance for credit losses to nonperforming loans 357.95 % 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 % The provision for credit losses was $ 750,000 and $ 1.1 million for the three months ended June 30, 2024 and June 30, 2023, respectively. In addition, the provision for credit losses was $ 750,000 and $ 3 .0 million for the six months ended June 30, 2024 and June 30, 2023, respectively. Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. The Company reviews individually evaluated loans for designation as collateral dependent loans, as well as other loans that management of the Company designates as having higher risk. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. 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. 21 Table of Contents The following tables present an analysis of collateral-dependent loans of the Company as of June 30, 2024 and December 31, 2023. Schedule of analysis of collateral-dependent loans June 30, 2024 Real Business (dollars in thousands) estate assets Other Total Commercial Owner occupied RE $ - - - - Non-owner occupied RE 7,274 - - 7,274 Construction - - - - Business 361 321 - 682 Total commercial 7,635 321 - 7,956 Consumer Real estate 1,304 - - 1,304 Home equity 564 - - 564 Construction - - - - Other - - - - Total consumer 1,868 - - 1,868 Total $ 9,503 321 - 9,824 December 31, 2023 Real Business (dollars in thousands) estate assets Other Total Commercial Owner occupied RE $ - - - - Non-owner occupied RE 720 - - 720 Construction - - - - Business 164 - - 164 Total commercial 884 - - 884 Consumer Real estate 166 - - 166 Home equity 343 - - 343 Construction - - - - Other - - - - Total consumer 509 - - 509 Total $ 1,393 - - 1,393 22 Table of Contents Allowance for Credit Losses - Unfunded Loan Commitments The allowance for credit losses for unfunded loan commitments was $ 1.4 million and $ 1.8 million at June 30, 2024 and December 31, 2023, respectively, and is separately classified on the balance sheet within other liabilities. The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the three and six months ended June 30, 2024 and June 30, 2023. Schedule of allowance for credit losses for unfunded loan commitments Three months ended Three months ended (dollars in thousands) June 30, 2024 June 30, 2023 Balance, beginning of period $ 1,656 2,750 Provision for (reversal of) credit losses ( 250 ) ( 185 ) Balance, end of period $ 1,406 2,565 Unfunded Loan Commitments $ 694,524 849,977 Reserve for Unfunded Commitments to Unfunded Loan Commitments 0.20 % 0.30 % Six months ended Six months ended (dollars in thousands) June 30, 2024 June 30, 2023 Balance, beginning of period $ 1,831 2,780 Provision for (reversal of) credit losses ( 425 ) ( 215 ) Balance, end of period $ 1,406 2,565 Unfunded Loan Commitments $ 694,524 849,977 Reserve for Unfunded Commitments to Unfunded Loan Commitments 0.20 % 0.30 % 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 hedging instrument matures on May 25, 2028. The Company is designating the fair value swap under the portfolio layer method (“PLM”). Under this method, the hedged item is designated as a hedged layer of a closed portfolio of financial loans that is anticipated to remain outstanding for the designated hedged period. Adjustments are made to record the swap at fair value on the consolidated balance sheets, with changes in fair value recognized in interest income. The carrying value of the fair value swap on the consolidated balance sheets will also be adjusted through interest income, based on changes in fair value attributable to changes in the hedged risk. 23 Table of Contents The following table represents the carrying value of the portfolio layer method hedged asset and liability and the cumulative fair value hedging adjustment included in the carrying value of the hedged asset as of June 30, 2024 and December 31, 2023. Schedule of carrying value of hedged asset and liability and cumulative fair value hedging adjustment June 30, 2024 December 31, 2023 (dollars in thousands) Carrying Amount Hedged Asset Carrying Amount Hedged Liability Fixed Rate Asset/Liability 1 $ 203,986 $ 3,986 $ 199,518 $ 482 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, 2024, the amortized cost basis of the closed portfolio used in this hedging relationship was $ 694.1 million, the cumulative basis adjustment associated with this hedging relationship was $ 4 .0 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, 2024 and December 31, 2023. Schedule of outstanding financial derivative instruments June 30, 2024 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 $ 3,986 Derivatives not designated as hedging instruments: Mortgage loan interest rate lock commitments Mortgage loan interest rate lock commitments [Member] 21,923 Other assets 253 MBS forward sales commitments MBS forward sales commitments [Member] 15,000 Other assets 21 Total derivative financial instruments Total derivative financial instruments [Member] $ 236,923 $ 4,260 December 31, 2023 Fair Value (dollars in thousands) Notional Balance Sheet Location Asset/(Liability) Derivatives designated as hedging instruments: Fair value swap $ 200,000 Other liabilities $ ( 482 ) Derivatives not designated as hedging instruments: Mortgage loan interest rate lock commitments 12,973 Other assets 159 MBS forward sales commitments 10,000 Other liabilities ( 68 ) Total derivative financial instruments $ 222,973 $ ( 391 ) Accrued interest receivable related to the interest rate swap as of June 30, 2024 totaled $ 293 ,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. 24 Table of Contents 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, 2024 and June 30, 2023. 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) 2024 2023 2024 2023 Gain (loss) on fair value hedging relationship: Hedged asset $ 3,986 2,750 $ 3,986 2,750 Fair value derivative designated as hedging instrument ( 3,947 ) ( 2,784 ) ( 3,997 ) ( 2,784 ) Total gain (loss) recognized in interest income on loans $ 39 ( 34 ) $ ( 11 ) ( 34 ) 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 individually evaluated 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 12 of the Company’s 2023 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. 25 Table of Contents Assets and Liabilities Recorded at Fair Value on a Recurring Basis The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of June 30, 2024 and December 31, 2023. Schedule of assets and liabilities measured at fair value on a recurring basis June 30, 2024 (dollars in thousands) Level 1 Level 2 Level 3 Total Assets Securities available for sale Corporate bonds $ - 1,887 - 1,887 US treasuries - 890 - 890 US government agencies - 17,700 - 17,700 State and political subdivisions - 19,323 - 19,323 Asset-backed securities - 31,575 - 31,575 Mortgage-backed securities - 49,978 - 49,978 Mortgage loans held for sale - 14,759 - 14,759 Mortgage loan interest rate lock commitments - 253 - 253 MBS forward sales commitments - 21 - 21 Derivative asset - 3,986 - 3,986 Total assets measured at fair value on a recurring basis $ - 140,372 - 140,372 The company had no liabilities recorded at fair value on a recurring basis as of June 30, 2024. December 31, 2023 (dollars in thousands) Level 1 Level 2 Level 3 Total Assets Securities available for sale: Corporate bonds $ - 1,910 - 1,910 US treasuries - 9,394 - 9,394 US government agencies - 18,656 - 18,656 State and political subdivisions - 19,741 - 19,741 Asset-backed securities - 33,236 - 33,236 Mortgage-backed securities - 51,765 - 51,765 Mortgage loans held for sale - 7,194 - 7,194 Mortgage loan interest rate lock commitments - 159 - 159 Total assets measured at fair value on a recurring basis $ - 142,055 - 142,055 Liabilities Derivative liability $ - 482 - 482 MBS forward sales commitments - 68 - 68 Total liabilities measured at fair value on a recurring basis $ - 550 - 550 26 Table of Contents 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, 2024 and December 31, 2023. Schedule of assets and liabilities measured at fair value on a nonrecurring basis As of June 30, 2024 (dollars in thousands) Level 1 [Member] Level 1 Level 2 Level 3 Total Assets Individually evaluated loans Level 2 [Member] $ - 8,560 1,867 10,427 Total assets measured at fair value on a nonrecurring basis $ - 8,560 1,867 10,427 As of December 31, 2023 (dollars in thousands) Level 1 Level 2 Level 3 Total Assets Individually evaluated loans Level 3 [Member] $ - 1,160 2,976 4,136 Total assets measured at fair value on a nonrecurring basis $ - 1,160 2,976 4,136 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, 2024 and December 31, 2023, 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. 27 Table of Contents The estimated fair values of the Company’s financial instruments at June 30, 2024 and December 31, 2023 are as follows: Schedule of estimated fair values of the company’s financial instruments June 30, 2024 (dollars in thousands) Carrying Amount Fair Value Level 1 Level 2 Level 3 Financial Assets: Other investments, at cost $ 18,653 18,653 - - 18,653 Loans 1 3,570,321 3,270,848 - - 3,270,848 Financial Liabilities: Deposits 3,459,869 3,223,811 - 3,223,811 - Subordinated debentures 36,376 40,563 - 40,563 - December 31, 2023 (dollars in thousands) Carrying Amount Fair Value Level 1 Level 2 Level 3 Financial Assets: Other investments, at cost $ 19,939 19,939 - - 19,939 Loans 1 3,557,120 3,337,768 - - 3,337,768 Financial Liabilities: Deposits 3,379,564 2,961,182 - 2,961,182 - Subordinated debentures 36,322 40,712 - 40,712 - 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 (“ROU”) assets, included in property and equipment, of $ 21.4 million and $ 22.2 million as of June 30, 2024 and December 31, 2023, respectively. The Company had lease liabilities, included in other liabilities, of $ 23.9 million and $ 24.6 million as of June 30, 2024 and December 31, 2023, 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 5.43 years as of June 30, 2024. The ROU asset and lease liability are recognized at lease commencement by calculating the present value of lease payments over the lease term. The ROU assets also include any initial direct costs incurred and lease payments made at or before commencement date and are reduced by any lease incentives. 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 2.28 % as of June 30, 2024. The total operating lease costs were $ 604,000 for the three months ended June 30, 2024 and 2023, respectively, and $ 1.2 million for the six months ended June 30, 2024 and 2023, respectively. 28 Table of Contents Operating lease payments due as of June 30, 2024 were as follows: Schedule of operating lease payments Operating (dollars in thousands) Leases 2024 $ 1,056 2025 2,157 2026 2,210 2027 2,267 2028 2,015 Thereafter 20,187 Total undiscounted lease payments 29,892 Discount effect of cash flows 5,946 Total lease liability $ 23,946 NOTE 8 – Earnings Per Common Share The following schedule reconciles the numerators and denominators of the basic and diluted earnings per share computations for the three and six month periods ended June 30, 2024 and 2023. Dilutive common shares arise from the potentially dilutive effect of the Company’s stock options that were outstanding at June 30, 2024. The assumed conversion of stock options can create a difference between basic and dilutive net income per common share. At June 30, 2024 and 2023, there were 266,974 and 386,003 options, respectively, that were not considered in computing diluted earnings per common share because they were anti-dilutive. Schedule of earnings per share calculation Three months ended June 30, Six months ended June 30, (dollars in thousands, except share data) 2024 2023 2024 2023 Numerator: Net income available to common shareholders $ 2,999 2,458 $ 5,521 5,161 Denominator: Weighted-average common shares outstanding – basic 8,125,869 8,051,131 8,118,059 8,038,642 Common stock equivalents 14,953 17,897 23,312 41,879 Weighted-average common shares outstanding – diluted 8,140,822 8,069,028 8,141,371 8,080,521 Earnings per common share: Basic $ 0.37 0.31 $ 0.68 0.64 Diluted 0.37 0.31 0.68 0.64 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, 2024 as compared to the three and six month periods ended June 30, 2023 and assesses our financial condition as of June 30, 2024 as compared to December 31, 2023. 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, 2023 included in our Annual Report on Form 10-K for that period. Results for the three and six month periods ended June 30, 2024 are not necessarily indicative of the results for the year ending December 31, 2024 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- 29 Table of Contents looking statements may relate to our financial condition, results of operations, plans, objectives, or future performance. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “seek to,” “strive,” “focus,” “expect,” “anticipate,” “predict,” “project,” “potential,” “believe,” “continue,” “assume,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in any forward-looking statements include, but are not limited to: ● Restrictions or conditions imposed by our regulators on our operations; ● Increases in competitive pressure in the banking and financial services industries; ● Changes in access to funding or increased regulatory requirements with regard to funding, which could impair our liquidity; ● Changes in deposit flows, which may be negatively affected by a number of factors, including rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to clients on alternative investments and general economic or industry conditions; ● Credit losses as a result of declining real estate values, increasing interest rates, increasing unemployment, changes in payment behavior or other factors; ● Credit losses due to loan concentration; ● Changes in the amount of our loan portfolio collateralized by real estate and weaknesses in the real estate market; ● Our ability to successfully execute our business strategy; ● Our ability to attract and retain key personnel; ● The success and costs of our expansion into the Charlotte, North Carolina, Greensboro, North Carolina and Atlanta, Georgia markets and into potential new markets; ● Risks with respect to future mergers or acquisitions, including our ability to successfully expand and integrate the businesses and operations that we acquire and realize the anticipated benefits of the mergers or acquisitions; ● Changes in the interest rate environment which could reduce anticipated or actual margins; ● Changes in political conditions or the legislative or regulatory environment, including new governmental initiatives affecting the financial services industry; ● Changes in economic conditions resulting in, among other things, a deterioration in credit quality; ● Changes occurring in business conditions and inflation; ● Increased cybersecurity risk, including potential business disruptions or financial losses; ● Changes in technology; ● The adequacy of the level of our allowance for credit losses and the amount of loan loss provisions required in future periods; ● 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; 30 Table of Contents ● The rate of loan growth in recent years and the lack of seasoning of a portion of our loan portfolio; ● Our ability to maintain appropriate levels of capital and to comply with our capital ratio requirements; ● Adverse changes in asset quality and resulting credit risk-related losses and expenses; ● Changes in accounting standards, rules and interpretations and the related impact on our financial statements; ● Risks associated with actual or potential litigation or investigations by customers, regulatory agencies or others; ● Adverse effects of failures by our vendors to provide agreed upon services in the manner and at the cost agreed; ● The potential effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics, war or terrorist activities, such as the war in Ukraine, the Middle East conflict, and the conflict between China and Taiwan, disruptions in our customers’ supply chains, disruptions in transportation, essential utility outages or trade disputes and related tariffs; and disruptions caused from widespread cybersecurity incidents; 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, 2023, 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, 2024, we had total assets of $4.11 billion, a 1.3% increase from total assets of $4.06 billion at December 31, 2023. The largest component of our total assets is loans which were $3.62 billion and $3.60 billion at June 30, 2024 and December 31, 2023, respectively. Our liabilities and shareholders’ equity at June 30, 2024 totaled $3.79 billion and $318.7 million, respectively, compared to liabilities of $3.74 billion and shareholders’ equity of $312.5 million at December 31, 2023. The principal component of our liabilities is deposits which were $3.46 billion and $3.38 billion at June 30, 2024 and December 31, 2023, 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 $3.0 million and $2.5 million for the three months ended June 30, 2024 and 2023, respectively. Diluted earnings per share (“EPS”) was $0.37 for the second quarter of 2024 as compared to $0.31 for the same period in 2023. The increase in net income was primarily driven by an increase in 31 Table of Contents net interest income resulting from additional interest income on our interest-earning assets combined with an increase in noninterest income, partially offset by an increase in noninterest expenses. Our net income to common shareholders was $5.5 million and $5.2 million for the six months ended June 30, 2024 and 2023, respectively. Diluted EPS was $0.68 for the six months ended June 30, 2024 as compared to $0.64 for the same period in 2023. The increase in net income was primarily driven by the additional interest income on our interest-earning assets. results of operations Net Interest Income and Margin Our level of net interest income is determined by the level of earning assets and the management of our net interest margin. Our net interest income was $19.5 million for the second quarter of 2024, a 3.7% increase over net interest income of $18.8 million for the second quarter of 2023, driven primarily by a $7.9 million increase in interest income on our interest-earning assets, partially offset by a $7.2 million increase in interest expense. In addition, our net interest margin, on a tax-equivalent basis (TE), was 1.98% for the second quarter of 2024 compared to 2.05% for the same period in 2023. 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, 2024 and 2023. 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. 32 Table of Contents Average Balances, Income and Expenses, Yields and Rates For the Three Months Ended June 30, 2024 2023 (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 $ 186,584 $ 2,583 5.57 % $ 71,004 $ 891 5.03 % Investment securities, taxable 133,507 1,376 4.15 % 93,922 623 2.66 % Investment securities, nontaxable (2) 8,027 55 2.73 % 10,200 108 4.24 % Loans (3) 3,645,595 46,545 5.14 % 3,511,225 41,089 4.69 % Total interest-earning assets 3,973,713 50,559 5.12 % 3,686,351 42,711 4.65 % Noninterest-earning assets 165,093 155,847 Total assets $ 4,138,806 $ 3,842,198 Interest-bearing liabilities NOW accounts $ 302,881 621 0.82 % $ 297,234 537 0.72 % Savings & money market 1,611,991 16,324 4.07 % 1,727,009 15,298 3.55 % Time deposits 898,878 11,271 5.04 % 573,095 6,102 4.27 % Total interest-bearing deposits 2,813,750 28,216 4.03 % 2,597,338 21,937 3.39 % FHLB advances and other borrowings 240,000 2,247 3.77 % 135,922 1,382 4.08 % Subordinated debentures 36,360 555 6.14 % 36,251 542 6.00 % Total interest-bearing liabilities 3,090,110 31,018 4.04 % 2,769,511 23,861 3.46 % Noninterest-bearing liabilities 731,843 771,388 Shareholders’ equity 316,853 301,299 Total liabilities and shareholders’ equity $ 4,138,806 $ 3,842,198 Net interest spread 1.08 % 1.19 % Net interest income (tax equivalent) / margin $ 19,541 1.98 % $ 18,850 2.05 % Less: tax-equivalent adjustment (2) 13 25 Net interest income $ 19,528 $ 18,825 (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 seven basis points to 1.98% during the second quarter of 2024, compared to the second quarter of 2023, primarily due to our deposit and borrowing costs increasing faster than our loan yield as our interest-bearing liabilities have been more sensitive to changes in the federal funds rate over the past two years. Our average interest-bearing liabilities grew by $320.6 million during the second quarter of 2024 from the prior year, while the rate on these liabilities increased 58 basis points to 4.04%. In contrast, our average interest-earning assets grew by $287.4 million during the second quarter of 2024 from the prior year, while the average yield on these assets increased by only 47 basis points to 5.12% during the same period. The increase in our average interest-bearing liabilities during the second quarter of 2024 resulted primarily from a $216.4 million increase in our interest-bearing deposits from the prior year, while the 58 basis point increase in rate on our interest-bearing liabilities was driven by a 64 basis point increase in deposit rates. The increase in average interest-earning assets for the second quarter of 2024 related primarily to an increase of $134.4 million in our average loan balances from the prior year and a $115.6 million increase in average federal funds sold and interest-bearing deposits with banks. The 47 basis point increase in yield on our interest-earning assets was driven by a 54 basis point increase in yield on federal funds sold and interest-bearing deposits with banks and a 45 basis point increase in loan yield. Our net interest spread was 1.08% for the second quarter of 2024 compared to 1.19% for the same period in 2023. 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 58 basis point increase in the rate on our interest-bearing liabilities was partially offset by a 47 basis point increase in yield on our interest-earning assets, resulting in a 11 basis point decrease in our net interest spread for the 2024 period. We anticipate continued pressure on our net interest spread 33 Table of Contents 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. Average Balances, Income and Expenses, Yields and Rates For the Six Months Ended June 30, 2024 2023 (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 $ 140,502 $ 3,863 5.53 % $ 78,445 $ 1,860 4.78 % Investment securities, taxable 127,084 2,812 4.45 % 90,739 1,152 2.56 % Investment securities, nontaxable (2) 16,367 109 1.34 % 10,233 216 4.25 % Loans (3) 3,634,284 92,150 5.10 % 3,423,365 77,837 4.59 % Total interest-earning assets 3,918,237 98,934 5.08 % 3,602,782 81,065 4.54 % Noninterest-earning assets 160,227 158,563 Total assets $ 4,078,464 $ 3,761,345 Interest-bearing liabilities NOW accounts $ 299,328 1,283 0.86 % $ 300,189 977 0.66 % Savings & money market 1,616,256 32,642 4.06 % 1,694,624 27,290 3.25 % Time deposits 850,305 21,223 5.02 % 558,341 10,848 3.92 % Total interest-bearing deposits 2,765,889 55,148 4.01 % 2,553,154 39,115 3.09 % FHLB advances and other borrowings 240,659 4,476 3.74 % 77,408 1,582 4.12 % Subordinated debentures 36,346 1,112 6.15 % 36,237 1,069 5.95 % Total interest-bearing liabilities 3,042,894 60,736 4.01 % 2,666,799 41,766 3.16 % Noninterest-bearing liabilities 719,868 794,627 Shareholders’ equity 315,702 299,919 Total liabilities and shareholders’ equity $ 4,078,464 $ 3,761,345 Net interest spread 1.06 % 1.38 % Net interest income (tax equivalent) / margin $ 38,198 1.96 % $ 39,298 2.20 % Less: tax-equivalent adjustment (2) 25 49 Net interest income $ 38,173 $ 39,249 (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 2024, our net interest margin (TE) decreased by 24 basis points to 1.96%, compared to 2.20% for the first six months of 2023, driven by the increase in yield on our interest-bearing liabilities. Our average interest-bearing liabilities grew by $376.1 million from the prior year, with the average yield increasing by 85 basis points to 4.01%. In contrast, our average interest-earning assets grew by $315.5 million, while the rate on these assets increased 54 basis points to 5.08%. The increase in average interest-bearing liabilities for the first half of 2024 was driven by an increase in interest-bearing deposits of $212.7 million and a $163.3 million increase in FHLB advances and other borrowings, while the increase in cost was driven by a 92 basis point increase on our interest-bearing deposits. The increase in average interest-earning assets for the first half of 2024 related primarily to a $210.9 million increase in our average loan balances and a $62.1 million increase in average federal funds sold and interest-bearing deposits with banks. The increase in yield on our interest-earning assets was driven by a 75 basis point increase in the yield on federal funds sold and interest-bearing deposits with banks and a 51 basis point increase in our loan yield. Our net interest spread was 1.06% for the first half of 2024 compared to 1.38% for the same period in 2023. The 32 basis point decrease in our net interest spread was driven by the 85 basis point increase in yield on our interest-bearing liabilities. 34 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, 2024 vs. 2023 June 30, 2023 vs. 2022 Increase (Decrease) Due to Increase (Decrease) Due to (dollars in thousands) Volume Rate Rate/ Volume Total Volume Rate Rate/ Volume Total Interest income Loans $ 1,572 3,741 143 5,456 $ 6,888 6,030 1,561 14,479 Investment securities 254 337 121 712 (20 ) 291 (13 ) 258 Federal funds sold and interest-bearing deposits with banks 1,450 92 150 1,692 (22 ) 835 (102 ) 711 Total interest income 3,276 4,170 414 7,860 6,846 7,156 1,446 15,448 Interest expense Deposits 1,139 4,886 254 6,279 403 16,159 3,531 20,093 FHLB advances and other borrowings 1,058 (109 ) (84 ) 865 165 435 676 1,276 Subordinated debentures (2 ) 15 - 13 4 133 1 138 Total interest expense 2,195 4,792 170 7,157 572 16,727 4,208 21,507 Net interest income $ 1,081 (622 ) 244 703 $ 6,274 (9,571 ) (2,762 ) (6,059 ) Net interest income, the largest component of our income, was $19.5 million for the second quarter of 2024 and $18.8 million for the second quarter of 2023, a $703,000, or 3.7%, increase year over year. The increase during 2024 was driven by a $7.9 million increase in interest income primarily due to higher yields on our loan portfolio and an increase in average loan balances and average federal funds sold and interest-bearing deposits with banks. Partially offsetting the increase in interest income was a $7.2 million increase in interest expense which was primarily driven by higher rates on our interest-bearing deposits. Six Months Ended June 30, 2024 vs. 2023 June 30, 2023 vs. 2022 Increase (Decrease) Due to Increase (Decrease) Due to (dollars in thousands) Volume Rate Rate/ Volume Total Volume Rate Rate/ Volume Total Interest income Loans $ 4,883 8,883 547 14,313 $ 14,084 10,333 2,879 27,296 Investment securities 557 719 302 1,578 (126 ) 604 (82 ) 396 Federal funds sold and interest-bearing deposits with banks 1,479 292 232 2,003 (18 ) 1,776 (137 ) 1,621 Total interest income 6,919 9,894 1,081 17,894 13,940 12,713 2,660 29,313 Interest expense Deposits 1,605 13,865 563 16,033 682 28,597 7,084 36,363 FHLB advances and other borrowings 3,351 (147 ) (310 ) 2,894 143 597 725 1,465 Subordinated debentures 3 39 1 43 2 281 1 284 Total interest expense 4,959 13,757 254 18,970 827 29,475 7,810 38,112 Net interest income $ 1,960 (3,863 ) 827 (1,076 ) $ 13,113 (16,762 ) (5,150 ) (8,799 ) Net interest income for the first half of 2024 was $38.2 million compared to $39.2 million for 2023, a $1.1 million, or 2.74%, decrease. The decrease in net interest income during 2024 was driven by a $19.0 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 – 35 Table of Contents Loans and Allowance for Credit Losses for a description of the factors we consider in determining the amount of the provision we expense each period to maintain this allowance. We recorded a $500,000 provision for credit losses during the second quarter of 2024, compared to a $910,000 provision for credit losses in the second quarter of 2023. We recorded a provision expense of $325,000 and $2.7 million for the six months ended June 30, 2024 and June 30, 2023, respectively. The $500,000 provision in 2024, which included a $750,000 provision for credit losses and a $250,000 reversal for unfunded commitments, was driven by an increase in the level of charge-offs we experienced during the second quarter, combined with an increase in the specific reserve on individually assessed loans. During the second quarter of 2024, we charged-off $1.0 million related to one relationship associated with the assisted living industry. The reversal of the reserve for unfunded commitments was due to a decrease in the balance of unfunded commitments at June 30, 2024. The $325,000 provision expense for the first half of 2024 included $750,000 provision for credit losses and a $425,000 reversal for unfunded commitments. 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) 2024 2023 2024 2023 Mortgage banking income $ 1,923 1,337 $ 3,087 1,959 Service fees on deposit accounts 416 331 810 656 ATM and debit card income 587 536 1,131 1,091 Income from bank owned life insurance 384 338 762 670 Other income 213 194 397 404 Total noninterest income $ 3,523 2,736 $ 6,187 4,780 Noninterest income was $3.5 million for the second quarter of 2024, a $787,000, or 28.8%, increase from noninterest income of $2.7 million for the second quarter of 2023. Mortgage banking income continues to be the largest component of our noninterest income at $1.9 million for the second quarter of 2024 an increase of $586,000, or 43.8%, over the prior year. The increase was driven by higher mortgage volume during the second quarter of 2024. Noninterest income was $6.2 million for the first half of 2024, a $1.4 million, or 29.4%, increase from noninterest income of $4.8 million for the first half of 2023. Mortgage banking income increased by $1.1 million, or 57.6%, over the prior year while service fees on deposit accounts increased $154,000, or 23.5%, from the first half of 2023. 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) 2024 2023 2024 2023 Compensation and benefits $ 11,290 10,287 $ 22,147 20,643 Occupancy 2,552 2,518 5,109 4,975 Outside service and data processing costs 1,962 1,705 3,808 3,334 Insurance 965 897 1,920 1,586 Professional fees 582 751 1,200 1,410 Marketing 389 335 758 701 Other 903 900 1,801 1,848 Total noninterest expense $ 18,643 17,393 $ 36,743 34,497 36 Table of Contents Noninterest expense was $18.6 million for the second quarter of 2024, a $1.3 million, or 7.2%, increase from noninterest expense of $17.4 million for the second quarter of 2023. The increase in noninterest expense was driven primarily by the following: · Compensation and benefits expense increased $1.0 million, or 9.8%, relating primarily to an increase in salaries, bonuses, and equity compensation expenses. · Outside service and data processing costs increased $257,000, or 15.1%, relating primarily to increases in software licensing and maintenance costs. Partially offsetting these increases, professional fees decreased $169,000, or 22.5%, relating primarily to decreases in loan appraisal fees and consulting fees. Noninterest expense was $36.7 million for the first half of 2024, a $2.2 million, or 6.5%, increase from noninterest expense of $34.5 million for the first half of 2023. The increase in noninterest expense was driven primarily by the following: · Compensation and benefits expense increased $1.5 million, or 7.3%, relating primarily to annual salary increases, bonuses, and equity compensation expenses. · Outside service and data processing costs increased $474,000, or 14.2%, relating primarily to increases in item processing, electronic banking and software licensing and maintenance costs. · Insurance costs increased $334,000, or 21.1%, as a result of higher FDIC insurance premiums. Partially offsetting these increases, professional fees decreased $210,000, or 14.9%, relating primarily to decreases in loan appraisal fees and consulting fees. Our efficiency ratio was 80.9% for the second quarter of 2024, compared to 80.7% for the second quarter of 2023. 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. We incurred income tax expense of $909,000 and $800,000 for the three months ended June 30, 2024 and 2023, respectively, and $1.8 million and $1.6 million for the six months ended June 30, 2024 and 2023, respectively. Our effective tax rate was 24.3% and 24.1% for the six months ended June 30, 2024 and 2023, respectively. The higher tax rate during the first half of 2024 was driven by the effect of equity compensation transactions during the period. Balance Sheet Review Investment Securities At June 30, 2024, the $140.0 million in our investment securities portfolio represented approximately 3.4% 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 $121.4 million and an amortized cost of $136.4 million, resulting in an unrealized loss of $15.0 million. At December 31, 2023, the $154.6 million in our investment securities portfolio represented approximately 3.8% of our total assets, including investment securities with a fair value of $134.7 million and an amortized cost of $149.1 million for an unrealized loss of $14.4 million. In addition, other investments, which include FHLB Stock and other nonmarketable investments, decreased $1.3 million from December 31, 2023 to $18.7 million at June 30, 2024. 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, 2024 and 2023 were $3.63 billion and $3.42 billion, respectively. Before the allowance for credit losses, total loans outstanding at June 30, 2024 and December 31, 2023 were $3.62 billion and $3.60 billion, respectively. 37 Table of Contents The principal component of our loan portfolio is loans secured by real estate mortgages. As of June 30, 2024, our loan portfolio included $3.05 billion, or 84.3%, of real estate loans, compared to $3.05 billion, or 84.8%, at December 31, 2023. 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 $189.3 million as of June 30, 2024, of which approximately 46% were in a first lien position, while the remaining balance was second liens. At December 31, 2023, our home equity lines of credit totaled $183.0 million, of which approximately 46% were in first lien positions, while the remaining balance was in second liens. The average home equity loan had a balance of approximately $86,000 and a loan to value of 71% as of June 30, 2024, compared to an average loan balance of $85,000 and a loan to value of approximately 73% as of December 31, 2023. Further, 0.4% and 0.8% of our total home equity lines of credit were over 30 days past due as of June 30, 2024 and December 31, 2023, respectively. Following is a summary of our loan composition at June 30, 2024 and December 31, 2023. During the first six months of 2024, our loan portfolio increased by $19.9 million, or 0.55%, with a $6.0 million increase in commercial loans while consumer loans increased by $13.9 million 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 257.7% of the Bank’s total risk-based capital at June 30, 2024. Our consumer real estate portfolio grew by $43.7 million and includes high quality 1-4 family consumer real estate loans. Our average consumer real estate loan currently has a principal balance of $467,000, a term of 23 years, and an average rate of 4.27% as of June 30, 2024, compared to a principal balance of $469,000, a term of 23 years, and an average rate of 4.10% as of December 31, 2023. June 30, 2024 December 31, 2023 (dollars in thousands) Amount % of Total Amount % of Total Commercial Owner occupied RE $ 642,008 17.7 % $ 631,657 17.5 % Non-owner occupied RE 917,034 25.3 % 942,529 26.2 % Construction 144,968 4.0 % 150,680 4.2 % Business 527,017 14.5 % 500,161 13.9 % Total commercial loans 2,231,027 61.5 % 2,225,027 61.8 % Consumer Real estate 1,126,155 31.1 % 1,082,429 30.0 % Home equity 189,294 5.3 % 183,004 5.1 % Construction 32,936 0.9 % 63,348 1.7 % Other 43,109 1.2 % 48,819 1.4 % Total consumer loans 1,391,494 38.5 % 1,377,600 38.2 % Total gross loans, net of deferred fees 3,622,521 100.0 % 3,602,627 100.0 % Less—allowance for credit losses (40,157 ) (40,682 ) Total loans, net $ 3,582,364 $ 3,561,945 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, 2024 and December 31, 2023, we had no loans 90 days past due and still accruing. 38 Table of Contents Following is a summary of our nonperforming assets. (dollars in thousands) June 30, 2024 December 31, 2023 Commercial $ 8,778 1,742 Consumer 2,440 2,221 Total nonaccrual loans 11,218 3,963 Other real estate owned - - Total nonperforming assets $ 11,218 3,963 At June 30, 2024, nonperforming assets were $11.2 million, or 0.27% of total assets and 0.31% of gross loans. Comparatively, nonperforming assets were $4.0 million, or 0.10% of total assets and 0.11% of gross loans at December 31, 2023. Nonaccrual loans increased $7.3 million during the first six months of 2024 due primarily to two relationships totaling $6.9 million that went on nonaccrual during the second quarter. The amount of foregone interest income on nonaccrual loans in the first six months of 2024 and 2023 was not material. At June 30, 2024 and December 31, 2023, the allowance for credit losses represented 357.95% and 1,026.58% of the total amount of nonperforming loans, respectively. A significant portion of the nonperforming loans at June 30, 2024 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, 2024, 84.3% of our loans were collateralized by real estate and 98.8% of our individually evaluated loans were secured by real estate. Included in our real estate portfolio at June 30, 2024 was $219.7 million of loans, or 6.1% of our total loan portfolio, collateralized by office properties, $172.6 million of loans, or 4.8%, collateralized by retail properties, $131.0 million of loans, or 3.6%, collateralized by hotels, and $109.1 million of loans, or 3.0%, collateralized by multifamily properties. 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, 2024, we did not have any individually evaluated real estate loans carried at a value in excess of the appraised value. We typically charge-off a portion or create a specific reserve for individually evaluated loans when we do not expect repayment to occur as agreed upon under the original terms of the loan agreement. At June 30, 2024, individually evaluated loans totaled $12.1 million with a reserve of approximately $1.7 million allocated in the allowance for credit losses. Comparatively, individually evaluated loans totaled $4.8 million at December 31, 2023 for which $3.7 million of these loans had a reserve of approximately $688,000 allocated in the allowance for credit losses. Allowance for Credit Losses The allowance for credit losses was $40.2 million, representing 1.11% of outstanding loans and providing coverage of 357.95% of nonperforming loans at June 30, 2024 compared to $40.7 million, or 1.13% of outstanding loans and 1,026.55% of nonperforming loans at December 31, 2023. At June 30, 2023, the allowance for credit losses was $41.1 million, or 1.16% of outstanding loans and 1,363.11% of nonperforming loans. 39 Table of Contents 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 30% 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 $3.00 billion, or 86.6% of total deposits, while our wholesale deposits represented $463.7 million, or 13.4%, of total deposits at June 30, 2024. At December 31, 2023, retail deposits represented $3.00 billion, or 88.8%, of our total deposits and wholesale deposits were $379.4 million, representing 11.2% of our total deposits. Our loan-to-deposit ratio was 105% at June 30, 2024 and 107% at December 31, 2023. The following is a detail of our deposit accounts: June 30, December 31, (dollars in thousands) 2024 2023 Non-interest bearing $ 683,291 674,167 Interest bearing: NOW accounts 293,875 310,218 Money market accounts 1,562,786 1,605,278 Savings 28,739 31,669 Time, less than $250,000 219,532 190,167 Time and out-of-market deposits, $250,000 and over 671,646 568,065 Total deposits $ 3,459,869 3,379,564 Our primary focus is 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. While our non-interest bearing deposits increased by $9.1 million from $674.2 million at December 31, 2023, our core deposits decreased to $2.79 billion from $2.81 billion at December 31, 2023. In addition, at June 30, 2024 and December 31, 2023, we estimate that we have approximately $1.3 billion, or 38.3% and 38.7% of total deposits, respectively, in uninsured deposits, including related interest accrued and unpaid. Since it is not reasonably practicable to provide a precise measure of uninsured deposits, the amounts above are estimates and are based on the same methodologies and assumptions used by the FDIC for the Bank’s regulatory reporting requirements. The following table shows the average balance amounts and the average rates paid on deposits. Six months ended June 30, 2024 2023 (dollars in thousands) Amount Rate Amount Rate Noninterest-bearing demand deposits $ 663,446 0.00 % $ 742,274 0.00 % Interest-bearing demand deposits 299,328 0.86 % 300,189 0.66 % Money market accounts 1,585,544 4.12 % 1,655,878 3.32 % Savings accounts 30,712 0.20 % 38,746 0.08 % Time deposits less than $250,000 149,995 4.49 % 85,325 3.75 % Time deposits greater than $250,000 700,311 5.12 % 473,017 1.12 % Total deposits $ 3,429,336 3.23 % $ 3,295,429 1.99 % During the first six months of 2024, our average transaction account balances decreased by $158.1 million, or 5.8%, from the prior year, while our average time deposit balances increased by $292.0 million, or 52.3%. All of our time deposits are certificates of deposits. The maturity distribution of our time deposits $250,000 or more at June 30, 2024 was as follows: 40 Table of Contents (dollars in thousands) June 30, 2024 Three months or less $ 67,302 Over three through six months 113,150 Over six through twelve months 241,895 Over twelve months 249,299 Total $ 671,646 Time deposits that meet or exceed the FDIC insurance limit of $250,000 at June 30, 2024 and December 31, 2023 were $671.6 million and $568.1 million, respectively. We have a relationship with IntraFi Promontory Network, allowing us to provide deposit customers with access to aggregate FDIC insurance in amounts exceeding $250,000. This gives us the ability, as and when needed, to attract and retain large deposits from insurance conscious customers. With IntraFi, we have the option to keep deposits on balance sheet or sell them to other members of the network. At June 30, 2024, we had $240.0 million of convertible fixed rate FHLB advances with a weighted average rate of 3.76%, while at December 31, 2023, we had $275.0 million in FHLB Advances. Of the $275.0 million outstanding at December 31, 2023, $35.0 million was at a variable rate and $240.0 million was at fixed rates. The $240.0 million was secured with approximately $1.32 billion of mortgage loans and $14.6 million of stock in the FHLB at June 30, 2024. The $275.0 million was secured with approximately $1.25 billion of mortgage loans and $16.1 million of stock in the FHLB at December 31, 2023. Listed below is a summary of the terms and maturities of the advances outstanding at June 30, 2024 and December 31, 2023. June 30, December 31, (dollars in thousands) 2024 2023 Maturity Amount Rate Amount Rate February 29, 2024 $ - - $ 35,000 5.57 % April 28, 2028 40,000 3.51 % 40,000 3.51 % May 15, 2028 - - 35,000 3.13 % June 28, 2028 40,000 3.54 % 40,000 3.54 % July 10, 2028 45,000 3.78 % 45,000 3.78 % July 10, 2028 40,000 3.87 % 40,000 3.87 % July 10, 2028 40,000 3.96 % 40,000 3.96 % May 15, 2029 35,000 3.90 % - - $ 240,000 3.76 % $ 275,000 3.89 % 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 institution’s 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. 41 Table of Contents At June 30, 2024 and December 31, 2023, our cash and cash equivalents totaled $194.8 million and $156.2 million, respectively, or 4.7% and 3.9% of total assets, respectively. Our investment securities at June 30, 2024 and December 31, 2023 amounted to $140.0 million and $154.6 million, respectively, or 3.4% and 3.8% 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 six federal funds purchased lines of credit with correspondent banks totaling $128.5 million for which there were no borrowings against the lines of credit at June 30, 2024. We also had $235.1 million pledged and available with the Federal Reserve Discount Window at June 30, 2024. Comparatively, at December 31, 2023, we had $227.1 million pledged and available with the Federal Reserve Discount Window. At December 31, 2023, we had $13.0 million of marketable investment securities pledged in the Federal Reserve’s Bank Term Funding Program which closed on March 11, 2024. 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, 2024 was $598.5 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, 2024 and December 31, 2023 we had $393.4 million and $388.3 million, respectively, of letters of credit outstanding with the FHLB to secure client deposits. We have a relationship with IntraFi Promontory Network, allowing us to provide deposit customers with access to aggregate FDIC insurance in amounts exceeding $250,000. This gives us the ability, as and when needed, to attract and retain large deposits from insurance conscious customers. With IntraFi, we have the option to keep deposits on balance sheet or sell them to other members of the network. Additionally, subject to certain limits, the Bank can use IntraFi to purchase cost-effective funding without collateralization and in lieu of generating funds through traditional brokered CDs or the FHLB. In this manner, IntraFi can provide us with another funding option. Thus, it serves as a deposit-gathering tool and an additional liquidity management tool. Under the Economic Growth, Regulatory Relief, and Consumer Protection Act, a well capitalized bank with a CAMELS rating of 1 or 2 may hold reciprocal deposits up to the lesser of 20% of its total liabilities or $5 billion without those deposits being treated as brokered deposits. We also have a line of credit with another financial institution for $15.0 million, which was unused at June 30, 2024. The line of credit was issued on December 28, 2023 at an interest rate of the U.S. Prime Rate plus 0.25% and a maturity date of February 28, 2025. We believe that our existing stable base of core deposits, federal funds purchased lines of credit with correspondent banks, availability with the Federal Reserve Discount Window, 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 $318.7 million at June 30, 2024 and $312.5 million at December 31, 2023. The $6.3 million increase from December 31, 2023 is primarily related to net income of $5.5 million during the first six months of 2024 and stock option exercises and equity compensation expenses of $1.3 million, partially offset by a $524,000 increase in other comprehensive loss related to our available for sale securities. 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, 2024 and the year ended December 31, 2023. Since our inception, we have not paid cash dividends. 42 Table of Contents June 30, 2024 December 31, 2023 Return on average assets 0.27 % 0.34 % Return on average equity 3.52 % 4.44 % Return on average common equity 3.52 % 4.44 % Average equity to average assets ratio 7.74 % 7.71 % Tangible common equity to assets ratio 7.76 % 7.70 % 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 as 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, 2024 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. June 30, 2024 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) $ 396,713 12.47 % $ 254,489 8.00 % $ 318,112 10.00 % Tier 1 Capital (to risk weighted assets) 356,944 11.22 % 190,867 6.00 % 254,489 8.00 % Common Equity Tier 1 Capital (to risk weighted assets) 356,944 11.22 % 143,150 4.50 % 206,773 6.50 % Tier 1 Capital (to average assets) 356,944 8.59 % 166,147 4.00 % 207,683 5.00 % December 31, 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) $ 390,197 12.28 % $ 254,278 8.00 % $ 317,847 10.00 % Tier 1 Capital (to risk weighted assets) 350,455 11.03 % 190,708 6.00 % 254,278 8.00 % Common Equity Tier 1 Capital (to risk weighted assets) 350,455 11.03 % 143,031 4.50 % 206,601 6.50 % Tier 1 Capital (to average assets) 350,455 8.47 % 165,414 4.00 % 206,767 5.00 % 43 Table of Contents The following table summarizes the capital amounts and ratios of the Company and the minimum regulatory requirements. June 30, 2024 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) $ 406,383 12.77 % $ 254,489 8.00 % N/A N/A Tier 1 Capital (to risk weighted assets) 343,614 10.80 % 190,867 6.00 % N/A N/A Common Equity Tier 1 Capital (to risk weighted assets) 330,614 10.39 % 143,150 4.50 % N/A N/A Tier 1 Capital (to average assets) 343,614 8.27 % 166,171 4.00 % N/A N/A December 31, 2023 Actual For capital adequacy purposes minimum plus the capital conservation buffer To be well capitalized under prompt corrective action provisions minimum (1) (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Total Capital (to risk weighted assets) $ 399,551 12.57 % $ 254,278 8.00 % N/A N/A Tier 1 Capital (to risk weighted assets) 336,809 10.60 % 190,708 6.00 % N/A N/A Common Equity Tier 1 Capital (to risk weighted assets) 323,809 10.19 % 143,031 4.50 % N/A N/A Tier 1 Capital (to average assets) 336,809 8.14 % 165,436 4.00 % N/A N/A (1) The prompt corrective action provisions are only applicable at the Bank level. The Bank exceeded the general minimum regulatory requirements to be considered “well capitalized.” The ability of the Company to pay cash dividends to shareholders is dependent upon receiving cash in the form of dividends from the Bank. The dividends that may be paid by the Bank to the Company are subject to legal limitations and regulatory capital requirements. Since our inception, we have not paid cash dividends to shareholders. Effect of Inflation and Changing Prices The effect of relative purchasing power over time due to inflation has not been taken into account in our consolidated financial statements. Rather, our financial statements have been prepared on an historical cost basis in accordance with generally accepted accounting principles. Unlike most industrial companies, our assets and liabilities are primarily monetary in nature. Therefore, the effect of changes in interest rates will have a more significant impact on our performance than will the effect of changing prices and inflation in general. In addition, interest rates may generally increase as the rate of inflation increases, although not necessarily in the same magnitude. As discussed previously, we seek to manage the relationships between interest sensitive assets and liabilities in order to protect against wide rate fluctuations, including those resulting from inflation. Off-Balance Sheet Risk Commitments to extend credit are agreements to lend money to a client as long as the client has not violated any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At June 30, 2024 unfunded commitments to extend credit were $694.5 million, of which $88.2 million were at fixed rates and $606.3 million were at variable rates. At December 31, 2023, unfunded commitments to extend credit were $724.6 million, of which approximately $145.6 million were at fixed rates and $579.0 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. 44 Table of Contents As of June 30, 2024, the reserve for unfunded commitments was $1.4 million or 0.20% of total unfunded commitments. As of December 31, 2023, the reserve for unfunded commitments was $1.8 million or 0.25% of total unfunded commitments. At June 30, 2024 and December 31, 2023, there were commitments under letters of credit for $13.0 million and $16.1 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, 2023, for a description our significant accounting policies that use critical accounting estimates. Accounting, Reporting, and Regulatory Matters See Note 1 – Summary of Significant Accounting Policies in the accompanying notes to consolidated financial statements included elsewhere in this report for details of recently issued accounting pronouncements and their expected impact on our consolidated financial statements. Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risk is the risk of loss from adverse changes in market prices and rates, which principally arises from interest rate risk inherent in our lending, investing, deposit gathering, and borrowing activities. Other types of market risks, such as foreign currency exchange rate risk and commodity price risk, do not generally arise in the normal course of our business. We actively monitor and manage our interest rate risk exposure in order to control the mix and maturities of our assets and liabilities utilizing a process we call asset/liability management. The essential purposes of asset/liability management are to seek to ensure adequate liquidity and to maintain an appropriate balance between interest sensitive assets and liabilities in order to minimize potentially adverse impacts on earnings from changes in market interest rates. Our asset/liability management committee (“ALCO”) monitors and considers methods of managing exposure to interest rate risk. We have both an internal ALCO consisting of senior management that meets no less than quarterly and a board risk committee that meets quarterly. These committees 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, 2024, 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 45 Table of Contents 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 (13.97 )% Up 200 basis points (8.73 )% Up 100 basis points (3.94 )% Base - Down 100 basis points 4.75 % Down 200 basis points 8.96 % Down 300 basis points 13.49 % Item 4. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control over Financial Reporting There has been no change in the Company’s internal control over financial reporting during the six months ended June 30, 2024, 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, 2023, as well as cautionary statements contained in this Quarterly Report on Form 10-Q, including those under the caption “Cautionary Warning Regarding Forward-Looking Statements” set forth in Part I, Item 2 of this Form 10-Q, risks and matters described elsewhere in this Form 10-Q, and in our other filings with the SEC. There have been no material changes to the risk factors previously disclosed in the Company’s (i) Annual Report on Form 10-K for fiscal year ended December 31, 2023. Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. (a) Sales of Unregistered Securities - None (b) Use of Proceeds – Not applicable (c) Issuer Purchases of Securities 46 Table of Contents As of June 30, 2024, the Company does not have an authorized share repurchase program. Item 3. DEFAULTS UPON SENIOR SECURITIES. None. Item 4. MINE SAFETY DISCLOSURES. Not applicable. Item 5. OTHER INFORMATION. Trading Plans During the six months ended June 30, 2024, no director or “officer” of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K of the Securities Act of 1933. 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. 47 Table of Contents INDEX TO EXHIBITS Exhibit Number Description 3.1 Amended and Restated Articles, as amended, of Southern First Bancshares, Inc. (effective May 30, 2024). 3.1.1 Amended and Restated Articles, as amended, of Southern First Bancshares, Inc. (effective May 30, 2024) (redline version of amended sections). 10.1 Employment Agreement by and between Southern First Bank and Christian Zych, dated May 6, 2024 (incorporated by reference to Exhibit 10.1 of Southern First Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on May 7, 2024). * 10.2 Amendment to Employment Agreement by and between Southern First Bank and Calvin C. Hurst, dated May 6, 2024 (incorporated by reference to Exhibit 10.2 of Southern First Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on May 7, 2024). * 10.3 Amendment to Employment Agreement by and between Southern First Bank and William M. Aiken, III, dated May 6, 2024 (incorporated by reference to Exhibit 10.3 of Southern First Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on May 7, 2024). * 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, 2024, 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. 48 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: July 31, 2024 /s/R. Arthur Seaver, Jr. R. Arthur Seaver, Jr. Chief Executive Officer (Principal Executive Officer) Date: July 31, 2024 /s/Christian J. Zych Christian J. Zych Chief Financial Officer (Principal Financial and Accounting Officer) 49