SOUTHERN FIRST BANCSHARES INC 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2024 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to Commission file number 000-27719 Southern First Bancshares, Inc. (Exact name of registrant as specified in its charter) South Carolina 58-2459561 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 6 Verdae Boulevard Greenville , S.C. 29607 (Address of principal executive offices) (Zip Code) 864 - 679-9000 (Registrant’s telephone number, including area code) Not Applicable (Former name, former address, and former fiscal year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock SFST The Nasdaq Global Market Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o 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 x No o 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 o Accelerated filer x Non-accelerated filer o Smaller Reporting Company o Emerging growth company o 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. o Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 8,159,847 shares of common stock, par value $0.01 per share, were issued and outstanding as of October 29, 2024. Table of Contents SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY September 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 27 Item 3. Quantitative and Qualitative Disclosures about Market Risk 44 Item 4. Controls and Procedures 44 PART II – OTHER INFORMATION Item 1. Legal Proceedings 45 Item 1A. Risk Factors 45 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 45 Item 3. Defaults upon Senior Securities 45 Item 4. Mine Safety Disclosures 45 Item 5. Other Information 45 Item 6. Exhibits 45 2 Table of Contents PART I. CONSOLIDATED FINANCIAL INFORMATION Item 1. CONSOLIDATED FINANCIAL STATEMENTS SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS September 30, December 31, (dollars in thousands, except share data) 2024 2023 (Unaudited) (Audited) ASSETS Cash and cash equivalents: Cash and due from banks $ 25,289 28,020 Federal funds sold 226,110 119,349 Interest-bearing deposits with banks 9,176 8,801 Total cash and cash equivalents 260,575 156,170 Investment securities: Investment securities available for sale 134,597 134,702 Other investments 19,640 19,939 Total investment securities 154,237 154,641 Mortgage loans held for sale 8,602 7,194 Loans 3,619,556 3,602,627 Less allowance for credit losses ( 40,166 ) ( 40,682 ) Loans, net 3,579,390 3,561,945 Bank owned life insurance 53,663 52,501 Property and equipment, net 90,158 94,301 Deferred income taxes, net 11,595 12,200 Other assets 16,411 16,837 Total assets $ 4,174,631 4,055,789 LIABILITIES Deposits $ 3,518,825 3,379,564 FHLB advances and related debt 240,000 275,000 Subordinated debentures 24,903 36,322 Other liabilities 64,365 52,436 Total liabilities 3,848,093 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, 8,156,097 shares issued and outstanding at September 30, 2024; 10,000,000 shares authorized, 8,088,186 shares issued and outstanding at December 31, 2023. 82 81 Nonvested restricted stock ( 4,219 ) ( 3,596 ) Additional paid-in capital 124,288 121,777 Accumulated other comprehensive loss ( 9,063 ) ( 11,342 ) Retained earnings 215,450 205,547 Total shareholders’ equity 326,538 312,467 Total liabilities and shareholders’ equity $ 4,174,631 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 nine months ended September 30, ended September 30, (dollars in thousands, except share data) 2024 2023 2024 2023 Interest income Loans $ 47,550 43,542 139,700 121,380 Investment securities 1,412 1,470 4,308 2,788 Federal funds sold and interest-bearing deposits with banks 2,209 2,435 6,072 4,295 Total interest income 51,171 47,447 150,080 128,463 Interest expense Deposits 27,725 25,130 82,873 64,245 Borrowings 2,855 2,972 8,443 5,623 Total interest expense 30,580 28,102 91,316 69,868 Net interest income 20,591 19,345 58,764 58,595 Provision for (reversal of) credit losses - ( 500 ) 325 2,235 Net interest income after provision for (reversal of) credit losses 20,591 19,845 58,439 56,360 Noninterest income Mortgage banking income 1,449 1,208 4,536 3,167 Service fees on deposit accounts 455 356 1,265 1,011 ATM and debit card income 599 588 1,730 1,680 Income from bank owned life insurance 401 349 1,162 1,018 Other income 271 249 669 653 Total noninterest income 3,175 2,750 9,362 7,529 Noninterest expenses Compensation and benefits 10,789 10,231 32,936 30,874 Occupancy 2,595 2,562 7,704 7,537 Outside service and data processing costs 1,930 1,744 5,738 5,078 Insurance 1,025 1,243 2,945 2,829 Professional fees 548 504 1,748 1,914 Marketing 319 293 1,077 994 Other 833 725 2,634 2,573 Total noninterest expenses 18,039 17,302 54,782 51,799 Income before income tax expense 5,727 5,293 13,019 12,090 Income tax expense 1,345 1,195 3,116 2,831 Net income $ 4,382 4,098 9,903 9,259 Earnings per common share Basic $ 0.54 0.51 1.22 1.15 Diluted 0.54 0.51 1.22 1.15 Weighted average common shares outstanding Basic 8,064,283 8,052,926 8,100,003 8,043,410 Diluted 8,089,176 8,072,408 8,123,846 8,077,830 See notes to consolidated financial statements that are an integral part of these consolidated statements. 4 Table of Contents SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) For the three months ended September 30, For the nine months ended September 30, (dollars in thousands) 2024 2023 2024 2023 Net income $ 4,382 4,098 9,903 9,259 Other comprehensive income (loss): Unrealized gain (loss) on securities available for sale: Unrealized holding gain (loss) arising during the period, pretax 3,548 ( 3,221 ) 2,884 ( 2,333 ) Tax benefit (expense) ( 745 ) 676 ( 605 ) 488 Other comprehensive income (loss) 2,803 ( 2,545 ) 2,279 ( 1,845 ) Comprehensive income $ 7,185 1,553 12,182 7,414 See notes to consolidated financial statements that are an integral part of these consolidated statements. 5 Table of Contents SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited) For the three months ended September 30, Common stock Preferred stock Nonvested restricted Additional paid-in Accumulated other comprehensive Retained (dollars in thousands, except share data) Shares Amount Shares Amount stock capital income (loss) earnings Total June 30, 2023 8,058,438 $ 81 - $ - $ ( 4,051 ) $ 120,912 $ ( 12,710 ) $ 197,282 $ 301,514 Net income Preferred stock - - - - - - - 4,098 4,098 Proceeds from exercise of stock options 14,250 - - - - 312 - - 312 Issuance of restricted stock, net of forfeitures Retained earnings 15,950 - - - ( 388 ) 388 - - - Compensation expense related to restricted stock, net of tax - - - - 374 - - - 374 Compensation expense related to stock options, net of tax Common stock - - - - - 145 - - 145 Other comprehensive loss - - - - - - ( 2,545 ) - ( 2,545 ) Additional paid-in capital September 30, 2023 8,088,638 $ 81 - $ - $ ( 4,065 ) $ 121,757 $ ( 15,255 ) $ 201,380 $ 303,898 June 30, 2024 8,155,097 $ 82 - $ - $ ( 4,710 ) $ 124,174 $ ( 11,866 ) $ 211,068 $ 318,748 Net income - - - - - - - 4,382 4,382 Proceeds from exercise of stock options 1,000 - - - - 23 - - 23 Issuance of restricted stock, net of forfeitures - - - - - - - - - Compensation expense related to restricted stock, net of tax - - - - 491 - - - 491 Compensation expense related to stock options, net of tax - - - - - 91 - - 91 Other comprehensive income - - - - - - 2,803 - 2,803 September 30, 2024 8,156,097 $ 82 - $ - $ ( 4,219 ) $ 124,288 $ ( 9,063 ) $ 215,450 $ 326,538 For the nine months ended September 30, Common stock Preferred stock Nonvested restricted Additional paid-in Accumulated other comprehensive Retained (dollars in thousands, except share data) Shares Amount Shares Amount stock capital income (loss) earnings Total December 31, 2022 8,011,045 $ 80 - - $ ( 3,306 ) $ 119,027 $ ( 13,410 ) $ 192,121 $ 294,512 Net income - - - - - - - 9,259 9,259 Proceeds from exercise of stock options 25,250 - - - - 497 - - 497 Issuance of restricted stock, net of forfeitures 52,343 1 - - ( 1,824 ) 1,823 - - - Compensation expense related to restricted stock, net of tax - - - - 1,065 - - - 1,065 Compensation expense related to stock options, net of tax - - - - - 410 - - 410 Other comprehensive loss - - - - - - ( 1,845 ) - ( 1,845 ) Accumulated other comprehensive income (loss) September 30, 2023 8,088,638 $ 81 - $ - $ ( 4,065 ) $ 121,757 $ ( 15,255 ) $ 201,380 $ 303,898 December 31, 2023 8,088,186 $ 81 - $ - $ ( 3,596 ) $ 121,777 $ ( 11,342 ) $ 205,547 $ 312,467 Net income - - - - - - - 9,903 9,903 Proceeds from exercise of stock options 12,000 - - - - 190 - - 190 Issuance of restricted stock, net of forfeitures 55,911 1 - - ( 2,035 ) 2,034 - - - Compensation expense related to restricted stock, net of tax - - - - 1,412 - - - 1,412 Compensation expense related to stock options, net of tax - - - - - 287 - - 287 Other comprehensive income - - - - - - 2,279 - 2,279 September 30, 2024 8,156,097 $ 82 - $ - $ ( 4,219 ) $ 124,288 $ ( 9,063 ) $ 215,450 $ 326,538 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 nine months ended September 30, (dollars in thousands) 2024 2023 Operating activities Net income $ 9,903 9,259 Adjustments to reconcile net income to cash provided by operating activities: Provision for credit losses 325 2,235 Depreciation and other amortization 3,623 3,611 Accretion and amortization of securities discounts and premium, net 437 142 Net change in operating leases 114 188 Compensation expense related to stock options and restricted stock grants 1,699 1,475 Gain on sale of loans held for sale ( 4,354 ) ( 2,793 ) Loans originated and held for sale ( 148,745 ) ( 112,930 ) Proceeds from sale of loans held for sale 151,691 112,523 Increase in cash surrender value of bank owned life insurance ( 1,162 ) ( 1,018 ) Increase in deferred tax asset - ( 66 ) Decrease (increase) in other assets 426 ( 7,892 ) Increase in other liabilities 13,408 6,059 Net cash provided by operating activities 27,365 10,793 Investing activities Increase (decrease) in cash realized from: Increase in loans, net ( 18,195 ) ( 280,627 ) Purchase of property and equipment ( 567 ) ( 1,120 ) Purchase of investment securities: Available for sale ( 20,513 ) ( 58,204 ) Other investments ( 4,301 ) ( 49,949 ) Payments and maturities, calls and repayments of investment securities: Available for sale 23,065 5,039 Other investments 4,600 41,182 Net cash used for investing activities ( 15,911 ) ( 343,679 ) Financing activities Increase (decrease) in cash realized from: Increase in deposits, net 139,261 213,907 Increase (decrease) in Federal Home Loan Bank advances and other borrowings, net ( 35,000 ) 100,000 Decrease in subordinated debentures ( 11,500 ) - Proceeds from the exercise of stock options 190 497 Net cash provided by financing activities 92,951 314,404 Net increase (decrease) in cash and cash equivalents 104,405 ( 18,482 ) Cash and cash equivalents at beginning of the period 156,170 170,874 Cash and cash equivalents at end of the period $ 260,575 152,392 Supplemental information Cash paid for Interest $ 87,129 64,390 Income taxes 2,235 586 Schedule of non-cash transactions Unrealized gain (loss) on securities, net of income taxes 2,279 ( 1,845 ) Right-of-use assets obtained in exchange for lease obligations: Operating Leases - 147 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 nine-month periods ended September 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 September 30, 2024 and 2023, real estate loans represented 84.4 % and 84.5 % , respectively, of total loans. However, borrowers’ ability to repay their loans is not dependent upon any specific economic sector. As of September 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 September 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 September 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] $ 2,128 - 181 1,947 US treasuries 999 - 75 924 US government agencies US government agencies [Member] 18,113 4 1,431 16,686 State and political subdivisions State and political subdivisions [Member] 22,450 - 2,427 20,023 Asset-backed securities Mortgage-backed securities [Member] 34,271 70 76 34,265 Mortgage-backed securities 68,108 35 7,391 60,752 Total investment securities available for sale $ 146,069 109 11,581 134,597 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 September 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 contractual maturities and yields on the company's investment securities September 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] $ - - $ - - $ 1,947 2.02 % $ - - $ 1,947 2.02 % US treasuries - - 924 1.27 % - - - - 924 1.27 % US government agencies US government agencies [Member] - - 4,239 1.08 % 12,447 4.56 % - - 16,686 3.67 % State and political subdivisions State and political subdivisions [Member] - - 1,331 1.96 % 6,101 1.98 % 12,591 2.13 % 20,023 2.07 % Asset-backed securities Asset-backed securities [Member] - - 49 ( 0.12 %) - - 34,216 6.70 % 34,265 6.69 % Mortgage-backed securities Mortgage-backed securities [Member] - - 6,689 1.28 % 7,865 3.01 % 46,198 2.37 % 60,752 2.33 % Total investment securities Total investment securities [Member] $ - - $ 13,232 1.28 % $ 28,360 3.40 % $ 93,005 3.93 % $ 134,597 3.56 % 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 September 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 September 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 $ 1,947 $ 181 1 $ 1,947 $ 181 US treasuries - - - 1 924 75 1 924 75 US government agencies - - - 9 10,582 1,431 9 10,582 1,431 State and political subdivisions 2 757 2 30 19,266 2,425 32 20,023 2,427 Asset-backed 4 9,575 44 8 7,124 32 12 16,699 76 Mortgage-backed securities 5 7,303 23 61 47,929 7,368 66 55,232 7,391 Total investment securities 11 $ 17,635 $ 69 110 $ 87,772 $ 11,512 121 $ 105,407 $ 11,581 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 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 September 30, 2024, the Company had 121 individual investments that were in an unrealized loss position. The unrealized losses were primarily attributable to changes in interest rates, rather than deterioration in credit quality. The individual securities are each investment grade securities. The Company considers factors such as the financial condition of the issuer including credit ratings and specific events affecting the operations of the issuer, volatility of the security, underlying assets that collateralize the debt security, and other industry and macroeconomic conditions. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell these securities before recovery of the amortized cost. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. As such, there is no allowance for credit losses on available for sale securities recognized as of September 30, 2024 . Other investments are comprised of the following and are recorded at cost which approximates fair value. Schedule of investments (dollars in thousands) September 30, 2024 December 31, 2023 Federal Home Loan Bank stock $ 14,516 16,063 Other nonmarketable investments 4,721 3,473 Investment in Trust Preferred subsidiaries 403 403 Total other investments $ 19,640 19,939 The Company has evaluated other investments for impairment and determined that the other investments are not impaired as of September 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 September 30, 2024, there were no securities pledged 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 September 30, 2024, mortgage loans held for sale totaled $ 8.6 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 $ 6.6 million as of September 30, 2024 and $ 7 .0 million as of December 31, 2023. Schedule of composition of our loan portfolio   September 30, 2024 December 31, 2023 (dollars in thousands) Commercial [Member] Amount % of Total Amount % of Total Commercial Owner occupied RE Owner occupied RE [Member] $ 642,608 17.8 % $ 631,657 17.5 % Non-owner occupied RE 917,642 25.3 % 942,529 26.2 % Construction Construction [Member] 144,665 4.0 % 150,680 4.2 % Business Business [Member] 521,535 14.4 % 500,161 13.9 % Total commercial loans Consumer [Member] 2,226,450 61.5 % 2,225,027 61.8 % Consumer Real estate Real estate [Member] 1,132,371 31.3 % 1,082,429 30.0 % Home equity Home equity [Member] 195,383 5.4 % 183,004 5.1 % Construction Non-owner occupied RE [Member] 21,582 0.6 % 63,348 1.7 % Other Other [Member] 43,770 1.2 % 48,819 1.4 % Total consumer loans 1,393,106 38.5 % 1,377,600 38.2 % Total gross loans, net of deferred fees 3,619,556 100.0 % 3,602,627 100.0 % Less—allowance for credit losses ( 40,166 ) ( 40,682 ) Total loans, net $ 3,579,390 $ 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 September 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 $ 15,557 205,224 380,526 41,301 642,608 Non-owner occupied RE 103,329 512,610 281,197 20,506 917,642 Construction 30,589 64,016 50,060 - 144,665 Business 122,565 244,825 149,858 4,287 521,535 Total commercial loans 272,040 1,026,675 861,641 66,094 2,226,450 Consumer Real estate 19,871 71,492 295,998 745,010 1,132,371 Home equity 2,810 33,445 154,758 4,370 195,383 Construction 4,514 2,500 11,601 2,967 21,582 Other 7,207 32,731 3,023 809 43,770 Total consumer loans 34,402 140,168 465,380 753,156 1,393,106 Total gross loans, net of deferred fees $ 306,442 1,166,843 1,327,021 819,250 3,619,556 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 September 30, 2024 December 31, 2023 Interest Rate Interest Rate (dollars in thousands) Fixed Floating or Adjustable Fixed Floating or Adjustable Commercial Owner occupied RE $ 601,086 25,965 605,199 9,100 Non-owner occupied RE 710,377 103,936 768,048 105,880 Construction 81,430 32,646 81,326 42,592 Business 272,599 126,371 293,920 91,809 Total commercial loans 1,665,492 288,918 1,748,493 249,381 Consumer Real estate 1,112,500 - 1,071,836 - Home equity 10,616 181,957 11,441 168,847 Construction 17,068 - 63,348 - Other 8,564 27,999 11,525 26,137 Total consumer loans 1,148,748 209,956 1,158,150 194,984 Total gross loans, net of deferred fees $ 2,814,240 498,874 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 September 30, 2024. Schedule of classified by credit quality indicators by year of origination September 30, 2024 (dollars in thousands) 2024 2023 2022 2021 2020 Prior Revolving Revolving Converted to Term Total Commercial Owner occupied RE Pass $ 44,238 44,567 180,574 125,436 68,270 150,019 85 239 613,428 Watch 488 - 3,377 1,464 8,898 11,121 - - 25,348 Special Mention - - 167 - - 2,857 - - 3,024 Substandard - - - - - 808 - - 808 Total Owner occupied RE 44,726 44,567 184,118 126,900 77,168 164,805 85 239 642,608 Non-owner occupied RE Pass 32,690 74,224 312,722 157,108 100,908 195,151 344 - 873,147 Watch - 959 4,568 438 1,645 11,444 - - 19,054 Special Mention - - - 7,630 - 8,938 - - 16,568 Substandard - - 969 300 - 7,604 - - 8,873 Total Non-owner occupied RE 32,690 75,183 318,259 165,476 102,553 223,137 344 - 917,642 Current period gross write-offs - - - - - ( 1,029 ) - - ( 1,029 ) Construction Pass 18,696 30,478 76,088 19,403 - - - - 144,665 Total Construction 18,696 30,478 76,088 19,403 - - - - 144,665 Business Pass 33,201 43,582 119,984 40,840 16,377 54,153 173,489 313 481,939 Watch - 142 16,665 2,020 1,442 5,434 9,398 131 35,232 Special Mention 663 96 817 - 67 1,101 - 209 2,953 Substandard - - - 143 362 309 597 - 1,411 Total Business 33,864 43,820 137,466 43,003 18,248 60,997 183,484 653 521,535 Current period gross write-offs - - - - ( 347 ) ( 18 ) ( 72 ) - ( 437 ) Total Commercial loans 129,976 194,048 715,931 354,782 197,969 448,939 183,913 892 2,226,450 Consumer Real estate Pass 61,766 150,755 287,584 270,022 163,332 159,210 - - 1,092,669 Watch - 760 5,573 7,472 5,488 5,525 - - 24,818 Special Mention - 141 2,702 1,504 988 4,816 - - 10,151 Substandard 213 275 334 1,215 976 1,720 - - 4,733 Total Real estate 61,979 151,931 296,193 280,213 170,784 171,271 - - 1,132,371 Home equity Pass -   - - - - - 181,922 - 181,922 Watch - - - - - - 8,628 - 8,628 Special Mention - - - - - - 3,402 - 3,402 Substandard - - - - - - 1,431 - 1,431 Total Home equity - - - - - - 195,383 - 195,383 Current period gross write-offs - - - - - - ( 45 ) ( 45 ) Construction Pass 5,305 4,678 9,890 1,709 - - - - 21,582 Total Construction 5,305 4,678 9,890 1,709 - - - - 21,582 Other Pass 2,978 954 1,662 1,812 1,274 2,815 31,016 - 42,511 Watch 161 7 16 338 - 144 57 - 723 Special Mention 19 29 326 65 - 62 30 - 531 Substandard - - -   - - - 5 - 5 Total Other 3,158 990 2,004 2,215 1,274 3,021 31,108 - 43,770 Current period gross write-offs - - - - - ( 38 ) ( 42 ) - ( 80 ) Total Consumer loans 70,442 157,599 308,087 284,137 172,058 174,292 226,491 - 1,393,106 Total loans $ 200,418 351,647 1,024,018 638,919 370,027 623,231 410,404 892 3,619,556 Total Current period gross write-offs - - - - ( 347 ) ( 1,085 ) ( 159 ) - ( 1,591 ) 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 September 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 $ 163 - - - 642,445 642,608 Non-owner occupied RE - - - 7,904 909,738 917,642 Construction - - - - 144,665 144,665 Business 1,454 556 - 838 518,687 521,535 Consumer Real estate 754 239 - 2,448 1,128,930 1,132,371 Home equity 101 - - 393 194,889 195,383 Construction - - - - 21,582 21,582 Other 4 - - - 43,766 43,770 Total loans $ 2,476 795 - 11,583 3,604,702 3,619,556 Total loans over 90 days past due - - - - - 2,073 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 September 30, 2024 and December 31, 2023, loans 30 days or more past due represented 0.16 % and 0.37 % of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.08 % and 0.27 % of the Company’s total loan portfolio as of September 30, 2024 and December 31, 2023, respectively. Consumer loans 30 days or more past due were 0.08 % and 0.09 % of total loans as of September 30, 2024 and December 31, 2023, respectively. The table below summarizes nonaccrual loans by major categories for the periods presented. Schedule of nonaccrual loans by major categories September 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 Non-owner occupied RE $ 5,432 2,472 7,904 $ 653 770 1,423 Business - 838 838 164 155 319 Total commercial 5,432 3,310 8,742 817 925 1,742 Consumer Real estate 1,735 713 2,448 - 985 985 Home equity 318 75 393 343 893 1,236 Total consumer 2,053 788 2,841 343 1,878 2,221 Total nonaccrual loans $ 7,485 4,098 11,583 $ 1,160 2,803 3,963 17 Table of Contents The Company did no t recognize interest income on nonaccrual loans for the three months ended September 30, 2024 and September 30, 2023. The accrued interest reversed during the three months ended September 30, 2024 and September 30, 2023 was no t material. Foregone interest income on the nonaccrual loans for the three-month period ended September 30, 2024 and September 30, 2023 was no t material. We did no t recognize interest income on nonaccrual loans for the nine months ended September 30, 2024 and September 30, 2023. Accrued interest of $ 94,000 was reversed during the nine months ended September 30, 2024 and $ 35,000 was reversed during the nine months ended September 30, 2023. The table below summarizes information regarding nonperforming assets. Schedule of nonperforming assets (dollars in thousands) September 30, 2024 December 31, 2023 Nonaccrual loans $ 11,583 3,963 Other real estate owned - - Total nonperforming assets $ 11,583 3,963 Nonperforming assets as a percentage of: Total assets 0.28 % 0.10 % Gross loans 0.32 % 0.11 % Total loans over 90 days past due $ 2,073 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. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses due to 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 nine months ended September 30, 2024 and September 30, 2023. Allowance for Credit Losses The Company maintains an allowance for credit losses to provide for expected credit losses. Losses are charged against the allowance when management believes that the principal is uncollectable. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance are made for specific loans and for pools of similar types of loans, although the entire allowance is available for any loan that, in management’s judgment, should be charged against the allowance. A provision for credit losses is taken based on management’s ongoing evaluation of the appropriate allowance balance. A formal evaluation of the adequacy of the credit loss allowance is conducted quarterly. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management's evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay a loan, the estimated value of any underlying collateral, composition of the loan portfolio, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. Management believes the level of the allowance for credit losses is adequate to absorb all 18 Table of Contents 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 nine months ended September 30, 2024 and September 30, 2023 under the CECL methodology. Schedule of activity related to the allowance for credit losses Three months ended September 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 $ 5,467 10,562 1,331 7,236 12,397 2,479 278 407 40,157 Provision for credit losses for loans - - - - - - - - - Loan charge-offs - - - ( 72 ) - ( 45 ) - ( 1 ) ( 118 ) Loan recoveries - - - 73 - 4 - 50 127 Net loan recoveries (charge-offs) - - - 1 - ( 41 ) - 49 9 Balance, end of period $ 5,467 10,562 1,331 7,237 12,397 2,438 278 456 40,166 Net recoveries to average loans (annualized) 0.00 % Allowance for credit losses to gross loans 1.11 % Allowance for credit losses to nonperforming loans 346.78 % 19 Table of Contents Three months ended September 30, 2023 Commercial Consumer (dollars in thousands) Owner occupied RE Non-owner occupied RE Construction Business Real Estate Home Equity Construction Other Total Balance, beginning of period $ 5,896 11,584 1,331 8,152 10,395 2,521 684 542 41,105 Provision for credit losses for loans 300 ( 247 ) ( 34 ) ( 148 ) 191 ( 20 ) ( 102 ) ( 40 ) ( 100 ) Loan charge-offs - ( 1 ) - ( 42 ) - - - - ( 43 ) Loan recoveries - 154 - 13 - 2 - - 169 Net loan recoveries (charge-offs) - 153 - ( 29 ) - 2 - - 126 Balance, end of period $ 6,196 11,490 1,297 7,975 10,586 2,503 582 502 41,131 Net recoveries to average loans (annualized) ( 0.01 )% Allowance for credit losses to gross loans 1.16 % Allowance for credit losses to nonperforming loans 953.25 % Nine months ended September 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 for loans ( 651 ) 424 ( 263 ) 190 1,750 ( 244 ) ( 399 ) ( 57 ) 750 Loan charge-offs - ( 1,029 ) - ( 437 ) - ( 45 ) - ( 80 ) ( 1,591 ) Loan recoveries - - - 99 - 127 - 99 325 Net loan recoveries (charge-offs) - ( 1,029 ) - ( 338 ) - 82 - 19 ( 1,266 ) Balance, end of period $ 5,467 10,562 1,331 7,237 12,397 2,438 278 456 40,166 Net charge-offs to average loans (annualized) 0.05 % Allowance for credit losses to gross loans 1.11 % Allowance for credit losses to nonperforming loans 346.78 % Nine months ended September 30, 2023 Commercial Consumer (dollars in thousands) Owner occupied RE Non- owner occupied RE Construction Business Real Estate Home Equity Construction Other Total Balance, beginning of period $ 5,867 10,376 1,292 7,861 9,487 2,551 893 312 38,639 Provision for credit losses for loans 329 1,138 5 120 1,099 278 ( 311 ) 192 2,850 Loan charge-offs - ( 209 ) - ( 43 ) - ( 389 ) - ( 2 ) ( 643 ) Loan recoveries - 185 - 37 - 63 - - 285 Net loan recoveries (charge-offs) - ( 24 ) - ( 6 ) - ( 326 ) - ( 2 ) ( 358 ) Balance, end of period $ 6,196 11,490 1,297 7,975 10,586 2,503 582 502 41,131 Net charge-offs to average loans (annualized) 0.01 % Allowance for credit losses to gross loans 1.16 % Allowance for credit losses to nonperforming loans 953.25 % There was no provision for credit losses for the three months ended September 30, 2024. For the three months ended September 30, 2023, there was a $ 100,000 reversal of the provision for credit losses related to loans. In addition, the provision for credit losses was $ 750,000 and $ 2.9 million for the nine months ended September 30, 2024 and September 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. 20 Table of Contents 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. The following tables present an analysis of collateral-dependent loans of the Company as of September 30, 2024 and December 31, 2023. Schedule of analysis of collateral-dependent loans September 30, 2024 Real Business (dollars in thousands) estate assets Other Total Commercial Non-owner occupied RE $ 7,240 - - 7,240 Business 461 234 - 695 Total commercial 7,701 234 - 7,935 Consumer Real estate 1,891 - - 1,891 Home equity 393 - - 393 Total consumer 2,284 - - 2,284 Total $ 9,985 234 - 10,219 December 31, 2023 Real Business (dollars in thousands) estate assets Other Total Commercial Non-owner occupied RE $ 720 - - 720 Business 164 - - 164 Total commercial 884 - - 884 Consumer Real estate 166 - - 166 Home equity 343 - - 343 Total consumer 509 - - 509 Total $ 1,393 - - 1,393 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 September 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 nine months ended September 30, 2024 and September 30, 2023. Schedule of allowance for credit losses for unfunded loan commitments Three months ended September 30, (dollars in thousands) 2024 2023 Balance, beginning of period $ 1,406 2,565 Provision for (reversal of) credit losses - ( 400 ) Balance, end of period $ 1,406 2,165 Unfunded Loan Commitments $ 699,888 780,581 Reserve for Unfunded Commitments to Unfunded Loan Commitments 0.20 % 0.28 % 21 Table of Contents Nine months ended September 30, (dollars in thousands) 2024 2023 Balance, beginning of period $ 1,831 2,780 Provision for (reversal of) credit losses ( 425 ) ( 615 ) Balance, end of period $ 1,406 2,165 Unfunded Loan Commitments $ 699,888 780,581 Reserve for Unfunded Commitments to Unfunded Loan Commitments 0.20 % 0.28 % 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 entered into a second pay-fixed portfolio layer method fair value swap, designated as a hedging instrument, with a total notional amount of $ 100.0 million in the third quarter of 2024. The hedging instrument matures on August 27, 2027 . The Company is designating the fair value swaps under the portfolio layer method (“PLM”). Under this method, the hedged item is designated as a hedged layer of a closed portfolio of financial loans that is anticipated to remain outstanding for the designated hedged period. Adjustments are made to record the swap at fair value on the consolidated balance sheets, with changes in fair value recognized in interest income. The carrying value of the fair value swap on the consolidated balance sheets will also be adjusted through interest income, based on changes in fair value attributable to changes in the hedged risk. The following table represents the carrying value of the portfolio layer method hedged asset and liability and the cumulative fair value hedging adjustment included in the carrying value of the hedged asset as of September 30, 2024 and December 31, 2023. Schedule of carrying value of hedged asset and liability and cumulative fair value hedging adjustment September 30, 2024 December 31, 2023 (dollars in thousands) Carrying Amount Hedged Liability Carrying Amount Hedged Liability Fixed Rate Asset/Liability 1 $ 296,937 $ 3,063 $ 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 September 30, 2024, the amortized cost basis of the closed portfolio used in this hedging relationship was $ 679.8 million, the cumulative basis adjustment associated with this hedging relationship was $ 3.2 million, and the amount of the designated hedged item was $ 300 .0 million. 22 Table of Contents The following table summarizes the Company’s outstanding financial derivative instruments at September 30, 2024 and December 31, 2023. Schedule of outstanding financial derivative instruments September 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] $ 300,000 Other liabilities $ ( 3,063 ) Derivatives not designated as hedging instruments: Mortgage loan interest rate lock commitments Mortgage loan interest rate lock commitments [Member] 28,937 Other assets 354 MBS forward sales commitments MBS forward sales commitments [Member] 19,000 Other liabilities ( 48 ) Total derivative financial instruments Total derivative financial instruments [Member] $ 347,937 $ ( 2,757 ) 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 September 30, 2024 totaled $ 402,000 and is excluded from the fair value presented in the table above. The Company assesses the effectiveness of the fair value swap hedge with a regression analysis that compares the changes in forward curves to determine the value. The effective portion of changes in fair value of derivatives designated as fair value hedges is recorded through interest income. The Company does not offset derivative assets and derivative liabilities for financial statement presentation purposes. The following table summarizes the effect of the fair value hedging relationship recognized in the consolidated statements of income for the three and nine months ended September 30, 2024 and September 30, 2023. Schedule of summarize the effect of fair value hedging relationship recognized in the consolidated statement of income Three months ended September 30, Nine months ended September 30, (dollars in thousands) 2024 2023 2024 2023 Gain (loss) on fair value hedging relationship: Hedged asset/liability $ 3,063 6,250 $ 3,063 6,250 Fair value derivative designated as hedging instrument ( 2,962 ) ( 6,251 ) ( 2,973 ) ( 6,285 ) Total gain (loss) recognized in interest income on loans $ 101 ( 1 ) $ 90 ( 35 ) 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: 23 Table of Contents 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. Assets and Liabilities Recorded at Fair Value on a Recurring Basis The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023. Schedule of assets and liabilities measured at fair value on a recurring basis September 30, 2024 (dollars in thousands) Level 1 Level 2 Level 3 Total Assets Securities available for sale Corporate bonds $ - 1,947 - 1,947 US treasuries - 924 - 924 US government agencies - 16,686 - 16,686 State and political subdivisions - 20,023 - 20,023 Asset-backed securities - 34,265 - 34,265 Mortgage-backed securities - 60,752 - 60,752 Mortgage loans held for sale - 8,602 - 8,602 Mortgage loan interest rate lock commitments - 354 - 354 Total assets measured at fair value on a recurring basis $ - 143,553 - 143,553 Liabilities Derivative liability - 3,063 - 3,063 MBS forward sales commitments - 48 - 48 Total liabilities measured at fair value on a recurring basis $ - 3,111 - 3,111 24 Table of Contents 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 Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2024 and December 31, 2023. Schedule of assets and liabilities measured at fair value on a nonrecurring basis As of September 30, 2024 (dollars in thousands) Level 1 [Member] Level 1 Level 2 Level 3 Total Assets Individually evaluated loans Level 2 [Member] $ - 8,954 1,812 10,766 Total assets measured at fair value on a nonrecurring basis $ - 8,954 1,812 10,766 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 September 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. 25 Table of Contents The estimated fair values of the Company’s financial instruments at September 30, 2024 and December 31, 2023 are as follows: Schedule of estimated fair values of the company's financial instruments September 30, 2024 (dollars in thousands) Carrying Amount Fair Value Level 1 Level 2 Level 3 Financial Assets: Other investments, at cost $ 19,640 19,640 - - 19,640 Loans 1 3,567,000 3,302,316 - - 3,302,316 Financial Liabilities: Deposits 3,518,825 3,348,532 - 3,348,532 - Subordinated debentures 24,903 28,200 - 28,200 - 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 .0 million and $ 22.2 million as of September 30, 2024 and December 31, 2023, respectively. The Company had lease liabilities, included in other liabilities, of $ 23.6 million and $ 24.6 million as of September 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 5.19 years as of September 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 September 30, 2024. The total operating lease costs were $ 604,000 and $ 597,000 for the three months ended September 30, 2024 and 2023, respectively, and $ 1.8 million for the nine months each ended September 30, 2024 and 2023. 26 Table of Contents Operating lease payments due as of September 30, 2024 were as follows: Schedule of operating lease payments Operating (dollars in thousands) Leases 2024 $ 531 2025 2,157 2026 2,210 2027 2,267 2028 2,015 Thereafter 20,187 Total undiscounted lease payments 29,367 Discount effect of cash flows 5,777 Total lease liability $ 23,590 NOTE 8 – Earnings Per Common Share The following schedule reconciles the numerators and denominators of the basic and diluted earnings per share computations for the three- and nine-month periods ended September 30, 2024 and 2023. Dilutive common shares arise from the potentially dilutive effect of the Company’s stock options that were outstanding at September 30, 2024. The assumed conversion of stock options can create a difference between basic and dilutive net income per common share. At September 30, 2024 and 2023, there were 263,387 and 351,746 options, respectively, that were not considered in computing diluted earnings per common share because they were anti-dilutive. Schedule of earnings per share computations Three months ended September 30, Nine months ended September 30, (dollars in thousands, except share data) 2024 2023 2024 2023 Numerator: Net income available to common shareholders $ 4,382 4,098 $ 9,903 9,259 Denominator: Weighted-average common shares outstanding – basic 8,064,283 8,052,926 8,100,003 8,043,410 Common stock equivalents 24,893 19,482 23,843 34,420 Weighted-average common shares outstanding – diluted 8,089,176 8,072,408 8,123,846 8,077,830 Earnings per common share: Basic $ 0.54 0.51 $ 1.22 1.15 Diluted 0.54 0.51 1.22 1.15 Item 2. MANAGEMENT’S DISCUSSION AND Analysis of Financial Condition and Results of Operations. The following discussion reviews our results of operations for the three- and nine-month periods ended September 30, 2024 as compared to the three- and nine-month periods ended September 30, 2023 and assesses our financial condition as of September 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 nine-month periods ended September 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-looking 27 Table of Contents 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 the upcoming 2024 federal elections and 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; 28 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 September 30, 2024, we had total assets of $4.17 billion, a 2.9% 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 September 30, 2024 and December 31, 2023, respectively. Our liabilities and shareholders’ equity at September 30, 2024 totaled $3.85 billion and $326.5 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 $3.52 billion and $3.38 billion at September 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 $4.4 million and $4.1 million for the three months ended September 30, 2024 and 2023, respectively. Diluted earnings per share (“EPS”) was $0.54 for the third quarter of 2024 as compared to $0.51 for the same period in 2023. The increase in net income was primarily driven by an increase in 29 Table of Contents net interest income resulting from additional interest income on our loan portfolio combined with an increase in noninterest income, partially offset by an increase in noninterest expenses. Our net income to common shareholders was $9.9 million and $9.3 million for the nine months ended September 30, 2024 and 2023, respectively. Diluted EPS was $1.22 for the nine months ended September 30, 2024 as compared to $1.15 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 $20.6 million for the third quarter of 2024, a 6.4% increase over net interest income of $19.3 million for the third quarter of 2023, driven primarily by a $3.7 million increase in interest income on our interest-earning assets, partially offset by a $2.5 million increase in interest expense. In addition, our net interest margin, on a tax-equivalent (TE) basis, was 2.08% for the third quarter of 2024 compared to 1.97% 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 nine-month periods ended September 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. 30 Table of Contents Average Balances, Income and Expenses, Yields and Rates For the Three Months Ended September 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 $ 158,222 $ 2,209 5.55 % $ 181,784 2,435 5.31 % Investment securities, taxable 137,087 1,370 3.98 % 148,239 1,429 3.82 % Investment securities, nontaxable (2) 8,047 55 2.70 % 7,799 55 2.77 % Loans (3) 3,629,050 47,550 5.21 % 3,554,478 43,542 4.86 % Total interest-earning assets 3,932,406 51,184 5.18 % 3,892,300 47,461 4.84 % Noninterest-earning assets 158,550 159,103 Total assets $ 4,090,956 $ 4,051,403 Interest-bearing liabilities NOW accounts $ 314,669 835 1.06 % $ 297,028 620 0.83 % Savings & money market 1,523,834 15,287 3.99 % 1,748,638 16,908 3.84 % Time deposits 909,192 11,603 5.08 % 648,949 7,602 4.65 % Total interest-bearing deposits 2,747,695 27,725 4.01 % 2,694,615 25,130 3.70 % FHLB advances and other borrowings 240,065 2,297 3.81 % 264,141 2,414 3.63 % Subordinated debentures 36,261 558 6.12 % 36,278 558 6.10 % Total interest-bearing liabilities 3,024,021 30,580 4.02 % 2,995,034 28,102 3.72 % Noninterest-bearing liabilities 744,025 752,433 Shareholders’ equity 322,910 303,936 Total liabilities and shareholders’ equity $ 4,090,956 $ 4,051,403 Net interest spread 1.16 % 1.12 % Net interest income (tax equivalent) / margin $ 20,604 2.08 % $ 19,359 1.97 % Less: tax-equivalent adjustment (2) 13 14 Net interest income $ 20,591 $ 19,345 (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) increased 11 basis points to 2.08% during the third quarter of 2024, compared to the third quarter of 2023, primarily due to an increase in our interest-earning assets, as well as an increase in the yield on our interest-earning assets. Our average interest-earning assets grew by $40.1 million during the third quarter of 2024 from the prior year, while the average yield on these assets increased by 34 basis points to 5.18%. Our average interest-bearing liabilities grew by $29.0 million during the third quarter of 2024 from the prior year, while the rate on these liabilities increased 30 basis points to 4.02%. The increase in average interest-earning assets for the third quarter of 2024 related primarily to an increase of $74.6 million in our average loan balances from the prior year, partially offset by a $23.6 million decrease in average federal funds sold and interest-bearing deposits with banks. The 34 basis point increase in yield on our interest-earning assets was driven by a 35 basis point increase in loan yield and a 24 basis point increase in yield on federal funds sold and interest-bearing deposits with banks. The increase in our average interest-bearing liabilities during the third quarter of 2024 resulted primarily from a $53.1 million increase in our interest-bearing deposits from the prior year, while the 30 basis point increase in rate on our interest-bearing liabilities was driven by a 31 basis point increase in deposit rates. Our net interest spread was 1.16% for the third quarter of 2024 compared to 1.12% 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 34 basis point increase in yield on our interest-earning assets was partially offset by a 30 basis point increase in the rate on our interest-bearing liabilities, resulting in a 4 basis point increase in our net interest spread for the 2024 period. We anticipate continued pressure on our net interest spread and net 31 Table of Contents interest margin in future periods based on the competitive rate environment around our deposits and the potential for additional rate cuts by the Federal Reserve. Average Balances, Income and Expenses, Yields and Rates For the nine Months Ended September 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 $ 146,452 $ 6,072 5.54 % $ 113,269 $ 4,295 5.07 % Investment securities, taxable 131,828 4,183 4.24 % 111,551 2,663 3.19 % Investment securities, nontaxable (2) 12,188 162 1.78 % 7,978 162 2.72 % Loans (3) 3,632,527 139,700 5.14 % 3,467,550 121,380 4.68 % Total interest-earning assets 3,922,995 150,117 5.11 % 3,700,348 128,500 4.64 % Noninterest-earning assets 159,663 158,746 Total assets $ 4,082,658 $ 3,859,094 Interest-bearing liabilities NOW accounts $ 304,479 2,117 0.93 % $ 299,123 1,598 0.71 % Savings & money market 1,585,224 47,930 4.04 % 1,712,827 44,197 3.45 % Time deposits 870,078 32,826 5.04 % 588,876 18,450 4.19 % Total interest-bearing deposits 2,759,781 82,873 4.01 % 2,600,826 64,245 3.30 % FHLB advances and other borrowings 240,460 6,772 3.76 % 140,336 3,996 3.81 % Subordinated debentures 36,318 1,671 6.15 % 36,251 1,627 6.00 % Total interest-bearing liabilities 3,036,559 91,316 4.02 % 2,777,413 69,868 3.36 % Noninterest-bearing liabilities 727,977 780,408 Shareholders’ equity 318,122 301,273 Total liabilities and shareholders’ equity $ 4,082,658 $ 3,859,094 Net interest spread 1.09 % 1.28 % Net interest income (tax equivalent) / margin $ 58,801 2.00 % $ 58,632 2.12 % Less: tax-equivalent adjustment (2) 37 37 Net interest income $ 58,764 $ 58,595 (1) Annualized for the nine-month period. (2) The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis. (3) Includes mortgage loans held for sale. During the first nine months of 2024, our net interest margin (TE) decreased by 12 basis points to 2.00%, compared to 2.12% for the first nine months of 2023, driven by the increase in yield on our interest-bearing liabilities. Our average interest-bearing liabilities grew by $259.1 million from the prior year, with the average yield increasing by 66 basis points to 4.02%. In contrast, our average interest-earning assets grew by $222.6 million, while the rate on these assets increased 47 basis points to 5.11%. The increase in average interest-bearing liabilities for the first nine months of 2024 was driven by an increase in interest-bearing deposits of $159.0 million and a $100.1 million increase in FHLB advances and other borrowings, while the increase in cost was driven by a 71 basis point increase on our interest-bearing deposits. The increase in average interest-earning assets for the first nine months of 2024 related primarily to a $165.0 million increase in our average loan balances and a $33.2 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 47 basis point increase in the yield on federal funds sold and interest-bearing deposits with banks and a 46 basis point increase in our loan yield. Our net interest spread was 1.09% for the first nine months of 2024 compared to 1.28% for the same period in 2023. The 19 basis point decrease in our net interest spread was driven by the 66 basis point increase in yield on our interest-bearing liabilities. 32 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 September 30, 2024 vs. 2023 September 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 $ 1,047 2,891 70 4,008 $ 6,233 6,248 1,309 13,790 Investment securities (103 ) 48 (3 ) (58 ) 271 451 242 964 Federal funds sold and interest-bearing deposits with banks (315 ) 102 (13 ) (226 ) 331 959 469 1,759 Total interest income 629 3,041 54 3,724 6,835 7,658 2,020 16,513 Interest expense Deposits 295 2,273 27 2,595 762 16,798 2,549 20,109 FHLB advances and other borrowings (220 ) 112 (10 ) (118 ) 1,938 2 466 2,406 Subordinated debentures - 1 - 1 1 106 - 107 Total interest expense 75 2,386 17 2,478 2,701 16,906 3,015 22,622 Net interest income $ 554 655 37 1,246 $ 4,134 (9,248 ) (995 ) (6,109 ) Net interest income, the largest component of our income, was $20.6 million for the third quarter of 2024 and $19.3 million for the third quarter of 2023, a $1.2 million, or 6.4%, increase year over year. The increase during 2024 was driven by a $3.7 million increase in interest income primarily due to higher yields on our loan portfolio and an increase in average loan balances. Partially offsetting the increase in interest income was a $2.5 million increase in interest expense which was primarily driven by higher rates on our interest-bearing deposits. Nine Months Ended September 30, 2024 vs. 2023 September 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 $ 6,121 11,617 582 18,320 $ 20,388 16,507 4,191 41,086 Investment securities 573 786 161 1,520 99 1,179 82 1,360 Federal funds sold and interest-bearing deposits with banks 1,262 398 117 1,777 148 2,781 451 3,380 Total interest income 7,956 12,801 860 21,617 20,635 20,467 4,724 45,826 Interest expense Deposits 1,981 16,151 496 18,628 1,656 45,190 9,626 56,472 FHLB advances and other borrowings 2,857 (47 ) (34 ) 2,776 636 545 2,686 3,867 Subordinated debentures 3 41 - 44 4 389 1 394 Total interest expense 4,841 16,145 462 21,448 2,296 46,124 12,313 60,733 Net interest income $ 3,115 (3,344 ) 398 169 $ 18,339 (25,657 ) (7,589 ) (14,907 ) Net interest income for the first nine months of 2024 was $58.8 million compared to $58.6 million for 2023, a $169,000, or 0.29%, increase. The increase in net interest income during 2024 was driven by a $21.6 million increase in interest income, offset by a $21.4 million increase in interest expense. Provision for Credit Losses The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the allowance for credit losses and reserve for unfunded commitments at levels consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date. We review the adequacy of the allowance for credit losses on a quarterly basis. Please see the discussion included in Note 4 – Loans and Allowance for Credit Losses for a description of the factors we consider in determining the amount of the provision we expense each period to maintain this allowance. 33 Table of Contents We did not record a provision for credit losses during the third quarter of 2024, compared to a reversal of $500,000 to the provision for credit losses in the third quarter of 2023. We recorded a provision expense of $325,000 and $2.2 million for the nine months ended September 30, 2024 and September 30, 2023, respectively. No provision was recorded in the third quarter of 2024 due to low charge-offs and insignificant loan growth. The reversal of $500,000 in the third quarter of 2023, included a $100,000 reversal of provision for credit losses and a $400,000 reversal for unfunded commitments. The reversal of the provision for credit losses was driven by lower expected loss rates, while the reversal of the reserve for unfunded commitments was driven by a decrease in the balance of unfunded commitments at September 30, 2023, compared to the previous quarter and year. The $325,000 provision expense for the first nine months of 2024 included $750,000 provision for credit losses and a $425,000 reversal for unfunded commitments. The $2.2 million provision expense for the first nine months of 2023 included a $2.9 million provision for credit losses and a $615,000 reversal for unfunded commitments. Noninterest Income The following table sets forth information related to our noninterest income. Three months ended September 30, Nine months ended September 30, (dollars in thousands) 2024 2023 2024 2023 Mortgage banking income $ 1,449 1,208 $ 4,536 3,167 Service fees on deposit accounts 455 356 1,265 1,011 ATM and debit card income 599 588 1,730 1,680 Income from bank owned life insurance 401 349 1,162 1,018 Other income 271 249 669 653 Total noninterest income $ 3,175 2,750 $ 9,362 7,529 Noninterest income was $3.2 million for the third quarter of 2024, a $425,000, or 15.5%, increase from noninterest income of $2.8 million for the third quarter of 2023. Mortgage banking income continues to be the largest component of our noninterest income at $1.5 million for the third quarter of 2024, an increase of $241,000, or 20.0%, over the prior year. The increase was driven by higher mortgage volume during the third quarter of 2024. Service fees on deposit accounts increased $99,000, or 27.8%, over the prior year. The increase was driven by fee income on our commercial credit cards and additional wire fee income. Noninterest income was $9.4 million for the first nine months of 2024, a $1.8 million, or 24.4%, increase from noninterest income of $7.5 million for the first nine months of 2023. Mortgage banking income increased by $1.4 million, or 43.2%, over the prior year while service fees on deposit accounts increased $254,000, or 25.1%, from the first nine months of 2023. Noninterest expenses The following table sets forth information related to our noninterest expenses. Three months ended September 30, Nine months ended September 30, (dollars in thousands) 2024 2023 2024 2023 Compensation and benefits $ 10,789 10,231 $ 32,936 30,874 Occupancy 2,595 2,562 7,704 7,537 Outside service and data processing costs 1,930 1,744 5,738 5,078 Insurance 1,025 1,243 2,945 2,829 Professional fees 548 504 1,748 1,914 Marketing 319 293 1,077 994 Other 833 725 2,634 2,573 Total noninterest expense $ 18,039 17,302 $ 54,782 51,799 Noninterest expense was $18.0 million for the third quarter of 2024, a $737,000, or 4.3%, increase from noninterest expense of $17.3 million for the third quarter of 2023. The increase in noninterest expense was driven primarily by the following: 34 Table of Contents · Compensation and benefits expense increased $558,000, or 5.5%, relating primarily to an increase in salaries, equity compensation expenses, and other employee benefits expenses. · Outside service and data processing costs increased $186,000, or 10.7%, relating primarily to increases in software licensing and maintenance costs. Noninterest expense was $54.8 million for the first nine months of 2024, a $3.0 million, or 5.8%, increase from noninterest expense of $51.8 million for the first nine months of 2023. The increase in noninterest expense was driven primarily by the following: · Compensation and benefits expense increased $2.1 million, or 6.7%, relating primarily to annual salary increases, bonuses, and equity compensation expenses. · Outside service and data processing costs increased $660,000, or 13.0%, relating primarily to increases in item processing, electronic banking and software licensing and maintenance costs. · Occupancy costs increased $167,000, or 2.2%, primarily due to depreciation on the Dream Mortgage Center which opened in the fourth quarter of 2023. · Insurance costs increased $116,000, or 4.1%, as a result of higher FDIC insurance premiums. Partially offsetting these increases, professional fees decreased $166,000, or 8.7%, relating primarily to decreases in loan appraisal fees, legal fees and other consulting fees. Our efficiency ratio was 75.9% for the third quarter of 2024, compared to 78.3% for the third 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. The improvement during the 2024 period is due to the higher level of net interest income recorded. We incurred income tax expense of $1.3 million and $1.2 million for the three months ended September 30, 2024 and 2023, respectively, and $3.1 million and $2.8 million for the nine months ended September 30, 2024 and 2023, respectively. Our effective tax rate was 23.9% and 23.4% for the nine months ended September 30, 2024 and 2023, respectively. The higher tax rate during the first nine months of 2024 was driven by the effect of equity compensation transactions during the period. Balance Sheet Review Investment Securities At September 30, 2024, the $154.2 million in our investment securities portfolio represented approximately 3.7% 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 $134.6 million and an amortized cost of $146.1 million, resulting in an unrealized loss of $11.5 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 $299,000 from December 31, 2023 to $19.6 million at September 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 nine months ended September 30, 2024 and 2023 were $3.62 billion and $3.46 billion, respectively. Before the allowance for credit losses, total loans outstanding at September 30, 2024 and December 31, 2023 were $3.62 billion and $3.60 billion, respectively. The principal component of our loan portfolio is loans secured by real estate mortgages. As of September 30, 2024, our loan portfolio included $3.05 billion, or 84.4%, 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 35 Table of Contents 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 $195.4 million as of September 30, 2024, of which approximately 45% 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 $89,000 and a loan to value of 73% as of September 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, 0.3% and 0.8% of our total home equity lines of credit were over 30 days past due as of September 30, 2024 and December 31, 2023, respectively. Following is a summary of our loan composition at September 30, 2024 and December 31, 2023. During the first nine months of 2024, our loan portfolio increased by $16.9 million, or 0.47%, primarily driven by a $15.5 million increase in consumer loans secured by real estate. Our consumer real estate portfolio grew by $49.9 million and includes high quality 1-4 family consumer real estate loans. Our average consumer real estate loan currently has a principal balance of $470,000, a term of 23 years, and an average rate of 4.33% as of September 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. September 30, 2024 December 31, 2023 (dollars in thousands) Amount % of Total Amount % of Total Commercial Owner occupied RE $ 642,608 17.8 % $ 631,657 17.5 % Non-owner occupied RE 917,642 25.3 % 942,529 26.2 % Construction 144,665 4.0 % 150,680 4.2 % Business 521,535 14.4 % 500,161 13.9 % Total commercial loans 2,226,450 61.5 % 2,225,027 61.8 % Consumer Real estate 1,132,371 31.3 % 1,082,429 30.0 % Home equity 195,383 5.4 % 183,004 5.1 % Construction 21,582 0.6 % 63,348 1.7 % Other 43,770 1.2 % 48,819 1.4 % Total consumer loans 1,393,106 38.5 % 1,377,600 38.2 % Total gross loans, net of deferred fees 3,619,556 100.0 % 3,602,627 100.0 % Less—allowance for credit losses (40,166 ) (40,682 ) Total loans, net $ 3,579,390 $ 3,561,945 We have included the table below to provide additional clarity on our commercial real estate exposure. We have not identified any geographic concentrations within these collateral types. Our level of non-owner occupied commercial real estate represents 257.3% of the Bank’s total risk-based capital at September 30, 2024. September 30, 2024 (dollars in thousands) Outstanding % of Loan Portfolio Average Loan Size Weighted Average LTV Collateral Office $ 222,508 6.15 % $ 1,403 56 % Retail 176,096 4.87 % 1,565 51 % Hotel 126,529 3.50 % 7,250 48 % Multifamily 107,915 2.98 % 2,958 47 % 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 36 Table of Contents 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 September 30, 2024 and December 31, 2023, we had no loans 90 days past due and still accruing. Following is a summary of our nonperforming assets. (dollars in thousands) September 30, 2024 December 31, 2023 Commercial $ 8,742 1,742 Consumer 2,841 2,221 Total nonaccrual loans 11,583 3,963 Other real estate owned - - Total nonperforming assets $ 11,583 3,963 At September 30, 2024, nonperforming assets were $11.6 million, or 0.28% of total assets and 0.32% 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 $7.6 million during the first nine 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 nine months of 2024 and 2023 was $134,000 and $48,000, respectively. At September 30, 2024 and December 31, 2023, the allowance for credit losses represented 346.78% and 1,026.58% of the total amount of nonperforming loans, respectively. A significant portion of the nonperforming loans at September 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 September 30, 2024, 84.4% of our loans were collateralized by real estate and 98.8% of our individually evaluated loans were secured by real estate. We utilize third party appraisers to determine the fair value of collateral dependent loans. Our current loan and appraisal policies require us to obtain updated appraisals on an annual basis, either through a new external appraisal or an appraisal evaluation. Individually evaluated loans are reviewed on a quarterly basis to determine the level of impairment. As of September 30, 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 September 30, 2024, individually evaluated loans totaled $12.4 million with a reserve of approximately $1.6 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. 37 Table of Contents Allowance for Credit Losses The allowance for credit losses was $40.2 million, representing 1.11% of outstanding loans and providing coverage of 346.78% of nonperforming loans at September 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 September 30, 2023, the allowance for credit losses was $41.1 million, or 1.16% of outstanding loans and 953.25% of nonperforming loans. Deposits and Other Interest-Bearing Liabilities Our primary source of funds for loans and investments is our deposits and advances from the FHLB. In the past, we have chosen to obtain a portion of our certificates of deposits from areas outside of our market in order to obtain longer term deposits than are readily available in our local market. Our internal guidelines regarding the use of brokered CDs limit our brokered CDs to 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 $2.93 billion, or 83.3% of total deposits, while our wholesale deposits represented $588.5 million, or 16.7%, of total deposits at September 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 103% at September 30, 2024 and 107% at December 31, 2023. The following is a detail of our deposit accounts: (dollars in thousands) September 30, 2024 December 31, 2023 Non-interest bearing $ 689,749 674,167 Interest bearing: NOW accounts 339,412 310,218 Money market accounts 1,423,403 1,605,278 Savings 29,283 31,669 Time, less than $250,000 223,582 190,167 Time and out-of-market deposits, $250,000 and over 813,396 568,065 Total deposits $ 3,518,825 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 $15.6 million from $674.2 million at December 31, 2023, our core deposits decreased to $2.71 billion from $2.81 billion at December 31, 2023. In addition, at September 30, 2024 and December 31, 2023, we estimate that we have approximately $1.3 billion, or 36.3% 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. Nine months ended September 30, 2024 2023 (dollars in thousands) Amount Rate Amount Rate Noninterest-bearing demand deposits $ 669,911 0.00 % $ 726,661 0.00 % Interest-bearing demand deposits 304,479 0.93 % 299,123 0.72 % Money market accounts 1,555,198 4.10 % 1,675,181 3.53 % Savings accounts 30,026 0.23 % 37,646 0.10 % Time deposits less than $250,000 213,748 4.66 % 119,069 3.78 % Time deposits greater than $250,000 656,330 5.14 % 469,807 4.31 % Total deposits $ 3,429,692 3.22 % $ 3,327,487 2.58 % 38 Table of Contents During the first nine months of 2024, our average transaction account balances decreased by $179.0 million, or 6.5%, from the prior year, while our average time deposit balances increased by $281.2 million, or 47.8%. All of our time deposits are certificates of deposits. The maturity distribution of our time deposits $250,000 or more at September 30, 2024 was as follows: (dollars in thousands) September 30, 2024 Three months or less $ 118,352 Over three through six months 205,059 Over six through twelve months 266,240 Over twelve months 223,745 Total $ 813,396 Time deposits that meet or exceed the FDIC insurance limit of $250,000 at September 30, 2024 and December 31, 2023 were $813.4 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 September 30, 2024, we had $240.0 million of convertible fixed rate FHLB advances with a weighted average rate of 3.74%, 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. At September 30, 2024, the $240.0 million was secured with approximately $1.24 billion of mortgage loans and $14.5 million of stock in the FHLB. At December 31, 2023, the $275.0 million was secured with approximately $1.25 billion of mortgage loans and $16.1 million of stock in the FHLB. Listed below is a summary of the terms and maturities of the advances outstanding at September 30, 2024 and December 31, 2023. (dollars in thousands) September 30, 2024 December 31, 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 % 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 % - - July 10, 2029 45,000 3.69 % - - $ 240,000 3.74 % $ 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 several large bank failures across the United States 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 39 Table of Contents requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control. At September 30, 2024 and December 31, 2023, our cash and cash equivalents totaled $260.6 million and $156.2 million, respectively, or 6.2% and 3.9% of total assets, respectively. Our investment securities at September 30, 2024 and December 31, 2023 amounted to $154.2 million and $154.6 million, respectively, or 3.7% 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 September 30, 2024. We also had $172.8 million pledged and available with the Federal Reserve Discount Window at September 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 September 30, 2024 was $716.7 million, based primarily on the Bank’s qualifying mortgages available to secure any future borrowings. However, we are able to pledge additional securities to the FHLB in order to increase our available borrowing capacity. In addition, at September 30, 2024 and December 31, 2023 we had $276.5 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 September 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. On September 30, 2024, in conjunction with the semi-annual interest payment, we redeemed $11.5 million of our outstanding subordinated debt. Beginning September 30, 2024, the interest rate shall reset quarterly to an interest rate per annum equal to the Three-Month Term SOFR plus 340.8 basis points, payable quarterly in arrears. 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. 40 Table of Contents Total shareholders’ equity was $326.5 million at September 30, 2024 and $312.5 million at December 31, 2023. The $14.1 million increase from December 31, 2023 is primarily related to net income of $9.9 million during the first nine months of 2024, stock option exercises and equity compensation expenses of $1.9 million, and a $2.3 million decrease 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 nine months ended September 30, 2024 and the year ended December 31, 2023. Since our inception, we have not paid cash dividends. September 30, 2024 December 31, 2023 Return on average assets 0.32 % 0.34 % Return on average equity 4.16 % 4.44 % Return on average common equity 4.16 % 4.44 % Average equity to average assets ratio 7.79 % 7.71 % Tangible common equity to assets ratio 7.82 % 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 September 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. 41 Table of Contents September 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) $ 396,451 12.50 % $ 253,645 8.00 % $ 317,056 10.00 % Tier 1 Capital (to risk weighted assets) 356,812 11.25 % 190,233 6.00 % 253,645 8.00 % Common Equity Tier 1 Capital (to risk weighted assets) 356,812 11.25 % 142,675 4.50 % 206,086 6.50 % Tier 1 Capital (to average assets) 356,812 8.70 % 164,141 4.00 % 205,176 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 % The following table summarizes the capital amounts and ratios of the Company and the minimum regulatory requirements. September 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) $ 399,736 12.61 % $ 253,631 8.00 % N/A N/A Tier 1 Capital (to risk weighted assets) 348,600 11.00 % 190,223 6.00 % N/A N/A Common Equity Tier 1 Capital (to risk weighted assets) 335,600 10.59 % 142,667 4.50 % N/A N/A Tier 1 Capital (to average assets) 348,600 8.49 % 164,164 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. 42 Table of Contents Effect of Inflation and Changing Prices The effect of relative purchasing power over time due to inflation has not been taken into account in our consolidated financial statements. Rather, our financial statements have been prepared on an historical cost basis in accordance with generally accepted accounting principles. Unlike most industrial companies, our assets and liabilities are primarily monetary in nature. Therefore, the effect of changes in interest rates will have a more significant impact on our performance than will the effect of changing prices and inflation in general. In addition, interest rates may generally increase as the rate of inflation increases, although not necessarily in the same magnitude. As discussed previously, we seek to manage the relationships between interest sensitive assets and liabilities in order to protect against wide rate fluctuations, including those resulting from inflation. Off-Balance Sheet Risk Commitments to extend credit are agreements to lend money to a client as long as the client has not violated any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At September 30, 2024 unfunded commitments to extend credit were $699.9 million, of which $76.3 million were at fixed rates and $623.6 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. As of September 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 September 30, 2024 and December 31, 2023, there were commitments under letters of credit for $13.6 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. 43 Table of Contents Accounting, Reporting, and Regulatory Matters See Note 1 – Summary of Significant Accounting Policies in the accompanying notes to consolidated financial statements included elsewhere in this report for details of recently issued accounting pronouncements and their expected impact on our consolidated financial statements. Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risk is the risk of loss from adverse changes in market prices and rates, which principally arises from interest rate risk inherent in our lending, investing, deposit gathering, and borrowing activities. Other types of market risks, such as foreign currency exchange rate risk and commodity price risk, do not generally arise in the normal course of our business. We actively monitor and manage our interest rate risk exposure in order to control the mix and maturities of our assets and liabilities utilizing a process we call asset/liability management. The essential purposes of asset/liability management are to seek to ensure adequate liquidity and to maintain an appropriate balance between interest sensitive assets and liabilities in order to minimize potentially adverse impacts on earnings from changes in market interest rates. Our asset/liability management committee (“ALCO”) monitors and considers methods of managing exposure to interest rate risk. We have both an internal ALCO consisting of senior management that meets 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 September 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 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 (9.34 )% Up 200 basis points (5.57 )% Up 100 basis points (2.23 )% Base - Down 100 basis points 3.73 % Down 200 basis points 12.73 % Down 300 basis points 26.29 % 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 44 Table of Contents Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control over Financial Reporting There has been no change in the Company’s internal control over financial reporting during the nine months ended September 30, 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 As of September 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 nine months ended September 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. 45 Table of Contents INDEX TO EXHIBITS Exhibit Number Description 31.1 Rule 13a-14(a) Certification of the Principal Executive Officer. 31.2 Rule 13a-14(a) Certification of the Principal Financial Officer. 32 Section 1350 Certifications. 101 The following materials from the Quarterly Report on Form 10-Q of Southern First Bancshares, Inc. for the quarter ended September 30, 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) 46 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: November 1, 2024 /s/R. Arthur Seaver, Jr. R. Arthur Seaver, Jr. Chief Executive Officer (Principal Executive Officer) Date: November 1, 2024 /s/Christian J. Zych Christian J. Zych Chief Financial Officer (Principal Financial Officer) 47