What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-02 compared with 2020-03-02 · 305 added, 217 removed, 1074 unchanged (33% of the section changed)

Financial Statements and Supplementary Data

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Southern First Bancshares, Inc.

is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, as amended.

The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the U.S.

The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records, that in reasonable detail, accurately and fairly reflect the transactions and disposition of the Company’s assets;

(2) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of the financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with the authorizations of the Company’s management and directors;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material impact on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

Management conducted an evaluation of the effectiveness of the internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013.

Management conducted an evaluation of the effectiveness of the internal control over financial reporting based on the framework in Internal Control —

Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013.

Based on this evaluation under the COSO criteria, management concluded that the internal control over financial reporting was effective as of December 31, 2020.

The effectiveness of the internal control structure over financial reporting as of December 31, 2019 has been audited by Elliott Davis, LLC, an independent registered public accounting firm, as stated in their report included in this Annual Report on Form 10-K, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019.

The effectiveness of the internal control structure over financial reporting as of December 31, 2020 has been audited by Elliott Davis, LLC, an independent registered public accounting firm, as stated in their report included in this Annual Report on Form 10-K, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020.

Arthur Seaver, Jr.

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Chief Executive Officer

Chief Financial Officer

Chief Financial Officer & Chief Operating Officer

Southern First Bancshares, Inc.

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and Subsidiary

Greenville, South Carolina

Opinion on the Internal Control Over Financial Reporting

We have audited Southern First Bancshares, Inc.

and Subsidiary's (the “Company”) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 (the “COSO criteria”).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018 and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019 of the Company and our report dated March 2, 2020 expressed an unqualified opinion.

and Subsidiary's (the “Company”) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control —

Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control —

Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

equity, and cash flows for each of the three years in the period ended December 31, 2020 of the Company and our report dated March 2, 2021 expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.

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Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

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and Subsidiary

Greenville, South Carolina

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Southern First Bancshares, Inc.

and Subsidiary (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes to the consolidated financial statements and schedules (collectively, the “financial statements”).

and Subsidiary (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, shareholders’

equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes to the consolidated financial statements (collectively, the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 2, 2020 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 2, 2021 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Losses

As described in Note 4 to the Company’s consolidated financial statements, the Company has a gross loan portfolio of $2.1 billion and related allowance for loan losses of $44.1 million as of December 31, 2020.

As described by the Company in Note 1, the evaluation of the allowance for loan losses is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance for loan losses is evaluated on a regular basis and is based upon the Company’s review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.

We identified the Company’s estimate of the allowance for loan losses as a critical audit matter.

The principal considerations for our determination of the allowance for loan losses as a critical audit matter related to the high degree of subjectivity in the Company’s judgments in determining the qualitative factors.

Auditing these complex judgments and assumptions by the Company involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill or knowledge needed.

The primary procedures we performed to address this critical audit matter included the following:

We tested the design and operating effectiveness of controls relating to the Company’s determination of the allowance for loan losses, including controls over qualitative factors.  

We evaluated the relevance and the reasonableness of assumptions related to evaluation of the loan portfolio, current economic conditions, and other risk factors used in development of the qualitative factors for collectively evaluated loans.  

We evaluated the reasonableness of assumptions and data used by the Company in developing the qualitative factors by comparing these data points to internally developed and third-party sources, and other audit evidence gathered.  

/s/ Elliott Davis, LLC

We have served as the Company’s auditor since 1999.

Greenville, South Carolina

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Total liabilities

SHAREHOLDERS’ EQUITY

Preferred stock, par value $.01 per share, 10,000,000 shares authorized

Common stock, par value $.01 per share, 10,000,000 shares authorized, 7,672,678 and 7,466,481 shares issued and outstanding at December 31, 2019 and 2018, respectively

SHAREHOLDERS’

Preferred stock, par value $.

01 per share, 10,000,000 shares authorized

Common stock, par value $.

01 per share, 10,000,000 shares authorized, 7,772,748 and 7,672,678 shares issued and outstanding at December 31, 2020 and 2019, respectively

Nonvested restricted stock

Additional paid-in capital

Accumulated other comprehensive loss

Accumulated other comprehensive income (loss)

Retained earnings

Total shareholders’ equity

Total liabilities and shareholders’ equity

Total shareholders’

Total liabilities and shareholders’

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

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Loss on extinguishment of debt

Net lender fees on PPP loan sale

Total noninterest income

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Compensation and benefits

Mortgage production costs

Other real estate owned (income) expenses, net

Outside service and data processing costs

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AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’

FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018

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December 31, 2017

Net issuance of common stock

Proceeds from exercise of stock options

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Compensation expense related to stock options, net of tax

Other comprehensive income

Other comprehensive loss

December 31, 2018

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Compensation expense related to stock options, net of tax

Other comprehensive loss

Other comprehensive income

December 31, 2019

Proceeds from exercise of stock options

Issuance of restricted stock

Issuance of restricted stock, net of forfeitures

Compensation expense related to restricted stock, net of tax

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Accretion and amortization of securities discounts and premiums, net

Write-down of real estate owned

Gain on sale of investment securities available for sale

Gain on sale of fixed assets

Net change in operating leases

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Increase in cash surrender value of bank owned life insurance

(Increase) decrease in deferred tax asset

Increase in deferred tax asset

(Increase) decrease in other assets, net

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Purchase of life insurance policies

Proceeds from sale of fixed assets

Proceeds from sale of other real estate owned

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Increase of subordinated debt

Issuance of common stock

Proceeds from the exercise of stock options

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

NOTE 1 – Summary of Significant Accounting Policies and Activities

NOTE 1 –

Summary of Significant Accounting Policies and Activities

Southern First Bancshares, Inc.

(the "Company") is a South Carolina corporation that owns all of the capital stock of Southern First Bank (the "Bank") and all of the stock of Greenville First Statutory Trust I and II (collectively, the "Trusts").

The Trusts are special purpose non-consolidated entities organized for the sole purpose of issuing trust preferred securities.

The Bank's primary federal regulator is the Federal Deposit Insurance Corporation (the "FDIC").

The Bank is also regulated and examined by the South Carolina Board of Financial Institutions.

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The accounting and reporting policies conform to accounting principles generally accepted in the United States of America.

In accordance with guidance issued by the Financial Accounting Standards Board (“FASB”), the operations of the Trusts have not been consolidated in these financial statements.

Business Segments

ASC Topic 280-10, “Segment Reporting,” requires selected segment information of operating segments based on a management approach.

The Company’s three reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning by management.

Please refer to “Note 24 – Reportable Segments” for further information on the reporting for the Company’s three business segments.

ASC Topic 280-10, “Segment Reporting,”

requires selected segment information of operating segments based on a management approach.

The Company’s three reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning by management.

Please refer to “Note 24 –

Reportable Segments”

for further information on the reporting for the Company’s three business segments.

Use of Estimates

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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.

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.

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These regulations can and do change significantly from period to period.

The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to changes with respect to valuation of assets, amount of required loan loss allowance and operating restrictions resulting from the regulators’ judgments based on information available to them at the time of their examinations.

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 and Triad regions of North Carolina and Atlanta, Georgia for various personal and commercial purposes.

The Bank’s loan portfolio has a concentration of real estate loans.

As of December 31, 2020 and 2019, real estate loans represented 84.6 % and 82.8 %, respectively, of total loans.

However, borrowers’ ability to repay their loans is not dependent upon any specific economic sector.

However, borrowers’

ability to repay their loans is not dependent upon any specific economic sector.

The impact of the coronavirus (COVID-19) pandemic is fluid and continues to evolve, adversely affecting many of the Bank’s clients.

The unprecedented and rapid spread of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and significant volatility and disruption in financial markets, and has had an adverse effect on the Company’s business, financial condition and results of operations.

The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including governmental and private sector initiatives, the effect of the recent rollout of vaccinations for the virus, whether such vaccinations will be effective against any resurgence of the virus, including any new strains, and the ability for customers and businesses to return to their pre-pandemic routine.

The Company’s business, financial condition and results of operations generally rely upon the ability of the Bank’s borrowers to repay their loans, the value of collateral underlying the Bank’s secured loans, and demand for loans and other products and services the Bank offers, which are highly dependent on the business environment in the Bank’s primary markets where it operates and in the United States as a whole.

On March 3, 2020, the Federal Reserve reduced the target federal funds rate by 50 basis points, followed by an additional reduction of 100 basis points on March 16, 2020.

These reductions in interest rates and other effects of the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, an adverse effect on Company’s business, financial condition and results of operations.

For instance, the pandemic has had negative effects on the Bank’s interest income, provision for loan losses, and certain transaction-based line items of noninterest income.

Other financial impacts could occur though such potential impact is unknown at this time.

As of December 31, 2020, the Company’s and the Bank’s capital ratios were in excess of all regulatory requirements.

While management believes that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by further credit losses.

The Company maintains access to multiple sources of liquidity, including a $ 15.0 million holding company line of credit with another bank which could be used to support capital ratios at the subsidiary bank.

As of December 31, 2020, the $ 15.0 million line was unused.

Subsequent Events

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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.

Certain amounts, previously reported, have been reclassified to state all periods on a comparable basis and had no effect on shareholders’

equity or net income.

Cash and Cash Equivalents

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Securities designated as available for sale are recorded at fair value.

Changes in the fair value of available for sale debt securities are included in shareholders’ equity as unrealized gains or losses, net of the related tax effect.

Changes in the fair value of available for sale debt securities are included in shareholders’

equity as unrealized gains or losses, net of the related tax effect.

Unrealized losses on available for sale securities, reflecting a decline in value judged to be other than temporary, are charged to income in the Consolidated Statements of Income.

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Other Investments

The Bank, as a member institution, is required to own a stock investment in the Federal Home Loan Bank of Atlanta (“FHLB”).

This stock is generally pledged against any borrowings from the FHLB and cash dividends on our FHLB stock are recorded in investment income.

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When a loan is placed on nonaccrual status, interest accrued but not received is generally reversed against interest income.

Cash receipts on nonaccrual loans are not recorded as interest income, but are used to reduce the loan’s principal balance.

A nonaccrual loan is generally returned to accrual status and accrual of interest is resumed when payments have been made according to the terms and conditions of the loan for a continuous six month period.

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Impaired Loans

Our impaired loans include loans on nonaccrual status and loans modified in a troubled debt restructuring (“TDR”), whether on accrual or nonaccrual status.

For loans that are classified as impaired, an allowance is established when the fair value (discounted cash flows, collateral value, or observable market price) of the impaired loan less costs to sell, are lower than the carrying value of that loan.

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Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including, without limitation, the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Impairment is measured on a loan by loan basis for commercial and consumer loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Loan Charge-off Policy

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As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing challenges in the current economic environment.

In accordance with the CARES Act, the Company implemented loan modification programs in response to the COVID-19 pandemic, and the Company elected the accounting policy in the CARES Act to not apply TDR accounting to loans modified for borrowers impacted by the COVID-19 pandemic.

In 2020, the Company granted short-term loan deferrals to six client relationships, with loans totaling $ 3.2 million at December 31, 2020, which were considered TDRs due to the client experiencing financial difficulty before the pandemic.

Our policy with respect to accrual of interest on loans restructured in a TDR follows relevant supervisory guidance.

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In addition, our policy, in accordance with supervisory guidance, also provides for a loan to be removed from TDR status if the loan is modified or renewed at terms consistent with current market rates and the loan has been performing under modified terms for an extended period of time or under certain circumstances.

In the determination of the allowance for loan losses, management considers TDRs on commercial and consumer loans and subsequent defaults in these restructurings by measuring impairment, on a loan by loan basis, based on either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent.

Allowance for Loan Losses

The allowance for loan losses is management’s estimate of credit losses inherent in the loan portfolio.

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings.

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Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions.

This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

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Comprehensive Income

Comprehensive income (loss) consists of net income and net unrealized gains (losses) on securities and is presented in the statements of shareholders’ equity and comprehensive income.

Comprehensive income (loss) consists of net income and net unrealized gains (losses) on securities and is presented in the statements of shareholders’

equity and comprehensive income.

The statement requires only additional disclosures in the consolidated financial statements;

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Revenue from Contracts with Customers

The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”).

The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers”

(“Topic 606”).

Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation.

Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606.

The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary.

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The following is a discussion of revenues within the scope of the guidance:

Service fees on deposit accounts - The Company earns fees from its deposit clients for various transaction-based, account maintenance, and overdraft or non-sufficient funds (“NSF”) services.

Transaction-based fees, which include services such as stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the client's request.

Service fees on deposit accounts - The Company earns fees from its deposit clients for various transaction-based, account maintenance, and overdraft or non-sufficient funds (“NSF”) services.

Account maintenance fees, which relate primarily to monthly maintenance and account management, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation.

Overdraft and NSF fees are recognized at the point in time that the overdraft occurs or the NSF item is presented.

Service charges on deposits are withdrawn from the client's account balance.

ATM and debit card income - The Company earns interchange fees from debit cardholder transactions conducted through the payment networks.

Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

The financial statements have been prepared on the accrual basis.

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Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled.

The Company believes that its income tax filing positions taken or expected to be taken on its tax returns will more likely than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Company’s financial condition, results of operations, or cash flow.

Therefore, no reserves for uncertain income tax positions have been recorded.

The Company’s federal and state income tax returns are open and subject to examination from the 2016 tax return year and forward.

On December 22, 2017, the Tax Act was signed into law and includes numerous provisions that impact the Company, most notably a reduction in the corporate tax rate from the maximum rate of 35% to a flat rate of 21%.

As a result, the Company recorded an incremental income tax expense of $2.4 million in the fourth quarter of 2017.

The Company’s federal and state income tax returns are open and subject to examination from the 2017 tax return year and forward.

Stock-Based Compensation

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Compensation cost is recognized for all stock options granted and for any outstanding unvested awards as if the fair value method had been applied to those awards as of the date of grant.

Adoption of New Accounting Standards

In February 2016, the FASB issued ASU No.

2016-02, “Leases (Topic 842)” .

The guidance in the update supersedes the requirements in ASC Topic 840, Leases.

The guidance is intended to increase transparency and comparability among organizations by recognizing right-of-use (“ROU”) assets and lease liabilities on the balance sheet.

For public companies, this update was effective for interim and annual periods beginning after December 15, 2018.

The Company adopted this guidance in the first quarter of 2019.

Upon adoption, the Company elected a practical expedient which allows existing leases to retain their classification as operating leases.

The Company has also elected to not recognize right-of-use assets and lease liabilities arising from short-term leases.

Implementation of the guidance resulted in the recording of a right-of-use asset and lease liability on the balance sheet;

however it does not have a material impact on the Company's other consolidated financial statements.

See additional disclosures in Note 7.

Newly Issued, But Not yet Effective Accounting Standards

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments” .

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments –

Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments”

Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

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The Company has established a team of individuals from credit, finance and risk management to evaluate the requirements of the new standard and the impact it will have on its processes.

In November 2019, the FASB issued guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments” .

In November 2019, the FASB issued guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, “Financial Instruments –

Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments”

The amendments affect a variety of Topics in the Accounting Standards Codification.

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Currently, the Company does not expect to adopt the ASU before the effective period.

In October 2020, the FASB updated various Topics of the Accounting Standards Codification to align the guidance in various SEC sections of the Codification with the requirements of certain SEC final rules.

The amendments were effective upon issuance and did not have a material effect on the financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

NOTE 2 – Investment Securities

NOTE 2 –

Investment Securities

The amortized costs and fair value of investment securities are as follows:

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Gross Unrealized

(dollars in thousands)

Available for sale

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At December 31, 2020 and 2019, there were no securities pledged as collateral for repurchase agreements from brokers.

NOTE 3 – Mortgage Loans Held for Sale

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.

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In such cases, the Company bears any subsequent credit loss on the loans.

As appropriate, the Company establishes mortgage repurchase reserves related to various representations and warranties that reflect management’s estimate of losses.

NOTE 4 – Loans and Allowance for Loan Losses

As appropriate, the Company establishes mortgage repurchase reserves related to various representations and warranties that reflect management’s estimate of losses.

NOTE 4 –

Loans and Allowance for Loan Losses

The Company makes loans to individuals and small businesses for various personal and commercial purposes primarily in the Upstate, Midlands, and Lowcountry regions of South Carolina, the Triangle and Triad regions of North Carolina as well as Atlanta, Georgia.

The Company’s loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers.

The Company focuses its lending activities primarily on the professional markets in these regions including doctors, dentists, and small business owners.

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principal deferral periods, loans with initial interest-only periods, etc.), and loans with high loan-to-value ratios.

Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life.

For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e.

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The various types of loans are individually underwritten and monitored to manage the associated risks.

The allowance for loan losses is management's estimate of credit losses inherent in the loan portfolio at the balance sheet date.

We have an established process to determine the adequacy of the allowance for loan losses that assesses the losses inherent in our portfolio.

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Our allowance levels are influenced by loan volume, loan grade or delinquency status, historic loss experience and other economic conditions.

Paycheck Protection Program (“PPP”)

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES”

Act or the “Act”) to provide emergency assistance and health care response for individuals, families, and businesses affected by the coronavirus pandemic.

The Small Business Administration (“SBA”) received funding and authority through the Act to modify existing loan programs and establish a new loan program to assist small businesses nationwide adversely impacted by the COVID-19 emergency.

The Act temporarily permits the SBA to guarantee 100 % of certain loans under a new program titled the “Paycheck Protection Program”

and also provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the PPP.

In an effort to assist our clients as best we could through the pandemic, we became an approved SBA lender in March 2020 and processed 853 loans under the PPP for a total of $ 97.5 million, receiving SBA lender fee income of $ 3.9 million.

As the regulations and guidance for PPP loans and the forgiveness process continued to change and evolve, management recognized the operational risk and complexity associated with this portfolio and decided to pursue the sale of the PPP loan portfolio to a third party better suited to support and serve our PPP clients through the loan forgiveness process.

The loan sale allowed our team to focus on serving our clients and proactively monitoring and addressing credit risk brought on by the pandemic.

On June 26, 2020, we completed the sale of our PPP loan portfolio to The Loan Source Inc., together with its servicing partner, ACAP SME LLC, and immediately recognized SBA lender fee income of $ 2.2 million, net of sale and processing costs, which is included in other noninterest income in the consolidated financial statements.

Portfolio Segment Methodology

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Total gross loans, net of deferred fees

Less – allowance for loan losses

Less –

allowance for loan losses

Total loans, net

1 unchanged sentence

(dollars in thousands)

Variable rate loans

Floating rate loans

Fixed rate loans

At December 31, 2019, approximately $716.0 million of the Company’s mortgage loans were pledged as collateral for advances from the FHLB, as set forth in Note 10.

At December 31, 2020, approximately $ 868.5 million of the Company’s mortgage loans were pledged as collateral for advances from the FHLB, as set forth in Note 10.

Credit Quality Indicators

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A description of the general characteristics of the risk grades is as follows:

Pass—These loans range from minimal credit risk to average however still acceptable credit risk.

Special mention—A special mention loan has potential weaknesses that deserve management’s close attention.

If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.

Substandard—A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

Pass—These loans range from minimal credit risk to average however still acceptable credit risk.  

Special mention—A special mention loan has potential weaknesses that deserve management’s close attention.

If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.  

Substandard—A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

Loans so classified must have a well-defined weakness, or weaknesses, that may jeopardize the liquidation of the debt.

A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

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.

A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.  

The following tables provide past due information for outstanding commercial loans and include loans on nonaccrual status.

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December 31, 2019

(dollars in thousands)

Special Mention

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The following table shows the nonperforming assets and the related percentage of nonperforming assets to total assets and gross loans.

Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful.

A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received.

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Recorded investment in loans

(dollars in thousands)

Individually evaluated

Collectively evaluated

NOTE 5 – Troubled Debt Restructurings

NOTE 5 –

Troubled Debt Restructurings

At December 31, 2020, we had 20 loans totaling $ 8.4 million and at December 31, 2019 we had 19 loans totaling $ 9.3 million, which we considered as TDRs.

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As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing challenges in the current economic environment.

During 2019, we have added one commercial loan totaling $1.8 million as TDRs and removed nine loans from TDR status due to pay-offs or in accordance with our nonperforming loans and TDR policies.

To date, we have restored five nonaccrual commercial loans previously classified as TDRs to accrual status.

A restructuring that results in only a delay in payments that is insignificant is not considered an economic concession.

Under the CARES Act, the Company granted short-term loan deferrals to 864 loan clients, of which two clients remain under deferral as of December 31, 2020.

In addition, short-term loan deferrals were granted to six clients with loans totaling $ 3.2 million at December 31, 2020, which were considered TDRs due to the client experiencing financial difficulty before the pandemic.

The following table summarizes the concession at the time of modification and the recorded investment in our TDRs before and after their modification.

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For the year ended December 31, 2019

Owner occupied RE

Non-owner occupied RE

As of December 31, 2020 and 2019 there were no loans modified as TDRs for which there was a payment default (60 days past due) within 12 months of the restructuring date.

NOTE 6 – Property and Equipment

NOTE 6 –

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation.

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Total property and equipment

During 2019, the Company purchased property for the construction of a new bank headquarters in Greenville, South Carolina which resulted in a $4.7 million increase in land.

Construction in process at December 31, 2019 included costs associated with the new bank headquarters, while the balance at December 31, 2018 included costs associated with the upfit of leased office space in Greensboro, North Carolina.

On October 9, 2020 we sold two of our office locations in Columbia, South Carolina and recognized a gain of $ 180,000 in the transaction.

Construction in process at December 31, 2020 and 2019 primarily included costs associated with the new bank headquarters building.

Depreciation and amortization expense for the years ended December 31, 2020 and 2019 was $ 2.1 million and $ 1.9 million, respectively.

5 unchanged sentences

Leasehold improvements

NOTE 7 – Leases

Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842)”.

As of December 31, 2019, we lease seven of our offices under various operating lease agreements.

NOTE 7 –

Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842)”.

Upon adoption, the Company elected practical expedients including existing leases retaining their classification as operating leases and combining lease and non-lease components.

The Company also elected to not recognize right-of-use assets and lease liabilities arising from short-term leases.

As of December 31, 2020, the Company leased six of our offices under various operating lease agreements.

The lease agreements have maturity dates ranging from February 2022 to October 2029, some of which include options for multiple five-year extensions.

The weighted average remaining life of the lease term for these leases was 7.97 years as of December 31, 2019.

The weighted average remaining life of the lease term for these leases was 7.30 years and 7.97 years as of December 31, 2020 and 2019, respectively.

The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption and as of the lease commencement date for leases subsequently entered in to.

The weighted average discount rate for leases was 2.86% as of December 31, 2019.

The weighted average discount rate for leases was 2.70 % and 2.86 % as of December 31, 2020 and 2019, respectively.

Total operating lease costs were $ 2.4 million and $ 2.2 million for the years ended December 31, 2020 and 2019, respectively.

The right-of-use asset, included in property and equipment, and lease liabilities, included in other liabilities, were $19.5 million and $20.1 million as of December 31, 2019, respectively.

The right-of-use asset and lease liability are recognized at lease commencement by calculating the present value of lease payments over the lease term.

The ROU asset, included in property and equipment, and lease liability, included in other liabilities, were $ 18.8 million and $19.5 million as of December 31, 2020, respectively, compared to $19.5 million and $ 20.1 million as of December 31, 2019, respectively.

The ROU asset and lease liability are recognized at lease commencement by calculating the present value of lease payments over the lease term.

Maturities of lease liabilities as of December 31, 2020 were as follows:

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Total lease liability

NOTE 8 – Other Real Estate Owned

NOTE 8 –

Other Real Estate Owned

Other real estate owned is comprised of real estate acquired in settlement of loans and is included in other assets on the balance sheet.

At December 31, 2019 and 2018, there was no other real estate owned.

At December 31, 2020 there was one commercial property owned totaling $ 1.2 million compared to no other real estate owned at December 31, 2019.

The following summarizes the activity in the real estate acquired in settlement of loans portion of other real estate owned:

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Balance, end of year

NOTE 9 – Deposits

NOTE 9 –

The following is a detail of the deposit accounts:

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At December 31, 2020 and 2019, time deposits greater than $250,000 were $ 130.9 million and $ 220.1 million, respectively.

Also, at December 31, 2019 and 2018, the Company had approximately $67.4 million and $79.3 million, respectively, of time deposits that were obtained outside of the Company’s primary market.

Also, at December 31, 2020 and 2019, the Company had approximately $ 22.0 million and $ 67.4 million, respectively, of time deposits that were obtained outside of the Company’s primary market.

Interest expense on time deposits greater than $100,000 was $ 4.6 million for the year ended December 31, 2020, $ 6.9 million for the year ended December 31, 2019, and $ 4.7 million for the year ended December 31, 2018.

2 unchanged sentences

2025 and after

NOTE 10 – Federal Home Loan Bank Advances and Other Borrowings

NOTE 10 –

Federal Home Loan Bank Advances and Other Borrowings

At December 31, 2020 and 2019, the Company had $25.0 million and $110.0 million in FHLB Advances, respectively.

The FHLB advances are secured with approximately $ 868.5 million of mortgage loans and $ 3.1 million of stock in the FHLB.

During the fourth quarter of 2019, the Company paid off $25.0 million of fixed rate FHLB advances with an average cost of 3.36% and incurred a loss on extinguishment of debt of $1.5 million.

Listed below is a summary of the terms and maturities of the advances outstanding at December 31, 2020 and 2019.

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The Company also has an unsecured, interest only line of credit for $ 15 million with another financial institution which was unused at December 31, 2020.

The line of credit bears interest at LIBOR plus 2.50% and matures on June 30, 2020.

The line of credit bears interest at LIBOR plus 3.50 % and matures on December 31, 2021 .

The loan agreement contains various financial covenants related to capital, earnings and asset quality.

NOTE 11 – Subordinated Debentures

NOTE 11 –

Subordinated Debentures

On June 26, 2003, Greenville First Statutory Trust I (a non-consolidated subsidiary) issued $ 6.0 million floating rate trust preferred securities with a maturity of June 26, 2033 .

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Financial institutions with less than $15 billion in total assets, such as the Bank, may continue to include their trust preferred securities issued prior to May 19, 2010 in Tier 1 capital, but cannot include in Tier 1 capital trust preferred securities issued after such date.

On September 30, 2019, the Company entered into Subordinated Note Purchase Agreements (collectively, the “Purchase Agreement”) with certain qualified institutional buyers and accredited investors (the “Purchasers”) pursuant to which the Company sold and issued $23.0 million in aggregate principal amount of its 4.75% Fixed-to-Floating Rate Subordinated Notes due 2029 (the “Notes”).

The Notes were offered and sold by the Company to eligible purchasers in a private offering in reliance on the exemption from the registration requirements of Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) and the provisions of Regulation D promulgated thereunder (the “Private Placement”).

On September 30, 2019, the Company entered into Subordinated Note Purchase Agreements (collectively, the “Purchase Agreement”) with certain qualified institutional buyers and accredited investors (the “Purchasers”) pursuant to which the Company sold and issued $ 23.0 million in aggregate principal amount of its 4.75 % Fixed-to-Floating Rate Subordinated Notes due 2029 (the “Notes”).

The Company intends to use the proceeds from the offering, which were approximately $ 22.5 million, for general corporate purposes, including providing capital to the Bank and supporting organic growth.

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The Purchase Agreement contains certain customary representations, warranties and covenants made by the Company, on the one hand, and the Purchasers, severally and not jointly, on the other hand.

On September 30, 2019, in connection with the sale and issuance of the Notes, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the Purchasers.

Under the terms of the Registration Rights Agreement, the Company has agreed to take certain actions to provide for the exchange of the Notes for subordinated notes that are registered under the Securities Act and have substantially the same terms as the Notes (the “Exchange Notes”).

On September 30, 2019, in connection with the sale and issuance of the Notes, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the Purchasers.

Under certain circumstances, if the Company fails to meet its obligations under the Registration Rights Agreement, it would be required to pay additional interest to the holders of the Notes.

The Notes were issued under an Indenture, dated September 30, 2019 (the “Indenture”), by and between the Company and UMB Bank, National Association, as trustee.

The Notes are not subject to any sinking fund and are not convertible into or, other than with respect to the Exchange Notes, exchangeable for any other securities or assets of the Company or any of its subsidiaries.

1 unchanged sentence

The Notes are unsecured, subordinated obligations of the Company only and are not obligations of, and are not guaranteed by, any subsidiary of the Company.

The Notes rank junior in right to payment to the Company’s current and future senior indebtedness.

The Notes are intended to qualify as Tier 2 capital for regulatory capital purposes for the Company.

NOTE 12 – Unused Lines of Credit

At December 31, 2019, the Company had four lines of credit to purchase federal funds that totaled $72.0 million which were unused at December 31, 2019.

NOTE 12 –

Unused Lines of Credit

At December 31, 2020, the Company had five lines of credit to purchase federal funds that totaled $ 118.5 million which were unused at December 31, 2020.

The lines of credit are available on a one to 14 day basis for general corporate purposes of the Company.

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The Company has collateral that would support approximately $ 512.5 million in additional borrowings with the FHLB at December 31, 2020.

NOTE 13 – Derivative Financial Instruments

NOTE 13 –

Derivative Financial Instruments

The Company utilizes derivative financial instruments primarily to hedge its exposure to changes in interest rates.

1 unchanged sentence

The Company accounts for all of its derivatives as free-standing derivatives and does not designate any of these instruments for hedge accounting.

Therefore, the gain or loss resulting from the change in the fair value of the derivative is recognized in the Company’s statement of income during the period of change.

The Company enters into commitments to originate residential mortgage loans held for sale, at specified interest rates and within a specified period of time, with clients who have applied for a loan and meet certain credit and underwriting criteria (interest rate lock commitments).

These interest rate lock commitments (“IRLCs”) meet the definition of a derivative financial instrument and are reflected in the balance sheet at fair value with changes in fair value recognized in current period earnings.

Unrealized gains and losses on the IRLCs are recorded as derivative assets and derivative liabilities, respectively, and are measured based on the value of the underlying mortgage loan, quoted mortgage-backed securities (“MBS”) prices and an estimate of the probability that the mortgage loan will fund within the terms of the interest rate lock commitment, net of estimated commission expenses.

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.

1 unchanged sentence

The Company takes into account various factors and strategies in determining the portion of the mortgage pipeline (IRLCs and mortgage loans held for sale) it wants to economically hedge.

The following table summarizes the Company’s outstanding financial derivative instruments at December 31, 2019 and December 31, 2018.

The following table summarizes the Company’s outstanding financial derivative instruments at December 31, 2020 and December 31, 2019.

December 31, 2020

13 unchanged sentences

Total derivative financial instruments

NOTE 14 – Fair Value Accounting

FASB ASC 820, “Fair Value Measurement and Disclosures Topic,” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

NOTE 14 –

Fair Value Accounting

FASB ASC 820, “Fair Value Measurement and Disclosures Topic,”

defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The standard describes three levels of inputs that may be used to measure fair value:

Level 1 – Quoted market price in active markets

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

Level 2 –

Significant other observable inputs

Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities;

1 unchanged sentence

or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 2 assets and liabilities include fixed income securities and mortgage-backed securities that are held in the Company’s available-for-sale portfolio and valued by a third-party pricing service, as well as certain impaired loans.

Level 3 – Significant unobservable inputs

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.

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A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash.

Certain items are specifically excluded from the disclosure requirements, including the Company’s common stock, premises and equipment and other assets and liabilities.

The following is a description of valuation methodologies used to estimate fair value for assets recorded at fair value.

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Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired.

Once a loan is identified as individually impaired, management measures the impairment in accordance with FASB ASC 310, “Receivables.” The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows.

Once a loan is identified as individually impaired, management measures the impairment in accordance with FASB ASC 310, “Receivables.”

The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows.

Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

In accordance with FASB ASC 820, “Fair Value Measurement and Disclosures,” impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.

In accordance with FASB ASC 820, “Fair Value Measurement and Disclosures,”

impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.

When the fair value of the collateral is based on an observable market price or a current appraised value, the Company considers the impaired loan as nonrecurring Level 2.

The Company’s current loan and appraisal policies require the Company to obtain updated appraisals on an “as is” basis at renewal, or in the case of an impaired loan, on an annual basis, either through a new external appraisal or an appraisal evaluation.

When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company considers the impaired loan as nonrecurring Level 3.

The Company’s current loan and appraisal policies require the Company to obtain updated appraisals on an “as is”

basis at renewal, or in the case of an impaired loan, on an annual basis, either through a new external appraisal or an appraisal evaluation.

The fair value of impaired loans may also be estimated using the present value of expected future cash flows to be realized on the loan, which is also considered a Level 3 valuation.

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Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company is predominantly an asset based lender with real estate serving as collateral on more than 83% of loans as of December 31, 2019.

The Company is predominantly an asset based lender with real estate serving as collateral on approximately 85% of loans as of December 31, 2020.

Loans which are deemed to be impaired are valued net of the allowance for loan losses, and other real estate owned is valued at the lower of cost or net realizable value of the underlying real estate collateral.

4 unchanged sentences

Impaired loans

Other real estate owned

Total assets measured at fair value on a nonrecurring basis

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Impaired loans

Appraised Value/

Discounted Cash Flows

Appraised Value/Discounted Cash Flows

Discounts to appraisals or cash flows for estimated holding and/or selling costs or age of appraisal

Other real estate owned

Appraised Value/

Comparable Sales

Appraised Value/Comparable Sales

Discounts to appraisals for estimated holding or selling costs

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A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash.

Certain items are specifically excluded from the disclosure requirements, including the Company’s common stock, premises and equipment and other assets and liabilities.

The following is a description of valuation methodologies used to estimate fair value for certain other financial instruments.

1 unchanged sentence

cash and due from banks, federal funds sold, other investments, federal funds purchased, and securities sold under agreement to repurchase.

Loans – The valuation of loans held for investment is estimated using the exit price notion which incorporates factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets.

Loans –

The valuation of loans held for investment is estimated using the exit price notion which incorporates factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets.

This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction.

The Company’s loan portfolio is initially fair valued using a segmented approach, using the eight categories as disclosed in Note 4 – Loans and Allowance for Loan Losses.

The Company’s loan portfolio is initially fair valued using a segmented approach, using the eight categories as disclosed in Note 4 –

Loans and Allowance for Loan Losses.

Loans are considered a Level 3 classification.

Deposits – Fair value for demand deposit accounts and interest-bearing accounts with no fixed maturity date is equal to the carrying value.

Deposits –

Fair value for demand deposit accounts and interest-bearing accounts with no fixed maturity date is equal to the carrying value.

The fair value of certificate of deposit accounts are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.

FHLB Advances and Other Borrowings – Fair value for FHLB advances and other borrowings are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.

Subordinated debentures – Fair value for subordinated debentures are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.

The Company has used management’s best estimate of fair value based on the above assumptions.

FHLB Advances and Other Borrowings –

Fair value for FHLB advances and other borrowings are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.

Subordinated debentures –

Fair value for subordinated debentures are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.

The Company has used management’s best estimate of fair value based on the above assumptions.

Thus, the fair values presented may not be the amounts that could be realized in an immediate sale or settlement of the instrument.

In addition, any income taxes or other expenses, which would be incurred in an actual sale or settlement, are not taken into consideration in the fair value presented.

The estimated fair values of the Company’s financial instruments at December 31, 2019 and 2018 are as follows:

The estimated fair values of the Company’s financial instruments at December 31, 2020 and 2019 are as follows:

December 31, 2020

13 unchanged sentences

(1) Carrying amount is net of the allowance for loan losses and previously presented impaired loans.

NOTE 15 – Earnings Per Common Share

NOTE 15 –

Earnings Per Common Share

The following schedule reconciles the numerators and denominators of the basic and diluted earnings per share computations for the years ended December 31, 2020, 2019 and 2018.

Dilutive common shares arise from the potentially dilutive effect of the Company’s stock options and warrants that are outstanding.

The assumed conversion of stock options and warrants can create a difference between basic and dilutive net income per common share.

7 unchanged sentences

Earnings per common share:

NOTE 16 – Commitments and Contingencies

The Company has entered into a three year employment agreement with its chief executive officer and a two year employment agreement with its president and with 12 executive vice presidents.

NOTE 16 –

Commitments and Contingencies

The Company has entered into a three year employment agreement with its chief executive officer and a two year employment agreement with 10 executive vice presidents.

These agreements also include a) an incentive program, b) a stock option plan, c) a one-year non-compete agreement upon termination and a severance payment equal to one year of compensation.

2 unchanged sentences

Components of this contract vary based on transaction and account volume, monthly charges and certain termination fees.

At December 31, 2020, the Company has a contract with a construction company for $ 28.2 million to construct a new bank headquarters in Greenville, South Carolina.

The Company may be subject to litigation and claims in the normal course of business.

As of December 31, 2020, management believes there is no material litigation pending.

NOTE 17 – Income Taxes

NOTE 17 –

The components of income tax expense were as follows:

11 unchanged sentences

Exempt income

Effect of change in federal tax rate

Effect of stock-based compensation

Income tax expense

Income tax expense for the year ended December 31, 2017 was impacted by the adjustment of our deferred tax assets and liabilities related to the reduction in the U.S.

federal statutory income tax rate to 21% under the Tax Act, which was enacted on December 22, 2017.

As a result of the new law, we recognized a provisional net tax expense totaling $2.4 million, as noted in the table above.

The components of the deferred tax assets and liabilities are as follows:

5 unchanged sentences

Deferred compensation

Sale of real estate owned

Write-down of real estate owned

Lease liabilities

1 unchanged sentence

Property and equipment

Unrealized gain on securities available for sale

Hedging transactions

Prepaid expenses

Right-of-use assets

Net deferred tax asset

The Company has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related to uncertain tax positions.

NOTE 18 – Related Party Transactions

NOTE 18 –

Related Party Transactions

Certain directors, executive officers, and companies with which they are affiliated, are clients of and have banking transactions with the Company in the ordinary course of business.

9 unchanged sentences

In addition, the Company periodically enters into various consulting agreements with the director for development, administration and advisory services related to the purchase of property and construction of current and future branch office sites, including the development of the new bank headquarters in Greenville, South Carolina.

Payments totaling $600,000 were made to the director for these services during the year ended December 31, 2019.

Also, the Company has previously contracted with the director to provide property management services for its four offices in the Greenville market.

The Company paid the director approximately $21,000, and $38,000 for these services during 2018 and 2017, respectively.

The Company also utilizes employment recruiting services from a vendor for which one of the Company’s directors is an owner and serves as the chairman of the board.

The Company paid approximately $38,000 to the vendor for the year ended December 31, 2018.

The Company is of the opinion that the lease payments, consulting fees, and recruiting costs represent market costs that could have been obtained in similar “arms length” transactions.

NOTE 19 – Financial Instruments With Off-Balance Sheet Risk

Payments totaling $ 600,000 were made to the director for these services during the years ended December 31, 2019 and 2020.

The Company is of the opinion that the lease payments and consulting fees represent market costs that could have been obtained in similar “arms length”

transactions.

NOTE 19 –

Financial Instruments With Off-Balance Sheet Risk

In the ordinary course of business, and to meet the financing needs of its clients, the Company is a party to various financial instruments with off-balance sheet risk.

1 unchanged sentence

The contract amount of those instruments reflects the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments.

The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

3 unchanged sentences

At December 31, 2019, unfunded commitments to extend credit were approximately $ 426.6 million, of which $ 105.0 million is at fixed rates and $ 321.6 million is at variable rates.

The Company evaluates each client’s credit-worthiness on a case-by-case basis.

The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.

The Company evaluates each client’s credit-worthiness on a case-by-case basis.

The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.

Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.

5 unchanged sentences

The total fair value of such instruments is not material.

NOTE 20 – Employee Benefit Plan

NOTE 20 –

Employee Benefit Plan

On January 1, 2000, the Company adopted the Southern First Bancshares, Inc.

2 unchanged sentences

Contributions made to the Plan for the years ended December 31, 2020, 2019, and 2018 amounted to $ 881,000 , $ 693,000 , and $ 587,000 , respectively.

The Company also provides a nonqualified deferred compensation plan for 24 executive officers in the form of a Supplemental Executive Retirement Plan (“SERP”).

The Company also provides a nonqualified deferred compensation plan for 26 executive officers in the form of a Supplemental Executive Retirement Plan (“SERP”).

The SERP provides retirement income for these officers.

As of December 31, 2020 and 2019, the Company had an accrued benefit obligation of $ 8.2 million and $ 6.7 million, respectively.

The Company incurred expenses related to this plan of $657,000, $940,000, and $792,000 in 2019, 2018, and 2017, respectively.

NOTE 21 – Stock-Based Compensation

The Company incurred expenses related to this plan of $ 1.6 million, $ 657,000 , and $ 940,000 in 2020, 2019, and 2018, respectively.

NOTE 21 –

Stock-Based Compensation

Compensation cost is recognized for stock options and restricted stock awards issued to employees and non-employee directors.

Compensation cost is measured as the fair value of these awards on their date of grant.

A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used as the fair value of restricted stock awards.

Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option and restricted stock awards.

The Company’s stock incentive programs are long-term retention programs intended to attract, retain, and provide incentives for key employees and non-employee directors in the form of incentive and non-qualified stock options and restricted stock.

Stock-based compensation expense was recorded as follows:

5 unchanged sentences

Stock Options

On May 18, 2010, the Company adopted the 2010 Incentive Plan, making available for issuance 366,025 stock options (adjusted for the 10% stock dividends in 2013, 2012, and 2011).

The options may be exercised at an exercise price per share based on the fair market value and determined on the date of grant and expire 10 years from the grant date.

On May 20, 2014, the Company amended the 2010 Incentive Plan to add an additional 200,000 shares of common stock to be issuable as stock options, for a total of 566,025 shares.

As of December 31, 2019, there were 9,275 options available for grant under the 2010 Incentive Plan.

On May 17, 2016, the Company adopted the 2016 Equity Incentive Plan, making available for issuance 400,000 stock options.

The Company’s 2010 Incentive Plan, as amended, had available for issuance a total of 566,025 shares (adjusted for the 10 % stock dividends in 2013, 2012, and 2011).

The Plan expired on March 16, 2020 and no further shares may be issued from the plan.

On March 15, 2016, the Company adopted the 2016 Equity Incentive Plan, making available for issuance 400,000 stock options.

The options may be exercised at an exercise price per share based on the fair market value and determined on the date of grant and expire 10 years from the grant date.

As of December 31, 2020, there were 123,827 options available for grant under the 2016 Equity Incentive Plan.

On March 17, 2020, the Company adopted the 2020 Equity Incentive Plan, making available for issuance up to 450,000 stock options.

The options may be exercised at an exercise price per share based on the fair market value and determined on the date of grant and expire 10 years from the grant date.

As of December 31, 2020, there were no shares issued under this plan.

A summary of the status of the stock option plan and changes for the period is presented below:

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Shares available for grant

The aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year and the exercise price, multiplied by the number of in-the-money options) of 541,414 and 648,311 stock options outstanding at December 31, 2019 and 2018 was $8.6 million and $8.7 million, respectively.

The aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year and the exercise price, multiplied by the number of in-the-money options) of 495,570 and 541,414 stock options outstanding at December 31, 2020 and 2019 was $ 3.7 million and $ 8.6 million, respectively.

The aggregate intrinsic value of 287,548 and 305,991 stock options exercisable at December 31, 2020 and 2019 was $ 3.3 million and $ 6.9 million, respectively.

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The cost is expected to be recognized over a weighted-average period of 2.5 years.

The fair value of stock option grants that vested during 2019, 2018, and 2017 was $1.2 million, $973,000 and $775,000, respectively.

The fair value of stock option grants that vested during 2020, 2019, and 2018 was $ 1.2 million, $ 1.2 million and $ 973,000 , respectively.

Restricted Stock Grants

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As of December 31, 2020, 25,524 shares of restricted stock were available for grant.

On May 12, 2020, the Company adopted the 2020 Equity Incentive Plan which included a provision for the issuance of 450,000 shares of common stock to be issuable as either stock options or restricted stock grants.

As of December 31, 2020, there were no issuances of stock options or restricted stock under this plan.

Shares of restricted stock granted to employees under the stock plans are subject to restrictions as to continuous employment for a specified time period following the date of grant.

During this period, the holder is entitled to full voting rights and dividends.

A summary of the status of the Company’s nonvested restricted stock and changes for the years ended December 31, 2019, 2018, and 2017 is as follows:

A summary of the status of the Company’s nonvested restricted stock and changes for the years ended December 31, 2020, 2019, and 2018 is as follows:

Nonvested at beginning of year

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The cost is expected to be recognized over a weighted-average period of 2.5 years.

NOTE 22 – Dividends

NOTE 22 –

The ability of the Company to pay cash dividends is dependent upon receiving cash in the form of dividends from the Bank.

The dividends that may be paid by the Bank to the Company are subject to legal limitations and regulatory capital requirements.

Also, the payment of cash dividends on the Company's common stock by the Company in the future will be subject to certain other legal and regulatory limitations (including the requirement that the Company’s capital be maintained at certain minimum levels) and will be subject to ongoing review by banking regulators.

The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies.

In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition.

NOTE 23 – Regulatory Matters

NOTE 23 –

Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.

The capital rules require banks and bank holding companies (other than bank holding companies, such as the Company, that qualify under the Federal Reserve’s Small Bank Holding Company Policy Statement) to maintain a minimum total risked-based capital ratio of at least 8%, a total Tier 1 capital ratio of at least 6%, a minimum common equity Tier 1 capital ratio of at least 4.5%, and a leverage ratio of at least 4%.

Bank holding companies and banks are also required to hold a capital conservation buffer of common equity Tier 1 capital of 2.5% to avoid limitations on capital distributions and discretionary executive compensation payments.

The capital conservation buffer will be phased in incrementally over time, becoming fully effective on January 1, 2019, and will consist of an additional amount of common equity equal to 2.5% of risk-weighted assets.

To be considered “well-capitalized” for purposes of certain rules and prompt corrective action requirements, the Bank must maintain a minimum total risked-based capital ratio of at least 10%, a total Tier 1 capital ratio of at least 8%, a common equity Tier 1 capital ratio of at least 6.5%, and a leverage ratio of at least 5%.

As of December 31, 2019, our capital ratios exceed these ratios and we remain “well capitalized.”

The capital conservation buffer was phased in incrementally over time, becoming fully effective on January 1, 2019, and consists of an additional amount of common equity equal to 2.5% of risk-weighted assets.

To be considered “well-capitalized”

for purposes of certain rules and prompt corrective action requirements, the Bank must maintain a minimum total risked-based capital ratio of at least 10%, a total Tier 1 capital ratio of at least 8%, a common equity Tier 1 capital ratio of at least 6.5%, and a leverage ratio of at least 5%.

As of December 31, 2020, 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 Company and the regulatory minimum requirements at December 31, 2020 and 2019.

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Tier 1 Capital (to average assets)

Under the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is not subject to the minimum capital adequacy and capital conservation buffer capital requirements at the holding company level, unless otherwise advised by the Federal Reserve (such capital requirements are applicable only at the Bank level).

Although the minimum regulatory capital requirements are not applicable to the Company, we calculate these ratios for our own planning and monitoring purposes.

NOTE 24 – Reportable Segments

The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning purposes by management.

NOTE 24 –

Reportable Segments

The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning purposes by management.

The three segments include Commercial and Retail Banking, Mortgage Banking, and Corporate Operations.

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Year ended December 31, 2019

Commercial and Retail Banking

Mortgage Banking

Corporate Operations

Interest income

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Commercial and retail banking.

The Company’s primary business is to provide traditional deposit and lending products and services to its commercial and retail banking clients.

Mortgage banking.

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Corporate operations is comprised primarily of compensation and benefits for certain members of management and interest on parent company debt.

NOTE 25 – Parent Company Financial Information

NOTE 25 –

Parent Company Financial Information

Following is condensed financial information of Southern First Bancshares, Inc.

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Investment in subsidiaries

Liabilities and Shareholders’ Equity

Liabilities and Shareholders’

Accounts payable and accrued expenses

Subordinated debentures

Shareholders’ equity

Total liabilities and shareholders’ equity

Shareholders’

Total liabilities and shareholders’

Condensed Statements of Income

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Operating activities

Adjustments to reconcile net income to cash provided by (used for) operating activities

Adjustments to reconcile net income to cash provided by (used for) operating activities

Equity in undistributed net income of subsidiaries

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Increase (decrease) in accounts payable and accrued expenses

Net cash provided by operating activities

Net cash provided by (used for) operating activities

Investing activities

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Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

Net increase in cash and cash equivalents

Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year

NOTE 26 – Selected Condensed Quarterly Financial Data (Unaudited)

NOTE 26 –

Selected Condensed Quarterly Financial Data (Unaudited)

For the quarters ended

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data