What changed in this filing

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Item 1. Business

2023-02-13 compared with 2022-03-04 · 565 added, 482 removed, 1064 unchanged (50% of the section changed)

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“Company”) was incorporated in March 1999 under the laws of South Carolina and is a bank holding company registered under

the Bank Holding Company Act of 1956.

Our primary business is to serve as the holding company for Southern First Bank (the “Bank”),

a South Carolina state bank.

The Bank is a commercial bank with eight retail offices located in the Greenville, Columbia, and Charleston

markets of South Carolina, three retail offices in the Raleigh, Greensboro, and Charlotte markets of North Carolina and one retail office

in Atlanta, Georgia.

the Bank Holding Company Act of 1956 (the “BHCA”).

Our primary business is to serve as the holding company for Southern First

Bank (the “Bank”), a South Carolina state bank.

The Bank is a commercial bank with eight retail offices located in the Greenville,

Columbia, and Charleston markets of South Carolina, three retail offices in the Raleigh, Greensboro, and Charlotte markets of North Carolina

and one retail office in Atlanta, Georgia.

The Bank is primarily engaged in the business of

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commercial, consumer and mortgage loans to the general public.

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 as described below.

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.

The commercial and retail banking segment employs 241 of the Company’s full-time equivalent

(“FTE”) employees.

The mortgage banking segment provides mortgage loan origination services for loans that will be sold in the secondary

market to investors and employs 37 FTE employees.

Corporate operations is comprised primarily of compensation and benefits for certain members of management and interest

on company debt.

There are no direct employees of corporate operations, however a portion of the salaries related to executive management

and finance are allocated to this segment.

Unless the context requires otherwise, references

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Total Offices

Our Market Deposits at

June 30, 2022

(Dollars in thousands)

Charlotte (3)

Represents the metropolitan statistical area (“MSA”) for each market.

The total market deposits data displayed are as of June 30, 2021 as reported by the FDIC.

The Charlotte office was not open as of June 30, 2021.

(1) Represents the metropolitan statistical area (“MSA”)

for each market.

(2) The total market deposits data displayed are as of June 30,

2022 as reported by the FDIC.

The city of Greenville is located

in Greenville County, South Carolina approximately midway between Atlanta and Charlotte on the heavily traveled I-85 business corridor.

The Greenville-Anderson MSA is the most populous market in South Carolina with an estimated 932,705 residents as of 2020.

The median household

income for the Greenville-Anderson MSA was $55,790 for 2019.

A large and diverse metropolitan area, the Greenville-Anderson-Mauldin MSA

is one of the southeast region’s premier areas for business, serving as headquarters for Michelin and Hubbell Lighting as well as

hosting significant operations for BMW and Lockheed Martin.

The Greenville-Anderson MSA is the most populous market in South Carolina with an estimated 940,774 residents as reported in March 2022.

The median household income for the Greenville-Anderson-Mauldin MSA was $62,265 for 2021.

A large and diverse metropolitan area, the Greenville-Anderson

MSA is one of the southeast region’s premier areas for business, serving as headquarters for Michelin and Current Lighting (formerly

Hubbell Lighting) as well as hosting significant operations for BMW and Lockheed Martin.

The city of Charleston is located

in Charleston County, South Carolina.

The Charleston-North Charleston MSA is the third most populous market in the state with an estimated

population of 813,052 residents as reported in March 2022.

Charleston is home to the deepest port in the Southeast and boasts top companies

in the aerospace, biomedical and technology fields such as Boeing, the Medical University of South Carolina (MUSC) and Blackbaud.

median household income for the Charleston-North Charleston MSA was approximately $72,719 for 2021.

One of our retail offices in the Charleston

market is located in the city of Mount Pleasant, which is located just north of Charleston in Charleston County and ranks as the fourth

largest city in South Carolina.

The city of Columbia is located

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The Columbia MSA is the second most populous market in the state with an estimated population of 836,324 residents as

reported in March 2022.

The median household income for the Columbia MSA was $58,213 for 2021.

The city of Charleston is located

in Charleston County, South Carolina.

The Charleston-North Charleston MSA is the third most populous market in the state with an estimated

population of 819,705 residents as of 2020.

Charleston is home to the deepest port in the Southeast and boasts top companies in the aerospace,

biomedical and technology fields such as Boeing, the Medical University of South Carolina (MUSC) and Blackbaud.

The median household income

for the Charleston-North Charleston MSA was approximately $64,283 for 2019.

One of our retail offices in the Charleston market is located

in the city of Mount Pleasant, which is located just north of Charleston in Charleston County and ranks as the fourth largest city in

South Carolina.

The city of Raleigh is the second

largest city in the state and is located in Wake County, North Carolina.

The Raleigh-Cary MSA is one of the most populous markets in the

state of North Carolina with an estimated population of 1.42 million residents as of 2020.

Raleigh is the state capital and is home to

North Carolina State University and is part of the Research Triangle area, together with Durham, North Carolina (home of Duke University)

and Chapel Hill, North Carolina (home of the University of North Carolina at Chapel Hill).

The median household income for the Raleigh

MSA was approximately $75,165 for 2019.

largest city in the state of North Carolina and is located in Wake County, North Carolina.

The Raleigh-Cary MSA is one of the most populous

markets in the state with an estimated population of 1.45 million residents as reported in March 2022.

Raleigh is the state capital and

is home to North Carolina State University and is part of the Research Triangle area, together with Durham, North Carolina (home of Duke

University) and Chapel Hill, North Carolina (home of the University of North Carolina at Chapel Hill).

The median household income for

the Raleigh-Cary MSA was approximately $85,303 for 2021.

The city of Greensboro is the

third largest city in North Carolina and is located in Guilford County.

The Greensboro-High Point MSA has an estimated population of 776,363

residents as of 2020.

Greensboro has traditionally been a fixture in the textiles, tobacco and furniture industries while also moving

towards an increased presence of high-tech, aviation and transportation/logistics sectors.

Greensboro, along with Winston-Salem and High

Point, is commonly referred to as the Triad region of North Carolina and is home to companies such as Honda Aircraft, Lincoln Financial

Group and Volvo Trucks of North America.

The median household income for the Greensboro MSA was approximately $50,026 for 2019.

third largest city in North Carolina and is located in Guilford County, North Carolina.

The Greensboro-High Point MSA is one of the most

populous markets in the state of North Carolina with an estimated population of 778,848 thousand residents as reported in March 2022.

Greensboro has traditionally been a fixture in the textiles, tobacco and furniture industries while also moving towards an increased presence

of high-tech, aviation and transportation/logistics sectors.

Greensboro, along with Winston-Salem and High Point, is commonly referred

to as the Triad region of North Carolina and is home to companies such as Honda Aircraft, Lincoln Financial Group and Volvo Trucks of

North America.

The median household income for the Greensboro-High Point MSA was approximately $57,908 for 2021.

The city of Charlotte is the

largest city in the state and is located in Mecklenburg County, North Carolina.

The Charlotte-Concord-Gastonia MSA is the most populous

market in the state of North Carolina with an estimated population of 2.7 million residents as reported in March 2022.

Charlotte is the

second largest banking city in the United States after New York and is home to the corporate headquarters of Bank of America, Truist Financial,

and the east coast headquarters of Wells Fargo.

Charlotte is also home to many Fortune 500 companies including Duke Energy, Honeywell

The median household income for the Charlotte-Concord-Gastonia MSA was approximately $71,041 for 2021.

The Atlanta-Sandy Springs-Alpharetta

MSA has the ninth largest population in the U.S.

with 6.09 million residents as of 2020.

Atlanta is the state capital of, and largest

city in, Georgia and is the world headquarters of corporations such as Coca-Cola, Home Depot, UPS, Delta Airlines and Turner Broadcasting.

The median household income for the Atlanta MSA is $69,464 for 2019.

The Charlotte-Concord-Gastonia

MSA is among the top 25 largest populations in the U.S.

with 2.68 million residents as of 2020.

Charlotte is the largest manufacturing

region in the Carolinas and is the second largest financial hub in the country.

Charlotte is also home to many Fortune 500 companies including

Duke Energy, Honeywell and Lowe’s.

The median household income for the Charlotte MSA was $54,086 in 2019.

MSA has the eighth largest population in the U.S.

with 6.14 million residents as reported in March 2022.

Atlanta is the state capital

of, and largest city in, Georgia and is the world headquarters of corporations such as Coca-Cola, Home Depot, UPS, Delta Airlines and

Turner Broadcasting.

The median household income for the Atlanta-Sandy Springs-Alpharetta MSA is $77,589 for 2021.

We believe that the demographics and growth characteristics

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Our senior management team is led by R.

Arthur Seaver, Jr., Michael D.

Dowling, Calvin C.

Hurst and Silvia T.

King whose biographies are included below.

These executives lead a team of 23 additional senior team members which

we believe compares favorably to any community bank management team assembled in South Carolina.

Arthur Seaver, Jr., Calvin C.

Hurst, Michael D.

Aiken, and Silvia T.

King, and whose biographies are included below.

These executives lead a team of 26 additional senior team

members which we believe compares favorably to any community bank management team assembled in South Carolina.

Arthur “Art” Seaver, Jr .

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of Community Bank Management.

Hurst has served as Chief Banking

Officer of our Company and our Bank since March 2019 and as President since August 2022.

Hurst has over 15 years of banking experience.

From 2006 to 2008, Mr.

Hurst served as a commercial underwriter for RBC Bank, and from 2008 to 2015 he served as commercial relationship

manager for PNC Bank.

Before joining Southern First, Mr.

Hurst served as regional vice president for TD Bank.

Hurst is a 2005 graduate

of Furman University, with a Bachelor’s degree in Business Administration and Economics.

Dowling has served as an Executive

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is a CPA in South Carolina and North Carolina.

Hurst has served as Chief Banking

Officer of our Company and our Bank since March 2019.

Hurst has over 14 years of banking experience.

From 2006 to 2008, Mr.

served as a commercial underwriter for RBC Bank, and from 2008 to 2015 he served as commercial relationship manager for PNC Bank.

joining Southern First, Mr.

Hurst served as regional vice president for TD Bank.

Hurst is a 2005 graduate of Furman University, with

a Bachelor’s degree in Business Administration and Economics.

On January 25, 2023, the Company announced Mr.

Dowling was resigning effective February

15, 2023, to lead a large sophisticated medical group, which is a long-standing client of the Bank.

Aiken, III has served as a Senior

Executive Vice President and Chief Risk officer of our Company and our Bank since 2021 and previously served as an executive credit risk

officer since 2020.

He has over 25 years in the banking industry.

Aiken has served in various roles at several banks during

his career including most recently as a Chief Commercial Credit officer at a regional bank.

He is a 1996 graduate of Clemson University,

with a degree in Financial Management.

King has served as Chief Human

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International Marketing from Clemson University and a Master of Human Resources degree from the University of South Carolina.

Aiken, III has served as a Senior

Executive Vice President and Chief Risk officer of our Company and our Bank since 2021 and previously served as an executive credit risk

officer since 2020.

He has over 25 years in the banking industry.

Aiken has served in various roles at several banks during

his career including most recently as a Chief Commercial Credit officer at a regional bank.

He is a 1996 graduate of Clemson University,

with a degree in Financial Management.

In addition to Messrs.

Seaver, Dowling, Hurst,

Seaver, Hurst, Dowling,

Aiken and Ms.

King, our executive management team consists of nine individuals who bring an average of 29 years of experience in the banking

King, our executive management team consists of 15 individuals who bring an average of 28 years of experience in the banking

The management team is complemented by our dedicated

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through the ownership of a substantial amount of our stock.

As of December 31, 2021, our executive officers and board of directors owned

As of December 31, 2022, our executive officers and board of directors

an aggregate of 612,503 shares of our common stock, including options to purchase shares of our common stock, which represented approximately

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We believe our

risk management structure allows our board and senior management to maintain effective oversight of our risks to ensure that our personnel

are following prudent and appropriate risk management practices resulting in strong loan quality and minimal loan losses.

management structure allows our board and senior management to maintain effective oversight of our risks to ensure that our personnel

are following prudent and appropriate risk management practices resulting in strong loan quality and minimal credit losses.

Attract Talented Banking Professionals With

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principal deferral periods,

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

loans with initial interest-only

periods, etc.), and loans with high loan-to-value ratios.

These types of loans are subject to strict

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115% of monthly debt service obligations.

In order to seek to ensure secondary sources of payment and liquidity to support a loan request,

we typically review all of the personal financial statements of the principal owners and require their personal guarantees.

As of December 31, 2022, $378.7

million, or 11.6% of our total loan portfolio, was collateralized

by office and retail properties.

In order to seek to ensure secondary sources of payment and liquidity to support a loan request, we typically

review all of the personal financial statements of the principal owners and require their personal guarantees.

● Construction Real Estate Loans.

We offer adjustable

and fixed rate construction real estate loans for commercial and consumer projects, typically to builders and developers and to consumers

who wish to build their own homes.

At December 31, 2021, total commercial and consumer construction loans amounted to $124.3 million,

or 5.0% of our loan portfolio.

Commercial construction loans represented $64.4 million, or 2.6%, of our total loan portfolio, while consumer

construction loans represented $59.8 million, or 2.4% of our total loan portfolio.

At December 31, 2021, our commercial construction real

estate loans ranged in size from approximately $98,000 to $9.0 million, with an average loan balance of approximately $1.2 million.

December 31, 2021, our consumer or residential construction loans ranged in size from approximately $100,000 to $2.3 million, with an

average loan size of approximately $392,000.

The duration of our construction loans generally is limited to 18 months, although payments

may be structured on a longer amortization basis.

Commercial construction loans generally carry a higher degree of risk than long-term

financing of existing properties because repayment depends on the ultimate completion of the project and sometimes on the sale of the

adjustable and fixed rate construction real estate loans for commercial and consumer projects, typically to builders and developers and

to consumers who wish to build their own homes.

At December 31, 2022, total commercial and consumer construction loans amounted to $190.1

million, or 5.9% of our loan portfolio.

Commercial construction loans represented $109.7 million, or 3.4%, of our total loan portfolio,

while consumer construction loans represented $80.4 million, or 2.5% of our total loan portfolio.

At December 31, 2022, our commercial

construction real estate loans ranged in size from approximately $15,000 to $9.0 million, with an average loan balance of approximately

$1.3 million.

At December 31, 2022, our consumer or residential construction loans ranged in size from approximately $20,000 to $2.4 million,

with an average loan size of approximately $468,000.

The duration of our construction loans generally is limited to 18 months, although

payments may be structured on a longer amortization basis.

Commercial construction loans generally carry a higher degree of risk than

long-term financing of existing properties because repayment depends on the ultimate completion of the project and sometimes on the sale

of the property.

Specific risks include:

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● a downturn in the real estate market;

rising interest rates which may prevent sale of the

● rising interest rates which may prevent sale of

the property;

● failure to sell completed projects in a timely manner.

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● Commercial Business Loans.

We make loans for

commercial purposes in various lines of businesses, including the manufacturing, service industry, and professional service areas.

December 31, 2021, commercial business loans amounted to $333.0 million, or 13.4% of our loan portfolio, and ranged in size from approximately

We make loans

for commercial purposes in various lines of businesses, including the manufacturing, service industry, and professional service areas.

At December 31, 2022, commercial business loans amounted to $468.1 million, or 14.3% of our loan portfolio, and ranged in size from approximately

$1,000 to $12.8 million, with an average loan size of approximately $277,000.

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of SBA loans do not exceed, and are generally less than, 80% of the loan.

As of December 31, 2021, we had originated one loan utilizing

government enhancements.

Consumer Real Estate Loans and Home Equity Loans.

At December 31, 2021 consumer real estate loans (other than construction loans) amounted to $849.2 million, or 34.1% of our loan portfolio.

Included in the consumer real estate loans was $694.4 million, or 27.9% of our loan portfolio, in first and second mortgages on individuals’

homes, while home equity loans represented $154.8 million, or 6.2% of our total loan portfolio.

At December 31, 2021, our individual residential

real estate loans ranged in size from $2,000 to $5.7 million, with an average loan size of approximately $459,000.

Generally, we limit

the loan-to-value ratio on our consumer real estate loans to 85%.

We offer fixed and adjustable rate consumer real estate loans with terms

of up to 30 years.

We typically offer these long-term fixed rate loans through a third party rather than originating and retaining these

loans ourselves.

Consumer real estate and home equity loans that we retain on our balance sheet typically have terms of ten years or less.

As of December 31, 2022, we had originated three loans utilizing

government enhancements and over 20 loans engaged in state-based small business partnerships.

● Consumer Real Estate Loans and Home Equity

At December 31, 2022 consumer real estate loans (other than construction loans) amounted to $1.1 billion, or 34.0% of our loan

Included in the consumer real estate loans was $931.3 million, or 28.5% of our loan portfolio, in first and second mortgages

on individuals’ homes, while home equity loans represented $179.3 million, or 5.5% of our total loan portfolio.

At December 31,

2022, our individual residential real estate loans ranged in size from $3,000 to $5.6 million, with an average loan size of approximately

Generally, we limit the loan-to-value ratio on our consumer real estate loans to 85%.

We offer fixed and adjustable rate consumer

real estate loans with terms of up to 30 years.

We also offer home equity lines of credit.

At December 31, 2021, our individual home equity lines of credit ranged in size from $8,000

to $2.3 million, with an average of approximately $82,000.

Our underwriting criteria and the risks associated with home equity loans and

lines of credit are generally the same as those for first mortgage loans.

Home equity lines of credit typically have terms of ten years

We generally limit the extension of credit to 90% of the market value of each property, although we may extend up to 100% of

the market value.

At December 31, 2022, our individual home equity

lines of credit ranged in size from $1,000 to $1.4 million, with an average of approximately $85,000.

Our underwriting criteria and the

risks associated with home equity loans and lines of credit are generally the same as those for first mortgage loans.

Home equity lines

of credit typically have terms of ten years or less.

We generally limit the extension of credit to 90% of the market value of each property,

although we may extend up to 100% of the market value.

● Other Consumer Loans.

We make a variety of

loans to individuals for personal and household purposes, including secured and unsecured installment loans and revolving lines of credit.

We make a variety

of loans to individuals for personal and household purposes, including secured and unsecured installment loans and revolving lines of

These consumer loans are underwritten based on the borrower’s income, current debt level, past credit history, and the availability

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Consumer rates are both fixed and variable, with negotiable terms.

At December 31, 2021, consumer loans other

At December 31, 2022,

consumer loans other

than real estate amounted to $29.1 million, or 0.9% of our loan portfolio, and ranged in size from $1,000 to $6.1 million, with an average

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deposits of various types, ranging from daily money market accounts to long-term certificates of deposit.

There were no out-of-market,

or wholesale, certificates of deposits at December 31, 2021.

In an effort to obtain lower cost deposits, we have focused on expanding

our retail deposit program.

We currently have 12 retail offices which assist us in obtaining low cost transaction accounts that are less

affected by rising rates.

At December 31, 2022, we had

$236.2 million in out-of-market, or wholesale, certificates of deposits.

In an effort to obtain lower cost deposits, we have focused on

expanding our retail deposit program.

We currently have 12 retail offices which assist us in obtaining low cost transaction accounts that

are less affected by rising rates.

Deposit rates are reviewed regularly by our senior management.

We believe that the rates we offer are competitive

with those offered by other financial institutions in our area.

We focus on client service and our ClientFIRST culture to attract and

retain deposits.

We believe that the rates we offer are

competitive with those offered by other financial institutions in our area.

We focus on client service and our ClientFIRST culture to

attract and retain deposits.

Other Banking Services

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advances enable more financial institutions to provide expanded financial services without having a physical presence in our markets.

Because larger competitors have advantages in attracting business from larger corporations, we do not generally compete for that business.

Because larger competitors have advantages in attracting business from larger corporations, we do not generally compete for that

Instead, we concentrate our efforts on attracting the business of individuals and small and medium-size businesses.

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Available Information

Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K with the SEC which are accessible electronically

We file Annual

Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K with the SEC which are accessible electronically

at the SEC’s website at www.sec.gov.

We maintain an Internet website at www.southernfirst.com

where these reports can also be accessed free of charge.

No information contained on our website is intended to be included as part of,

or incorporated by reference into, this Annual Report on Form 10-K.

We maintain an Internet website at www.southernfirst.com where these reports can also

be accessed free of charge.

No information contained on our website is intended to be included as part of, or incorporated by reference

into, this Annual Report on Form 10-K.

SUPERVISION AND REGULATION

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2010 and impacts financial institutions in numerous ways, including:

The creation of a Financial Stability Oversight Council

responsible for monitoring and managing systemic risk,

Granting additional authority to the Board of Governors

of the Federal Reserve (the “Federal Reserve”) to regulate certain types of nonbank financial companies,

Granting new authority to the FDIC as liquidator and

Changing the manner in which deposit insurance assessments

● The creation of a Financial Stability Oversight

Council responsible for monitoring and managing systemic risk,

● Granting additional authority to the Board of

Governors of the Federal Reserve (the “Federal Reserve”) to regulate certain types of nonbank financial companies,

● Granting new authority to the FDIC as liquidator

and receiver,

● Changing the manner in which deposit insurance

assessments are made,

● Requiring regulators to modify capital standards,

Establishing the Consumer Financial Protection Bureau

(the “CFPB”),

● Establishing the Consumer Financial Protection

Bureau (the “CFPB”),

● Capping interchange fees that banks charge merchants

for debit card transactions,

Imposing more stringent requirements on mortgage lenders,

● Imposing more stringent requirements on mortgage

● Limiting banks’ proprietary trading activities.

There are many provisions in the Dodd-Frank Act

mandating regulators to adopt new regulations and conduct studies upon which future regulation may be based.

While some have been issued,

many remain to be issued.

Governmental intervention and new regulations could materially and adversely affect our business, financial

There are many provisions in the Dodd-Frank

Act mandating regulators to adopt new regulations and conduct studies upon which future regulation may be based.

While some have

been issued, many remain to be issued.

intervention and new regulations could materially and adversely affect our business, financial

condition and results of operations.

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The Economic Growth, Regulatory Relief,

and Consumer Protection Act (the “Reform Law”) modifies or eliminates certain requirements on community and regional banks

and Consumer Protection Act (the “Reform Law”) modified or eliminated certain requirements on community and regional banks

and nonbank financial institutions.

For instance, under the Reform Act and related rule making:

banks that have less than $10 billion in total consolidated

assets and total trading assets and trading liabilities of less than five percent of total consolidated assets from Section 619 of the

Dodd-Frank Act, known as the “Volcker Rule”, which prohibits “proprietary trading” and the ownership or sponsorship

of private equity or hedge funds that are referred to as “covered funds”;

the asset threshold for bank holding companies to

qualify for treatment under the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” was raised

from $1 billion to $3 billion, which exempts these institutions (including the Company) from certain regulatory requirements including

the Basel III capital rules;

a new “community bank leverage ratio”

● banks that have less than $10 billion in total

consolidated assets and total trading assets and trading liabilities of less than five percent of total consolidated assets is excluded

from Section 619 of the Dodd-Frank Act, known as the “Volcker Rule”, which prohibits “proprietary trading” and

the ownership or sponsorship of private equity or hedge funds that are referred to as “covered funds”;

● the asset threshold for bank holding companies

to qualify for treatment under the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” was

raised from $1 billion to $3 billion, which exempts these institutions from certain regulatory requirements including the Basel III capital

● a “community bank leverage ratio”

was adopted, which is applicable to certain banks and bank holding companies with total assets of less than $10 billion (as described

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holding companies,” generally holding companies with consolidated assets of less than $3 billion.

The Company is currently considered

a “small bank holding company.” More stringent requirements are imposed on “advanced approaches” banking organizations-those

organizations with $250 billion or more in total consolidated assets, $10 billion or more in total foreign exposures, or that have opted

in to the Basel II capital regime.

The Basel III rules require the Bank to maintain

the following minimum capital requirements:

a new common equity Tier 1 (“CET1”) risk-based

More stringent requirements are

imposed on “advanced approaches” banking organizations-those organizations with $250 billion or more in total consolidated

assets, $10 billion or more in total foreign exposures, or that have opted in to the Basel II capital regime.

The Basel III rules require the Company and the

Bank to maintain the following minimum capital requirements:

● a common equity Tier 1 (“CET1”) risk-based

capital ratio of 4.5%;

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interests and grandfathered trust preferred securities (as discussed below).

Tier 2 capital generally includes the allowance for loan

Tier 2 capital generally includes the allowance for credit

losses up to 1.25% of risk-weighted assets, qualifying preferred stock, subordinated debt and qualifying tier 2 minority interests, less

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ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%.

On December 21, 2018, the federal banking agencies

issued a joint final rule to revise their regulatory capital rules to (i) address the upcoming implementation of a new credit impairment

model, the Current Expected Credit Loss, or CECL model, an accounting standard under GAAP; (ii) provide an optional three-year phase-in

period for the day-one adverse regulatory capital effects that banking organizations are expected to experience upon adopting CECL;

and (iii) require the use of CECL in stress tests beginning with the 2020 capital planning and stress testing cycle for certain banking

organizations that are subject to stress testing.

We are currently evaluating the impact the CECL model will have on our financial statements

and expect to recognize a one-time cumulative-effect adjustment to our allowance for loan losses upon adoption of the new standard.

currently anticipate early adopting the CECL model as of January 1, 2022, before the January 1, 2023 implementation date, at which time

we estimate there will be a charge to retained earnings of between $3.5 million to $7.0 million.

As part of its response to the impact of the COVID-19

pandemic, in the first quarter of 2020, U.S.

federal regulatory authorities issued an interim final rule that provided banking organizations

that adopted the credit impairment model, the Current Expected Credit Loss, or CECL, during the 2020 calendar year with the option to

delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred

loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during

the initial two-year delay (i.e., a five-year transition in total).

In connection with our adoption of CECL on January 1, 2022, we did

not elect to utilize the five-year CECL transition.

In November 2019, the federal banking regulators

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and met the Basel III rule requirements to be well-capitalized.

Acquisition Activity

The primary purpose

of a bank holding company is to control and manage banks.

The BHCA generally requires the prior approval of the Federal Reserve for any

merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company.

the prior approval of the FDIC is required for a bank to merge with another bank or purchase the assets or assume the deposits of another

In determining whether to approve a proposed bank acquisition, federal bank regulators will consider, among other factors, the effect

of the acquisition on competition, the public benefits expected to be received from the acquisition, the projected capital ratios and

levels on a post-acquisition basis, and the acquiring institution’s record of addressing the credit needs of the communities it

serves, including the needs of low and moderate income neighborhoods, consistent with the safe and sound operation of the bank, under

the Community Reinvestment Act (“CRA”).

On July 9, 2021,

President Biden issued an Executive Order on Promoting Competition in the American Economy.

Among other initiatives, the Executive Order

encouraged the federal banking agencies to review their current merger oversight practices under the BHCA and the Bank Merger Act and

adopt a plan for revitalization of such practices.

In December 2021, the U.S.

Department of Justice (“DOJ”) (in consultation

with the Federal Reserve, the Office of the Comptroller of the Currency (the “OCC”), and FDIC announced that it was seeking

additional public comments on whether and how the DOJ should revise the 1995 Bank Merger Competitive Review Guidelines.

The comment period

closed on February 15, 2022.

In March 2022, the FDIC published a Request for Information seeking information and comments regarding the

laws, practices, rules, regulations, guidance, and statements of policy that apply to merger transactions involving one or more insured

depository institutions, including the merger between an insured depository institution and a noninsured institution.

In a May 2022 speech,

the acting head of the OCC announced that he had asked his staff to work with DOJ and other federal banking agencies to review the agency’s

frameworks to analyze bank mergers.

In May 2022, the CFPB announced the establishment of an Office of Competition and Innovation.

There are many

steps that must be taken by the agencies before any final changes to the framework for evaluating bank mergers can be implemented and

the prospects for such action continue to be uncertain at this time; however, the adoption of more expansive or prescriptive standards

may have an impact on any acquisition activities.

Legislative and Regulatory Responses to the

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The CARES Act was a $2.2 trillion economic stimulus bill that was intended to provide relief in the wake of the COVID-19

There have also been a number of regulatory actions intended to help mitigate the adverse economic impact of the COVID-19 pandemic

have also been a number of regulatory actions intended to help mitigate the adverse economic impact of the COVID-19 pandemic

on borrowers, including several mandates from the bank regulatory agencies, requiring financial institutions to work constructively with

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related thereto if (i) the borrower was not more than 30 days past due as of December 31, 2019, (ii) the modifications were related to

COVID-19, and (iii) the modification occurred between March 1, 2020 and the earlier of 60 days after the date of termination of the national

emergency or January 1, 2022.

Federal bank regulatory authorities also issued guidance to encourage banks to make loan modifications for

borrowers affected by COVID-19.

COVID-19, and (iii) the modification occurred between March 1, 2020 and January 1, 2022.

Federal bank regulatory authorities also issued

guidance to encourage banks to make loan modifications for borrowers affected by COVID-19.

Proposed Legislation and Regulatory Action

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We own 100% of the outstanding capital stock of

the Bank, and therefore we are considered to be a bank holding company under the federal Bank Holding Company Act of 1956 (the “Bank

Holding Company Act”).

As a result, we are primarily subject to the supervision, examination and reporting requirements of the Federal

Reserve under the Bank Holding Company Act and its regulations promulgated thereunder.

Moreover, as a bank holding company of a bank located

in South Carolina, we also are subject to the South Carolina Banking and Branching Efficiency Act.

the Bank, and therefore we are considered to be a bank holding company under the federal Bank Holding Company Act of 1956.

we are primarily subject to the supervision, examination and reporting requirements of the Federal Reserve under the BHCA and its regulations

promulgated thereunder.

Moreover, as a bank holding company of a bank located in South Carolina, we also are subject to the South Carolina

Banking and Branching Efficiency Act.

Permitted Activities.

Under the Bank

Holding Company Act, a bank holding company is generally permitted to engage in, or acquire direct or indirect control of more than 5%

of the voting shares of any company engaged in, the following activities:

Under the BHCA,

a bank holding company is generally permitted to engage in, or acquire direct or indirect control of more than 5% of the voting shares

of any company engaged in, the following activities:

● banking or managing or controlling banks;

furnishing services to or performing services for

our subsidiaries;

any activity that the Federal Reserve determines to

be so closely related to banking as to be a proper incident to the business of banking.

● furnishing services to or performing services

for our subsidiaries;

● any activity that the Federal Reserve determines

to be so closely related to banking as to be a proper incident to the business of banking.

Activities that the Federal Reserve has found to

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● factoring accounts receivable;

making, acquiring, brokering or servicing loans and

usual related activities;

● making, acquiring, brokering or servicing loans

and usual related activities;

● leasing personal or real property;

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and money market instruments;

providing specified management consulting and counseling

performing selected data processing services and support

acting as agent or broker in selling credit life insurance

and other types of insurance in connection with credit transactions;

● providing specified management consulting and

counseling activities;

● performing selected data processing services and

support services;

● acting as agent or broker in selling credit life

insurance and other types of insurance in connection with credit transactions;

● performing selected insurance underwriting activities.

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If we were to elect financial holding company status, each insured depository institution we control would have

to be well capitalized, well managed and have at least a satisfactory rating under the Community Reinvestment Act as discussed below.

to be well capitalized, well managed and have at least a satisfactory rating under the CRA as discussed below.

The Federal Reserve has the authority to order

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Two statutes,

the Bank Holding Company Act and the Change in Bank Control Act, together with regulations promulgated under them, require some form of

regulatory review before any company may acquire “control” of a bank or a bank holding company.

Under the Bank Holding Company

Act, control is deemed to exist if a company acquires 25% or more of any class of voting securities of a bank holding company;

the election of a majority of the members of the board of directors;

or exercises a controlling influence over the management or policies

of a bank or bank holding company.

On January 30, 2020, the Federal Reserve issued a final rule (which became effective September 30,

2020) that clarified and codified the Federal Reserve’s standards for determining whether one company has control over another.

The final rule established four categories of tiered presumptions of noncontrol that are based on the percentage of voting shares held

by the investor (less than 5%, 5-9.9%, 10-14.9% and 15-24.9%) and the presence of other indicia of control.

As the percentage of ownership

increases, fewer indicia of control are permitted without falling outside of the presumption of noncontrol.

These indicia of control include

nonvoting equity ownership, director representation, management interlocks, business relationship and restrictive contractual covenants.

Under the final rule, investors can hold up to 24.9% of the voting securities and up to 33% of the total equity of a company without necessarily

having a controlling influence.

State laws generally, including South Carolina law, require state approval before an acquirer may become

the holding company of a state bank.

the BHCA and the Change in Bank Control Act, together with regulations promulgated under them, require some form of regulatory review

before any company may acquire “control” of a bank or a bank holding company.

Under the BHCA, control is deemed to exist if

a company acquires 25% or more of any class of voting securities of a bank holding company;

controls the election of a majority of the

members of the board of directors;

or exercises a controlling influence over the management or policies of a bank or bank holding company.

On January 30, 2020, the Federal Reserve issued a final rule (which became effective September 30, 2020) that clarified and codified the

Federal Reserve’s standards for determining whether one company has control over another.

The final rule established four categories

of tiered presumptions of noncontrol that are based on the percentage of voting shares held by the investor (less than 5%, 5-9.9%, 10-14.9%

and 15-24.9%) and the presence of other indicia of control.

As the percentage of ownership increases, fewer indicia of control are permitted

without falling outside of the presumption of noncontrol.

These indicia of control include nonvoting equity ownership, director representation,

management interlocks, business relationship and restrictive contractual covenants.

Under the final rule, investors can hold up to 24.9%

of the voting securities and up to 33% of the total equity of a company without necessarily having a controlling influence.

generally, including South Carolina law, require state approval before an acquirer may become the holding company of a state bank.

Under the Change in Bank Control Act, a person

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at the bank level, only the bank’s primary federal regulator is involved.

subject to the Bank Holding Company Act are exempt from Change in Control Act requirements.

For state banks, state laws, including that

of South Carolina, typically require approval by the state bank regulator as well.

Transactions subject

to the BHCA are exempt from Change in Control Act requirements.

For state banks, state laws, including that of South Carolina, typically

require approval by the state bank regulator as well.

Source of Strength .

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compliance of any insured depository institution subsidiary that may become “undercapitalized” within the terms of any capital

restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of

restoration plan filed by such subsidiary with its appropriate federal

banking agency up to the lesser of (i) an amount equal to 5% of

the institution’s total assets at the time the institution became undercapitalized, or (ii) the amount which is necessary (or would

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The Federal Reserve also has the authority under

the Bank Holding Company Act to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary

(other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a

serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company.

Further, federal

law grants federal bank regulatory authorities’ additional discretion to require a bank holding company to divest itself of any

bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.

the BHCA to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank

subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial

soundness or stability of any subsidiary depository institution of the bank holding company.

Further, federal law grants federal bank

regulatory authorities’ additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary

if the agency determines that divestiture may aid the depository institution’s financial condition.

In addition, the “cross guarantee”

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Capital Requirements .

Reserve imposes certain capital requirements on the bank holding company under the Bank Holding Company Act, including a minimum leverage

ratio and a minimum ratio of “qualifying” capital to risk-weighted assets.

These requirements are essentially the same as

those that apply to the Bank and are described above under “Basel III Capital Standards.” However, because the Company currently

qualifies as a small bank holding company, these capital requirements do not currently apply to the Company.

Subject to certain restrictions,

we are able to borrow money to make a capital contribution to the Bank, and these loans may be repaid from dividends paid from the Bank

to the Company.

Our ability to pay dividends depends on, among other things, the Bank’s ability to pay dividends to us, which is

subject to regulatory restrictions as described below in “Southern First Bank—Dividends.”

Reserve imposes certain capital requirements on the bank holding company under the BHCA, including a minimum leverage ratio and a minimum

ratio of “qualifying” capital to risk-weighted assets.

These requirements are essentially the same as those that apply to

the Bank and are described above under “Basel III Capital Standards.” Subject to certain restrictions, we are able to borrow

money to make a capital contribution to the Bank, and these loans may be repaid from dividends paid from the Bank to the Company.

ability to pay dividends depends on, among other things, the Bank’s ability to pay dividends to us, which is subject to regulatory

restrictions as described below in “Southern First Bank—Dividends.”

We are also able to raise capital for contribution

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● adequacy of capitalization and loss reserves;

● investments;

● borrowings;

● issuances of securities;

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the categories are:

Well Capitalized — The institution exceeds the

required minimum level for each relevant capital measure.

A well-capitalized institution (i) has a total risk-based capital ratio of 10%

or greater, (ii) has a Tier 1 risk-based capital ratio of 8% or greater, (iii) has a common equity Tier 1 risk-based capital ratio of

6.5% or greater, (iv) has a leverage capital ratio of 5% or greater, and (v) is not subject to any order or written directive to meet

and maintain a specific capital level for any capital measure.

Adequately Capitalized — The institution meets

● Well Capitalized — The institution exceeds

the required minimum level for each relevant capital measure.

A well-capitalized institution (i) has a total risk-based capital ratio

of 10% or greater, (ii) has a Tier 1 risk-based capital ratio of 8% or greater, (iii) has a common equity Tier 1 risk-based capital ratio

of 6.5% or greater, (iv) has a leverage capital ratio of 5% or greater, and (v) is not subject to any order or written directive to meet

and maintain a specific capital level for any capital measure.

● Adequately Capitalized — The institution

meets the required minimum level for each relevant capital measure.

No capital distribution may be made that would result in the institution

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has a leverage capital ratio of 4% or greater.

Undercapitalized — The institution fails to

meet the required minimum level for any relevant capital measure.

An undercapitalized institution (i) has a total risk-based capital ratio

of less than 8%, (ii) has a Tier 1 risk-based capital ratio of less than 6%, (iii) has a common equity Tier 1 risk-based capital ratio

of less than 4.5% or greater, or (iv) has a leverage capital ratio of less than 4%.

● Undercapitalized — The institution fails

to meet the required minimum level for any relevant capital measure.

An undercapitalized institution (i) has a total risk-based capital

ratio of less than 8%, (ii) has a Tier 1 risk-based capital ratio of less than 6%, (iii) has a common equity Tier 1 risk-based capital

ratio of less than 4.5% or greater, or (iv) has a leverage capital ratio of less than 4%.

● Significantly Undercapitalized — The institution

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managers and banks satisfy certain conditions designed to ensure that there is a lack of control by the asset manager over the bank.

relief has been extended and will expire on the sooner of January 1, 2023, or the effective date of a final Federal Reserve rule having

a revision to Regulation O that addresses the treatment of extensions of credit by a bank to fund complex-controlled portfolio companies

that are insiders of a bank.

December 22, 2022, the federal banking agencies issued a revised interagency statement extending the temporary relief from such enforcement,

which will expire on the sooner of January 1, 2024, or the effective date of a final Federal Reserve rule having a revision to Regulation

O that addresses the treatment of extensions of credit by a bank to fund complex-controlled portfolio companies that are insiders of a

The Company’s principal

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Community Reinvestment Act.

The Community

Reinvestment Act (“CRA”) requires that the FDIC evaluate the record of the Bank in meeting the credit needs of its local community,

including low and moderate income neighborhoods.

These factors are also considered in evaluating mergers, acquisitions, and applications

to open a branch or facility.

Failure to adequately meet these criteria could impose additional requirements and limitations on our Bank.

On February 12, 2018, the date of the most recent examination report, the Bank received a satisfactory CRA rating.

requires that the FDIC evaluate the record of the Bank in meeting the credit needs of its local community, including low and moderate

income neighborhoods.

These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility.

Failure to adequately meet these criteria imposes additional requirements and limitations on our Bank.

On June 1, 2022, the date of the

most recent examination report, the Bank received a Needs to Improve CRA rating.

In December 2019, the FDIC and the Office of the

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and (iv) provide for more transparent, consistent, and timely CRA-related data collection, recordkeeping, and reporting.

However, the Federal Reserve did not join the proposed rulemaking.

However, the Federal

Reserve did not join the proposed rulemaking.

In May 2020, the OCC issued its final CRA rule, which was later rescinded

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the same day that the OCC announced its plans to rescind the CRA final rule, the OCC, the FDIC, and the Federal Reserve announced that

they are working together to “strengthen and modernize the rules implementing the CRA.” The effects on the Bank of any potential

change to the CRA rules will depend on the final form of any federal rulemaking and cannot be predicted at this time.

Management will

continue to evaluate any changes to the CRA’s regulations and their impact to the Bank.

they are working together to “strengthen and modernize the rules implementing the CRA.” On May 5, 2022, the OCC, FDIC, and

Federal Reserve released a notice of proposed rulemaking regarding the CRA and invited public comment on the proposed rules.

period closed on August 5, 2022.

The proposed rules, among other things, seek to (i) expand access to credit, investment, and basic banking

services in low- and moderate-income communities, (ii) adapt to changes in the banking industry, including internet and mobile banking,

(iii) provide greater clarity, consistency, and transparency, (iv) tailor CRA evaluations and data collection to bank size and type, and

(v) maintain a unified approach among the bank regulatory agencies.

The effects on the Bank of any potential change to the CRA rules will

depend on the final form of any federal rulemaking and cannot be predicted at this time.

Management will continue to evaluate any changes

to the CRA’s regulations and their impact to the Bank.

Fair Lending Requirements.

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If a pattern or practice of lending discrimination

is alleged by a regulator, then the matter may be referred by the agency to the U.S.

Department of Justice (“DOJ”) for investigation.

In December 2012, the DOJ and CFPB entered into a Memorandum of Understanding under which the agencies have agreed to share information,

coordinate investigations, and have generally committed to strengthen their coordination efforts.

is alleged by a regulator, then the matter may be referred by the agency to the DOJ for investigation.

In December 2012, the DOJ and CFPB

entered into a Memorandum of Understanding under which the agencies have agreed to share information, coordinate investigations, and have

generally committed to strengthen their coordination efforts.

In addition to substantive penalties and corrective

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of the Bank are also subject to federal laws applicable to credit transactions, such as:

the Truth-In-Lending Act (“TILA”) and

Regulation Z, governing disclosures of credit and servicing terms to consumer borrowers and including substantial requirements for mortgage

lending and servicing, as mandated by the Dodd-Frank Act;

● the Truth-In-Lending Act (“TILA”)

and Regulation Z, governing disclosures of credit and servicing terms to consumer borrowers and including substantial requirements for

mortgage lending and servicing, as mandated by the Dodd-Frank Act;

● the Home Mortgage Disclosure

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discrimination on the basis of race, color, religion, or other prohibited factors in any aspect of a credit transaction;

the Fair Credit Reporting Act,

as amended by the Fair and Accurate Credit Transactions Act and Regulation V, as well as the rules and regulations of the FDIC governing

the use of consumer reports, provision of information to credit reporting agencies, certain identity theft protections and certain credit

and other disclosures;

the Fair Debt Collection Practices

Act and Regulation F, governing the manner in which consumer debts may be collected by collection agencies and intending to eliminate

abusive, deceptive, and unfair debt collection practices;

● the Fair Credit Reporting Act, as amended by the

Fair and Accurate Credit Transactions Act and Regulation V, as well as the rules and regulations of the FDIC governing the use of consumer

reports, provision of information to credit reporting agencies, certain identity theft protections and certain credit and other disclosures;

● the Fair Debt Collection Practices Act and Regulation

F, governing the manner in which consumer debts may be collected by collection agencies and intending to eliminate abusive, deceptive,

and unfair debt collection practices;

● the Real Estate Settlement Procedures Act (“RESPA”)

and Regulation X, which governs various aspects of residential mortgage loans, including the settlement and servicing process, dictates

certain disclosures to be provided to consumers, and imposes other requirements related to compensation of service providers, insurance

certain disclosures to be

provided to consumers, and imposes other requirements related to compensation of service providers, insurance

escrow accounts, and loss mitigation procedures;

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of PMI, disclosure and notification requirements, and the requirement to return unearned premiums;

The Fair Housing Act prohibits discrimination in all

aspects of residential real-estate related transactions based on race or color, national origin, religion, sex, and other prohibited factors;

The Servicemembers Civil Relief Act and Military Lending

Act, providing certain protections for servicemembers, members of the military, and their respective spouses, dependents and others;

● The Fair Housing Act prohibits discrimination

in all aspects of residential real-estate related transactions based on race or color, national origin, religion, sex, and other prohibited

● The Servicemembers Civil Relief Act and Military

Lending Act, providing certain protections for servicemembers, members of the military, and their respective spouses, dependents and others;

● Section 106(c)(5) of the Housing and Urban Development

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to federal laws, such as:

the Federal Deposit Insurance

Act (“FDIA”), which, among other things, limits the amount of deposit insurance available per insured depositor category to

$250,000 and imposes other limits on deposit-taking;

the Right to Financial Privacy

Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative

subpoenas of financial records;

the Electronic Funds Transfer

Act and Regulation E, which governs the rights, liabilities, and responsibilities of consumers and financial institutions using electronic

fund transfer services, and which generally mandates disclosure requirements, establishes limitations on liability applicable to consumers

for unauthorized electronic fund transfers, dictates certain error resolution processes, and applies other requirements relating to automatic

deposits to and withdrawals from deposit accounts;

The Expedited Funds Availability

Act and Regulation CC, setting forth requirements to make funds deposited into transaction accounts available according to specified time

schedules, disclose funds availability policies to customers, and relating to the collection and return of checks and electronic checks,

including the rules regarding the creation or receipt of substitute checks;

the Truth in Savings Act and

Regulation DD, which requires depository institutions to provide disclosures so that consumers can make meaningful comparisons about depository

institutions and accounts.

The Consumer Financial Protection Bureau

(the “CFPB”) is an independent regulatory authority housed within the Federal Reserve.

The CFPB has broad authority to regulate

the offering and provision of consumer financial products and services.

The CFPB has the authority to supervise and examine depository

institutions with more than $10 billion in assets for compliance with federal consumer laws.

The authority to supervise and examine

depository institutions with $10 billion or less in assets, such as us, for compliance with federal consumer laws remains largely

with those institutions’ primary regulators.

However, the CFPB may participate in examinations of these smaller institutions on

a “sampling basis” and may refer potential enforcement actions against such institutions to their primary regulators.

the CFPB may participate in examinations of the Bank.

In addition, states are permitted to adopt consumer protection laws and regulations

that are stricter than the regulations promulgated by the CFPB, and state attorneys general are permitted to enforce consumer protection

rules adopted by the CFPB against certain institutions.

● the Federal Deposit Insurance Act (“FDIA”),

which, among other things, limits the amount of deposit insurance available per insured depositor category to $250,000 and imposes other

limits on deposit-taking;

● the Right to Financial Privacy Act, which imposes

a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas

of financial records;

● the Electronic Funds Transfer Act and Regulation

E, which governs the rights, liabilities, and responsibilities of consumers and financial institutions using electronic fund transfer

services, and which generally mandates disclosure requirements, establishes limitations on liability applicable to consumers for unauthorized

electronic fund transfers, dictates certain error resolution processes, and applies other requirements relating to automatic deposits

to and withdrawals from deposit accounts;

● The Expedited Funds Availability Act and Regulation

CC, setting forth requirements to make funds deposited into transaction accounts available according to specified time schedules, disclose

funds availability policies to customers, and relating to the collection and return of checks and electronic checks, including the rules

regarding the creation or receipt of substitute checks;

● the Truth in Savings Act and Regulation DD, which

requires depository institutions to provide disclosures so that consumers can make meaningful comparisons about depository institutions

and accounts.

The CFPB is an independent regulatory authority

housed within the Federal Reserve.

The CFPB has broad authority to regulate the offering and provision of consumer financial products

and services.

The CFPB has the authority to supervise and examine depository institutions with more than $10 billion in assets for

compliance with federal consumer laws.

The authority to supervise and examine depository institutions with $10 billion or less in

assets, such as us, for compliance with federal consumer laws remains largely with those institutions’ primary regulators.

the CFPB may participate in examinations of these smaller institutions on a “sampling basis” and may refer potential enforcement

actions against such institutions to their primary regulators.

As such, the CFPB may participate in examinations of the Bank.

states are permitted to adopt consumer protection laws and regulations that are stricter than the regulations promulgated by the CFPB,

and state attorneys general are permitted to enforce consumer protection rules adopted by the CFPB against certain institutions.

The CFPB has issued a number of significant rules

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for appraisals and certain financial products.

In March 2022, the CFPB announced changes to its supervisory operations to scrutinize

discriminatory conduct under the CFPB’s UDAAP powers to examine financial institution’s decision-making in advertising, pricing,

and other areas to ensure that companies are testing for and eliminating illegal discrimination.

In this supervisory notice, the CFPB

expanded its UDAAP powers to create essentially a fair-lending style discrimination test outside of ECOA that applies to non-lending products.

In October 2022, the CFPB issued Bulletin 2022-06 explaining that blanket policies of charging returned deposit item fees to consumers

or all returned transactions irrespective of the circumstances or patterns of behavior on the account are likely

unfair under the Consumer

Financial Protection Act of 2010CFPA.

The CFPB has also issued an advisory opinion prohibiting the collection of pay-to-pay fees (such

as convenience fees), which ) are prohibited under the Fair Debt Collection Practices Act FDCPA.

The Office of Foreign Assets Control.

Office of Foreign Assets Control (“OFAC”), which is a division of the U.S.

Treasury, is responsible for helping to insure

entities do not engage in transactions with “enemies” of the U.S., as defined by various Executive Orders and Acts

OFAC has sent, and will send, our banking regulatory agencies lists of names of persons and organizations suspected of aiding,

harboring or engaging in terrorist acts.

If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list,

it must freeze such account, file a suspicious activity report and notify the FBI.

The Bank has appointed an OFAC compliance officer to

oversee the inspection of its accounts and the filing of any notifications.

The Bank actively checks high-risk OFAC areas such as new

accounts, wire transfers and customer files.

The Bank performs these checks utilizing software, which is updated each time a modification

is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons.

Anti-Money Laundering and the USA Patriot

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efforts among the agencies tasked with administering anti-money laundering and countering the financing of terrorism requirements, including

the Financial Crimes Enforcement Network (“FinCEN”), the primary federal banking regulators, federal law enforcement agencies,

national security agencies, the intelligence community, and financial institutions;

providing additional penalties with respect to violations

of BSA and enhancing the powers of FinCEN;

significant updates to the beneficial ownership collection

rules and the creation of a registry of beneficial ownership which will track the beneficial owners of reporting companies which may be

shared with law enforcement and financial institutions conducting due diligence under certain circumstances;

improvements to existing information sharing provisions

that permit financial institutions to share information relating to SARs with foreign branches, subsidiaries, and affiliates (except those

located in China, Russia, or certain other jurisdictions) for the purpose of combating illicit finance risks;

enhanced whistleblower protection provisions, allowing

whistleblower(s) who provide original information which leads to successful enforcement of anti-money laundering laws in certain judicial

or administrative actions resulting in certain monetary sanctions to receive up to 30% of the amount that is collected in monetary sanctions

as well as increased protections.

Under the USA PATRIOT Act, the Financial Crimes

Enforcement Network (“FinCEN”) can send our banking regulatory agencies lists of the names of persons suspected of involvement

in terrorist activities.

The Bank can be requested, to search its records for any relationships or transactions with persons on those

If the Bank finds any relationships or transactions, it must file a suspicious activity report and contact FinCEN.

The Office of Foreign Assets Control.

Office of Foreign Assets Control (“OFAC”), which is a division of the U.S.

Treasury, is responsible for helping to insure

entities do not engage in transactions with “enemies” of the U.S., as defined by various Executive Orders and Acts

OFAC has sent, and will send, our banking regulatory agencies lists of names of persons and organizations suspected of aiding,

harboring or engaging in terrorist acts.

If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list,

it must freeze such account, file a suspicious activity report and notify the FBI.

The Bank has appointed an OFAC compliance officer to

oversee the inspection of its accounts and the filing of any notifications.

The Bank actively checks high-risk OFAC areas such as new

accounts, wire transfers and customer files.

The Bank performs these checks utilizing software, which is updated each time a modification

is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons.

the Financial Crimes Enforcement Network (“FinCEN”), the primary federal banking regulators, federal

enforcement agencies, national security agencies, the intelligence community, and financial institutions;

additional penalties with respect to violations of BSA and enhancing the powers of FinCEN;

● significant

updates to the beneficial ownership collection rules and the creation of a registry of beneficial ownership which will track the beneficial

owners of reporting companies which may be shared with law enforcement and financial institutions conducting due diligence under certain

circumstances;

● improvements

to existing information sharing provisions that permit financial institutions to share information relating to SARs with foreign branches,

subsidiaries, and affiliates (except those located in China, Russia, or certain other jurisdictions) for the purpose of combating illicit

finance risks;

whistleblower protection provisions, allowing whistleblower(s) who provide original information which leads to successful enforcement

of anti-money laundering laws in certain judicial or administrative actions resulting in certain monetary sanctions to receive up to

30% of the amount that is collected in monetary sanctions as well as increased protections.

Following Russia’s invasion of Ukraine, OFAC

took several sanctions related actions related to the Russian financial services sector pursuant to Executive Order 14024 beginning in

February 2022 including:

(i) a determination by the Secretary of the Treasury with respect to the financial services sector of the Russian

Federation that authorizes sanctions against persons determined to operate or to have operated in that sector;

(ii) correspondent or payable-through

account and payment processing prohibitions on certain Russian financial institutions;

(iii) the blocking of certain Russian financial

institutions;

(iv) expanding sovereign debt prohibitions to apply to new issuances in the secondary market;

(v) prohibitions related to

new debt and equity for certain Russian entities;

and (vi) a prohibition on transactions involving certain Russian government entities,

including the Central Bank of the Russian Federation.

In March 2022, FinCEN issued an alert advising increased vigilance for potential

Russian Sanctions Evasion Attempts.

The Financial Action Task Force (“FATF”) continues to revise the list of high-risk jurisdictions.

In October 2022, FATF removed Nicaragua and Pakistan from its lists of Jurisdictions under Increased Monitoring and added the Democratic

Republic of the Congo, Mozambique, and Tanzania.

The FATF also added Burma to the list of High-Risk Jurisdictions Subject to a Call for

Under the USA PATRIOT Act, the FinCEN can send

our banking regulatory agencies lists of the names of persons suspected of involvement in terrorist activities.

The Bank can be requested,

to search its records for any relationships or transactions with persons on those lists.

If the Bank finds any relationships or transactions,

it must file a suspicious activity report and contact FinCEN.

Privacy, Data Security and Credit Reporting.

Financial institutions are required to disclose their policies for collecting and protecting confidential information.

Customers generally

may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third parties except under

narrow circumstances, such as the processing of transactions requested by the consumer or if the Bank is jointly sponsoring a product

or service with a nonaffiliated third party.

Additionally, financial institutions generally may not disclose consumer account numbers

to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers.

It is the Bank’s

policy not to disclose any personal information unless required by law.

Under privacy protection provisions of the Gramm-Leach-Bliley Act of 1999 (“GLBA”) and related regulations, we are limited

in our ability to disclose non-public information about consumers to nonaffiliated third parties.

Financial institutions are required

to disclose their policies for collecting and protecting confidential information.

Customers generally may prevent financial institutions

from sharing nonpublic personal financial information with nonaffiliated third parties except under narrow circumstances, such as the

processing of transactions requested by the consumer or if the Bank is jointly sponsoring a product or service with a nonaffiliated third

Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use

in telemarketing, direct mail marketing or other marketing to consumers.

It is the Bank’s policy not to disclose any personal information

unless required by law.

Consumers must be notified in the event of a data

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to materially disrupt or degrade, covered services provided to such bank for as much as four hours.

The final rule will take effect on

April 1, 2022 and banks and their service providers must be in compliance with the requirements of the rule by May 1, 2022.

The final rule took effect on April

1, 2022 and banks and their service providers must have complied with the requirements of the rule by May 1, 2022.

Effective December

9, 2022, the Federal Trade Commission’s amendments to GLBA’s Safeguards Rule went into effect requiring financial institutions

(i) appoint a qualified individual to oversee and implement their information security programs;

(ii) implement additional criteria

for information security risk assessments;

(iii) implement safeguards identified by assessments, including access controls, data inventory,

data disposal, change management, and monitoring, among other things;

(iv) implement information system monitoring in the form of either

“continuous monitoring” or “periodic penetration testing;” (v) implement additional controls including training

personnel, periodic assessment of service providers, written incident response plans, and periodic reports from the qualified

individual to the board of directors.

In addition, pursuant to the Fair and Accurate

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opportunity and a reasonable and simple method to opt out of the making of such solicitations.

Federal Home Loan Bank

The Bank is a member of the Federal Home Loan Bank (“FHLB”) of Atlanta, which is one of 12 regional FHLBs

that administer home financing credit for depository institutions.

Each FHLB serves as a reserve or central bank for its members within

its assigned region.

It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System.

loans or advances to members in accordance with policies and procedures established by the Board of Directors of the FHLB, which are subject

to the oversight of the Federal Housing Financing Board.

All advances from the FHLB, which are subject to the oversight of the Federal

Housing Finance Board.

All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB.

Effect of Governmental

Monetary Policies.

Federal Home Loan Bank System.

Bank is a member of the Federal Home Loan Bank (“FHLB”) of Atlanta, which is one of 12 regional FHLBs that administer home financing

credit for depository institutions.

Each FHLB serves as a reserve or central bank for its members within its assigned region.

primarily from proceeds derived from the sale of consolidated obligations of the FHLB System.

It makes loans or advances to members in

accordance with policies and procedures established by the Board of Directors of the FHLB, which are subject to the oversight of the Federal

Housing Financing Board.

All advances from the FHLB, which are subject to the oversight of the Federal Housing Finance Board.

from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB.

Effect of Governmental Monetary Policies.

Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the U.S.

government and its agencies.

The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important

impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things,

to curb inflation or combat a recession.

The monetary policies of the Federal Reserve have major effects upon the levels of bank loans,

investments and deposits through its open market operations in U.S.

government securities and through its regulation of the discount rate

on borrowings of member banks and the reserve requirements against member bank deposits.

It is not possible to predict the nature or impact

of future changes in monetary and fiscal policies.

In response to the COVID-19 pandemic, on March 3, 2020, the Federal Open Market Committee

(“FOMC”) reduced the targeted federal funds interest rate range by 50 basis points to 1.00% to 1.25%.

On March 15, 2020, the

FOMC again lowered the federal funds rate to a target range of 0.0% to 0.25%.

In mid-December the Federal Reserve indicated that it will

conclude its large-scale asset purchase program as soon as March 2022 and that three 25 basis point rate hikes were expected to follow

The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results

of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat

The monetary policies of the Federal Reserve have major effects upon the levels of bank loans, investments and deposits through

its open market operations in U.S.

government securities and through its regulation of the discount rate on borrowings of member banks

and the reserve requirements against member bank deposits.

It is not possible to predict the nature or impact of future changes in monetary

and fiscal policies.

In response to the COVID-19 pandemic, in 2020, the Federal Open Market Committee (“FOMC”) reduced the

targeted federal funds interest rate range to 0.0% to 0.25%;

however, due in part to rising inflation, throughout 2022 the target federal

funds rate increased to between 4.25% and 4.50%.

Incentive Compensation.

The Dodd-Frank Act requires the federal bank regulators and the SEC to establish joint regulations or guidelines prohibiting incentive-based

payment arrangements at specified regulated entities having at least $1 billion in total assets that encourage inappropriate risks by

providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could

lead to material financial loss to the entity.

In addition, these regulators must establish regulations or guidelines requiring enhanced

disclosure to regulators of incentive-based compensation arrangements.

The agencies proposed such regulations in April 2011.

the 2011 proposal was replaced with a new proposal in May 2016, which makes explicit that the involvement of risk management and control

personnel includes not only compliance, risk management and internal audit, but also legal, human resources, accounting, financial reporting

and finance roles responsible for identifying, measuring, monitoring or controlling risk-taking.

A final rule had not been adopted as

of December 31, 2021.

In June 2010, the Federal Reserve,

the FDIC and the OCC issued a comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation

policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking.

The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually

or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should

(i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks,

(ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including

to the potential restrictions on discretionary bonus compensation under the Basel III rules, the federal bank regulatory agencies have

issued guidance on incentive compensation policies (the “Incentive Compensation Guidance”) intended to ensure that the incentive

compensation policies of financial institutions do not undermine the safety and soundness of such institutions by encouraging excessive

The Incentive Compensation Guidance, which covers all employees that have the ability to materially affect the risk profile

of an institution, either individually or as part of a group, is based upon the key principles that a financial institution’s incentive

compensation arrangements should comply with the following principles:

(i) provide employees incentives that appropriately balance risk

(ii) be compatible with effective controls and risk-management;

and (iii) be supported by strong corporate governance, including

active and effective oversight by the organization’s board of directors.

The Federal Reserve will review,

as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the

Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on

the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements.

of the supervisory initiatives will be included in reports of examination.

Deficiencies will be incorporated into the organization’s

supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions.

Enforcement actions

may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance

processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures

to correct the deficiencies.

In addition, the Tax Cuts and

Jobs Act (the “Tax Act”), which was signed into law in December 2017, contains certain provisions affecting performance-based

compensation.

Specifically, the pre-existing exception to the $1 million deduction limitation applicable to performance-based compensation

was repealed.

The deduction limitation is now applied to all compensation exceeding $1.0 million, for our covered employees, regardless

of how it is classified, which could have an adverse effect on our income tax expense and net income.

Concentrations in Commercial

Real Estate .

The scope and content of federal bank regulatory

agencies’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future.

2016, federal agencies proposed regulations which could significantly change the regulation of incentive compensation programs at financial

institutions.

The proposal would create four tiers of institutions based on asset size.

Institutions in the top two tiers would be subject

to rules much more detailed and proscriptive than are currently in effect.

If interpreted aggressively by the regulators, the proposed

rules could be used to prevent, as a practical matter, larger institutions from engaging in certain lines of business where substantial

commission and bonus pool arrangements are the norm.

In the 2016 proposal, the top two tiers included institutions with more than $50

billion of assets, which would not currently apply to us.

We cannot predict what final rules may be adopted, nor how they may be implemented

and, therefore, it cannot be determined at this time whether compliance with such policies will adversely affect our ability to hire,

retain and motivate our key employees.

Corporate Governance .

The Dodd-Frank

Act addressed many investor protection, corporate governance and executive compensation matters that affect most U.S.

publicly traded

The Dodd-Frank Act (i) grants stockholders of U.S.

publicly traded companies an advisory vote on executive compensation and

so-called “golden parachute” payments, (ii) enhances independence requirements for compensation committee members, (iii) requires

the SEC to adopt rules directing national securities exchanges to establish listing standards requiring all listed companies to adopt

incentive-based compensation clawback policies for executive officers, and (iv) provides the SEC with authority to adopt proxy access

rules that would allow stockholders of publicly traded companies to nominate candidates for election as a director and have those nominees

included in a company’s proxy materials.

The SEC has completed the bulk (although not all)

of the rulemaking necessary to implement

these provisions.

However, on October 14, 2021, the SEC signaled a renewed interest in this rulemaking initiative by re-opening the comment

period on a proposed rule issued originally in 2015 regarding clawbacks of incentive-based executive compensation.

On October 26, 2022,

the SEC adopted final rules implementing the incentive-based compensation recovery (clawback) provisions of the Dodd-Frank Act.

rules direct the stock exchanges to establish listing standards requiring listed companies to develop and implement a policy providing

for the recovery of erroneously awarded incentive-based compensation received by current or former executive officers and to satisfy related

disclosure obligations.

We are currently awaiting the final rules from The Nasdaq Stock Market, which are not expected to take effect

until mid-2023 at the earliest.

Concentrations in Commercial Real Estate .

Concentration risk exists when FDIC-insured institutions deploy too many assets to any one industry or segment.

concentration in commercial real estate is one example of regulatory concern.

The interagency Concentrations in Commercial Real Estate

Lending, Sound Risk Management Practices guidance (“CRE Guidance”) provides supervisory criteria, including the following

numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations

that may warrant greater supervisory scrutiny:

(i) commercial real estate loans exceeding 300% of capital and increasing 50% or more in

the preceding three years or (ii) construction and land development loans exceeding 100% of capital.

The CRE Guidance does not limit banks’

levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels

of capital that are commensurate with the level and nature of their commercial real estate concentrations.

On December 18, 2015, the federal

banking agencies issued a statement to reinforce prudent risk-management practices related to commercial real estate lending, having observed

substantial growth in many commercial real estate asset and lending markets, increased competitive pressures, rising commercial real estate

concentrations in banks, and an easing of commercial real estate underwriting standards.

The federal bank agencies reminded FDIC-insured

institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor and manage

the risks arising from commercial real estate lending.

In addition, FDIC-insured institutions must maintain capital commensurate with

the level and nature of their commercial real estate concentration risk.

Based on the Bank’s loan

portfolio as of December 31, 2021, it did not exceed the 300% and 100% guidelines for commercial real estate loans.

The Bank will continue

to monitor its portfolio to manage this increased risk.

A concentration in commercial

real estate is one example of regulatory concern.

The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management

Practices guidance (“CRE Guidance”) provides supervisory criteria, including the following numerical indicators, to assist

bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory

(i) commercial real estate loans exceeding 300% of capital and increasing 50% or more in the preceding three years or (ii) construction

and land development loans exceeding 100% of capital.

The CRE Guidance does not limit banks’ levels of commercial real estate lending

activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the

level and nature of their commercial real estate concentrations.

On December 18, 2015, the federal banking agencies issued a statement

to reinforce prudent risk-management practices related to commercial real estate lending, having observed substantial growth in many commercial

real estate asset and lending markets, increased competitive pressures, rising commercial real estate concentrations in banks, and an

easing of commercial real estate underwriting standards.

The federal bank agencies reminded FDIC-insured institutions to maintain underwriting

discipline and exercise prudent risk-management practices to identify, measure, monitor and manage the risks arising from commercial real

estate lending.

In addition, FDIC-insured institutions must maintain capital commensurate with the level and nature of their commercial

real estate concentration risk.

Based on the Bank’s loan portfolio as of

December 31, 2022, it did not exceed the 300% and 100% guidelines for commercial real estate loans or construction and land development

The Bank will continue to monitor its portfolio to manage this increased risk.

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 1. Business