What changed in this filing

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Item 1. Business

2024-03-05 compared with 2023-02-13 · 871 added, 966 removed, 663 unchanged (73% of the section changed)

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and one retail office in Atlanta, Georgia.

The Bank is primarily engaged in the business of

accepting demand deposits and savings deposits insured by the Federal Deposit Insurance Corporation (the “FDIC”), and providing

commercial, consumer and mortgage loans to the general public.

Unless the context requires otherwise, references

to the “Company,” “we,” “us,” “our,” or similar references mean Southern First Bancshares,

In addition, we opened our Dream Mortgage Center, a loan production office, located in Columbia,

South Carolina during 2023.

The Bank is primarily engaged in the business of accepting

demand deposits and savings deposits insured by the Federal Deposit Insurance Corporation (the “FDIC”), and providing commercial,

consumer and mortgage loans to the general public.

Unless the context requires otherwise, references to

the “Company,” “we,” “us,” “our,” or similar references mean Southern First Bancshares,

and its subsidiaries.

Our Competitive Strengths

We believe that the following business strengths

have been instrumental to the success of our core operations.

We believe these attributes will enable us to continue profitable growth,

while remaining fundamentally sound and driving value to our shareholders.

We believe that the following business strengths have

been instrumental to the success of our core operations.

We believe these attributes will enable us to continue profitable growth, while

remaining fundamentally sound and driving value to our shareholders.

Simple and Efficient ClientFIRST Model.

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into new markets in the past, and will enable us to be successful if we seek to expand into new markets in the future.

Our ClientFIRST model focuses on achieving cost

efficiencies by diligently managing the growth of our number of employees and banking offices.

We believe that the identification of talented

bankers will drive our growth strategy, as opposed to a more general desire to enter a specific geography or market.

Our ClientFIRST model focuses on achieving cost efficiencies

by diligently managing the growth of our number of employees and banking offices.

We believe that the identification of talented bankers

will drive our growth strategy, as opposed to a more general desire to enter a specific geography or market.

This strategy translates

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competitors, as evidenced by our 78.7% efficiency ratio for the year ended December 31, 2023.

We continue to make significant investments in

our IT systems and technology offerings to our clients that we believe will continue to drive low-cost deposit growth.

We believe that

our current mobile banking, on-line banking and cash management offerings are industry-leading solutions amongst community banks, and

we plan to continue to invest in the latest technology solutions to enable us to meet the evolving needs of our clients and maintain this

competitive advantage over other community banks.

Attractive South Carolina, North Carolina,

and Georgia Markets.

We have eight banking offices located in Greenville, Columbia and Charleston, South Carolina, which are the

three largest markets in South Carolina;

three banking offices located in Charlotte, Raleigh and Greensboro, North Carolina, which are

the three largest markets in North Carolina;

We continue to make significant investments in our

IT systems and technology offerings to our clients that we believe will continue to drive low-cost deposit growth.

We believe that our

current mobile banking, on-line banking and cash management offerings are industry-leading solutions amongst community banks, and we plan

to continue to invest in the latest technology solutions to enable us to meet the evolving needs of our clients and maintain this competitive

advantage over other community banks.

Attractive South Carolina, North Carolina, and

Georgia Markets.

We have eight banking offices located in Greenville, Columbia and Charleston, South Carolina, which are the three

largest markets in South Carolina;

three banking offices located in Charlotte, Raleigh and Greensboro, North Carolina, which are the three

largest markets in North Carolina;

and one banking office located in Atlanta, Georgia, which is the largest market in Georgia.

The following table illustrates our market share, by insured deposits as of the dates indicated, in these seven markets:

The following

table illustrates our market share, by insured deposits as of the dates indicated, in these seven markets:

Total Offices

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(Dollars in thousands)

(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.

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

The total market deposits data displayed are as of June 30, 2023 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 940,774 residents as reported in March 2022.

The Greenville-Anderson MSA is the most populous market in South Carolina with an estimated population of 958,958 as reported for2022.

The median household income for the Greenville-Anderson-Mauldin MSA was $65,681 for 2022.

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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

in Richland County, South Carolina and its surrounding suburban areas expand into adjoining Lexington County.

population of 830,529 for 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.

The median household income for the

Charleston-North Charleston MSA was approximately $78,927 for 2022.

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 in

Richland County, South Carolina and its surrounding suburban areas expand into adjoining Lexington County.

Columbia is the state capital,

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Training Center.

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 Raleigh is the second

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, 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 Columbia MSA is the second most populous market in the state with an estimated population of 847,804 for 2022.

median household income for the Columbia MSA was $63,933 for 2022.

The city of Raleigh is the second 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 1.48 million for 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 $92,739

The city of Greensboro is the 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 784,101 for 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

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 $60,271 for 2022.

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 2.75 million for 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 and Lowe’s.

The median household

income for the Charlotte-Concord-Gastonia MSA was approximately $77,154 for 2022.

The Atlanta-Sandy Springs-Alpharetta

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.

estimated at 6.22 million for 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 $84,876 for 2022.

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Arthur Seaver, Jr., Calvin C.

Hurst, Michael D.

Andrew Borrmann,

Aiken, and Silvia T.

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Arthur “Art” Seaver, Jr .

has served as the Chief Executive Officer of our Company and our Bank since 1999.

served as the Chief Executive Officer of our Company and our Bank since 1999.

He has over 35 years of banking experience.

until 1992, Mr.

From 1986 until

Seaver held various positions with The Citizens & Southern National Bank of South Carolina.

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he was with Greenville National Bank, which was acquired by Regions Bank in 1998.

He was the Senior Vice President in lending and

was also responsible for managing Greenville National Bank’s deposit strategies prior to leaving to form the Bank.

a 1986 graduate of Clemson University with a bachelor’s degree in Financial Management and a 1999 graduate of the BAI Graduate School

of Community Bank Management.

He was the Senior Vice President in lending and was

also responsible for managing Greenville National Bank’s deposit strategies prior to leaving to form the Bank.

Seaver is a 1986

graduate of Clemson University with a bachelor’s degree in Financial Management and a 1999 graduate of the BAI Graduate School of

Community Bank Management.

Hurst has served as Chief Banking

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

Dowling has served as an Executive

Vice President and the Chief Financial Officer of our Company and our Bank since 2011 and as Chief Operating Officer since July 2019.

He has over 25 years of experience in the banking industry.

Dowling was previously employed with KPMG LLP from 1994 until 2011, including

most recently as an Audit Partner (2005-2011) and a member of KPMG’s Financial Services practice.

Dowling has extensive experience

working with public companies and financial institutions.

He is a 1993 graduate of Clemson University, with a degree in Accounting and

is a CPA in South Carolina and North Carolina.

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.

Andrew Borrmann has served as an Executive Vice

President and the Chief Financial Officer of our Company and our Bank since April 2023.

From August 2021 to February 2023, Mr.

Borrmann was employed with Colony Bank where he served most recently as Chief Financial Officer and Chief Strategy Officer.

Colony Bank, Mr.

Borrmann worked at SouthCrest Bank as Chief Financial Officer for 10 years until it merged with Colony Bank in

Bormann has further experience as a bank analyst and raising capital in the community banking industry.

Borrmann is a 1996 graduate of Arizona State University with a degree in Finance.

On February 27, 2024, the Company announced Mr.

Borrmann was resigning effective March 29, 2024.

Aiken, III has served as a Senior

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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

Resources Officer of our Company and our Bank since March 2018.

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 Resources

Officer of our Company and our Bank since March 2018.

King has over 20 years of Human Resources leadership experience.

2003 to 2009, Ms.

King served in various human resource and senior management roles with Monsanto Company and Select Comfort Corporation.

From 2009 to 2016, Ms.

2009 to 2016, Ms.

King served as senior human resources consultant for FGP International, a professional staffing firm in Greenville,

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In addition to Messrs.

Seaver, Hurst, Dowling,

Aiken and Ms.

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

Seaver, Hurst, Borrmann, Aiken

King, our executive management team consists of 14 individuals who bring an average of 28 years of experience in the banking industry.

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, 2022, our executive officers and board of directors

As of December 31, 2023, our executive officers and board of directors owned

an aggregate of 646,142 shares of our common stock, including options to purchase shares of our common stock, which represented approximately

8.00% of the fully-diluted amount of our common stock outstanding.

We believe that our officers’ and directors’ experience

and local market knowledge are valuable assets and will enable them to guide us successfully in the future.

In addition, we believe that we have assembled

a group of highly talented employees by being an employer of choice in the markets we serve.

We employed a total of 293 FTE employees

as of December 31, 2022.

Our employees are skilled in the areas of banking, information technology, management, sales, advertising and

marketing, among others.

We strive to provide an “umbrella for great talent,” characterized by a culture of transparency and

collaboration which permeates all levels of the organization.

To drive our culture of transparency and collaboration, our employees engage

in a series of weekly meetings to understand the goals and plan for each week.

These meetings are intended to remind our employees of

our vision, strategy and ClientFIRST service, and provide our employees with information regarding monthly and quarterly goals and client

or prospect needs.

In addition, each week is started with a meeting of all Senior and Executive Vice Presidents so that all team members

are informed on the latest developments of our Company.

Our employees and their ClientFIRST approach to service have been instrumental

to our success.

We believe that

our officers’ and directors’

experience and local market knowledge are valuable assets and will enable them to guide us successfully in the future.

In addition, we believe that we have assembled a group

of highly talented employees by being an employer of choice in the markets we serve.

We employed a total of 296 FTE employees as of December

Our employees are skilled in the areas of banking, information technology, management, sales, advertising and marketing, among

We strive to provide an “umbrella for great talent,” characterized by a culture of transparency and collaboration

which permeates all levels of the organization.

To drive our culture of transparency and collaboration, our employees engage in a series

of weekly meetings to understand the goals and plan for each week.

These meetings are intended to remind our employees of our vision,

strategy and ClientFIRST service, and provide our employees with information regarding monthly and quarterly goals and client or prospect

In addition, each week is started with a meeting of all Senior and Executive Vice Presidents so that all team members are informed

on the latest developments of our Company.

Our employees and their ClientFIRST approach to service have been instrumental to our success.

Our Business Strategy

We are focused on growing business relationships

and building core deposits, profitable loans and noninterest income.

We believe that we have built a dynamic franchise that meets the

financial needs of our clients by providing an array of personalized products and services delivered by seasoned banking professionals

with knowledge of our local markets.

Our overall strategic goal is to provide the highest level of service to our clients while achieving

high-performance metrics within the community banking market that drive franchise and shareholder value.

Our specific business strategies

We are focused on growing business relationships and

building core deposits, profitable loans and noninterest income.

We believe that we have built a dynamic franchise that meets the financial

needs of our clients by providing an array of personalized products and services delivered by seasoned banking professionals with knowledge

of our local markets.

Our overall strategic goal is to provide the highest level of service to our clients while achieving high-performance

metrics within the community banking market that drive franchise and shareholder value.

Our specific business strategies include:

Focus on Profitable and Efficient Growth.

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We believe our

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

A “ClientFIRST” Focus.

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 credit losses.

Attract Talented Banking Professionals With A

“ClientFIRST” Focus.

We believe that our ability to attract and retain banking professionals with strong community

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Lending Activities

We emphasize a range of lending

services, including real estate, commercial, and equity-line consumer loans to individuals and small- to medium-sized businesses and professional

firms that are located in or conduct a substantial portion of their business in our market area.

Our underwriting standards vary for each

type of loan, as described below.

We offer a full complement of loan

services to businesses and individuals.

This includes commercial, real estate, and consumer loans.

Our underwriting standards vary for

each type of loan, as described below.

Because loans typically provide higher interest yields than other types of interest-earning assets,

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representing 87.8% of our total assets.

We have focused our lending activities primarily

on the professional sector in each of our markets including doctors, dentists, and small business owners.

By focusing on this client base

and by serving each client with a consistent relationship team of bankers, we have generated a loan portfolio with larger average loan

amounts than we believe is typical for a community bank.

As of December 31, 2022, our average loan size was approximately $350,000.

the same time, we have strived to maintain a diversified loan portfolio and limit the amount of our loans to any single client.

December 31, 2022, our ten largest client loan relationships represented approximately $299.6 million, or 9.15%, of our loan portfolio.

We focus our lending to businesses and individuals

that reside in the markets that we serve.

By focusing on this client base and by serving each client with a consistent relationship team

of bankers, we have generated a loan portfolio with larger average loan amounts than we believe is typical for a community bank.

December 31, 2023, our average loan size was approximately $375,000.

At the same time, we have strived to maintain a diversified loan

portfolio and limit the amount of our loans to any single client.

As of December 31, 2023, our ten largest client loan relationships represented

approximately $314.1 million, or 8.72%, of our loan portfolio.

In October 2023, we announced the opening of the Dream

Mortgage Center in Columbia, South Carolina.

The Dream Mortgage Center is a loan production center designed to create space for opportunities

for homebuyer education, community events, and mortgage lending experts equipped with a variety of loan products.

Loan Approval .

Certain credit risks are

inherent in making loans.

These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks

resulting from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers.

We attempt to mitigate

repayment risks by adhering to internal credit policies and procedures.

These policies and procedures include officer and client lending

limits, a multi-layered approval process for larger loans, documentation examination, and follow-up procedures for any exceptions to credit

Certain credit risks are inherent

in making loans.

These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting

from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers.

We attempt to mitigate repayment

risks by adhering to internal credit policies and procedures.

These policies and procedures include officer and client lending limits,

a multi-layered approval process for larger loans, documentation examination, and follow-up procedures for any exceptions to credit policies.

Our loan approval policies provide for various levels of officer lending authority.

When the amount of aggregate loans to a

single borrower exceeds an individual officer’s lending authority, the loan request will be considered for approval by a team of

officers led by a senior lender, or by the voting members of the Credit Approval Support Team (“CAST”) committee, based on

the loan amount.

The CAST committee, which is comprised of a group of our senior commercial lenders, chief banking officer, and chief

executive officer, has pre-determined lending limits, and any loans in excess of this lending limit will be submitted for approval by

the finance committee of our board or by the full board.

We do not make any loans to any director or executive officer of the Bank unless

the loan is approved by the board of directors of the Bank and all loans to directors, officers and employees are on terms not more favorable

to such person than would be available to a person not affiliated with the Bank, consistent with federal banking regulations.

Management monitors exposure to credit risk from

potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, as well as concentrations

of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g.

principal deferral periods,

loans with initial interest-only

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

When the amount of aggregate loans to a single borrower

exceeds an individual officer’s lending authority, the loan request will be considered for approval by a team of officers led by

a senior lender, or by the voting members of the Credit Approval Support Team (“CAST”) committee, based on the loan amount.

The CAST committee, which is comprised of a group of our senior commercial lenders, senior credit administrators, chief risk officer,

president, and chief executive officer, has pre-determined lending limits, and any loans in excess of this lending limit will be submitted

for approval by our full board.

We do not make any loans to any director or executive officer of the Bank unless the loan is approved

by the board of directors of the Bank and all loans to directors, officers and employees are on terms not more favorable to such person

than would be available to a person not affiliated with the Bank, consistent with federal banking regulations.

Management monitors exposure to credit risk from potential

concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, as well as concentrations of

lending products and practices such as loans

that subject borrowers to substantial payment increases (e.g., principal deferral periods,

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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Credit Administration and Loan Review .

maintain a continuous loan review system.

We also apply a credit grading system to each loan, and we use an independent process to review

the loan files on a test basis to assess the grading of each loan.

We periodically review performance benchmarks established by management

in the areas of nonperforming assets, charge-offs, past dues, and loan documentation.

Each loan officer is responsible for each loan he

or she makes, regardless of whether other individuals or committees joined in the approval.

This responsibility continues until the loan

is repaid or until the loan is officially assigned to another officer.

a continuous loan review system.

We also apply a credit grading system to each loan, and we use an independent process to review the loan

files on a test basis to assess the grading of each loan.

We periodically review performance benchmarks established by management in the

areas of nonperforming assets, charge-offs, past dues, and loan documentation.

Each loan officer is responsible for each loan he or she

makes, regardless of whether other individuals or committees joined in the approval.

This responsibility continues until the loan is repaid

or until the loan is officially assigned to another officer.

Lending Limits.

Our lending activities are

subject to a variety of lending limits imposed by federal and state laws and regulations.

In general, the Bank is subject to a legal limit

on loans to a single borrower equal to 15% of the Bank’s capital and unimpaired surplus.

Our lending activities are subject

to a variety of lending limits imposed by federal and state laws and regulations.

In general, the Bank is subject to a legal limit on

loans to a single borrower equal to 15% of the Bank’s capital and unimpaired surplus.

Based upon the capitalization of the Bank

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the primary source of repayment may not be the sale of real estate.

The following describes the types of loans in our

loan portfolio.

● Commercial Real Estate Loans (Commercial Owner

Occupied and Commercial Non-owner Occupied Real Estate Loans).

At December 31, 2022, commercial owner occupied and non-owner occupied

real estate loans (other than construction loans) amounted to $1.48 billion, or 45.1% of our loan portfolio.

Of our commercial real estate

loan portfolio, $862.6 million in loans were non-owner occupied properties, representing 42.0% of our commercial loan portfolio and 26.3%

The following describes the types of loans in our loan

Commercial Real Estate

Loans (Commercial Owner Occupied and Commercial Non-owner Occupied Real Estate Loans).

At December 31, 2023, commercial owner

occupied and non-owner occupied real estate loans (other than construction loans) amounted to $1.57 billion, or 43.7% of our loan

Of our commercial real estate loan portfolio, $942.5 million in loans were non-owner occupied properties, representing

42.4% of our commercial loan portfolio and 26.2% of our total loan portfolio.

The remainder of our commercial real estate loan

portfolio, $631.7 million in loans or 28.4% of the commercial loan portfolio, were owner occupied.

Owner occupied loans represented

17.5% of our total loan portfolio.

The remainder of our commercial real estate loan portfolio, $612.9 million in loans or 29.8% of the commercial

loan portfolio, were owner occupied.

Owner occupied loans represented 18.7% of our total loan portfolio.

At December 31, 2022, our individual

commercial real estate loans ranged in size from approximately $15,000 to $22.0 million, with an average loan size of approximately $802,000.

These loans generally have terms of five years or less, although payments may be structured on a longer amortization basis.

each borrower on an individual basis and attempt to determine the business risks and credit profile of each borrower.

We attempt to reduce

credit risk in the commercial real estate portfolio by emphasizing loans on owner-occupied office and retail buildings where the loan-to-value

ratio, established by independent appraisals, does not exceed 85%.

We also generally require that a borrower’s cash flow exceeds

115% of monthly debt service obligations.

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.

At December 31, 2023, our individual commercial real estate loans ranged in size from

approximately $15,000 to $21.0 million, with an average loan size of approximately $850,000.

These loans generally have terms of

five years or less, although payments may be structured on a longer amortization basis.

We evaluate each borrower on an individual

basis and attempt to determine the business risks and credit profile of each borrower.

We attempt to reduce credit risk in the commercial real estate portfolio by emphasizing loans on owner-occupied office and retail buildings where the loan-to-value ratio, established by independent appraisals, does not exceed 85%.

We also generally require that

a borrower’s cash flow exceeds 115% of monthly debt service obligations.

As of December 31, 2023, $215.9 million, or 6.0% of our total loan portfolio, was collateralized by office properties, $173.9 million, or 4.8%, was collateralized by retail properties, $146.3 million, or 4.1%, was collateralized by hotels, and $100.4 million, or 2.8% was collateralized by multifamily 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.

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.

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, 2023, total commercial and consumer construction loans amounted to $214.0 million, or 5.9% of our loan portfolio.

Commercial construction loans represented $150.7 million, or 4.2%, of our total loan portfolio, while consumer construction loans represented $63.3 million, or 1.7% of our total loan portfolio.

At December 31, 2023, our commercial construction real estate loans ranged in size from approximately $15,000 to $13.0 million, with an average loan balance of approximately $2.1 million.

At December 31, 2023, our consumer or residential construction loans ranged in size from approximately $18,000 to $3.2 million, with an average loan size of approximately $705,000.

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 property;

rising interest rates which may prevent sale of the property;

failure to sell completed projects in a timely manner.

We attempt to reduce the risk associated

with construction loans by obtaining personal guarantees where possible and by keeping the loan-to-value ratio of the completed project

at or below 80%.

We attempt to reduce the risk associated with construction loans by obtaining personal guarantees where possible and by keeping the loan-to-value ratio of the completed project at or below 80%.

Commercial Business Loans.

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.

Commercial loans are generally considered to have greater

risk than first or second mortgages on real estate because commercial loans may be unsecured, or if they are secured, the value of the

collateral may be difficult to assess and more likely to decrease than real estate.

We are eligible to offer small business

loans utilizing government enhancements such as the Small Business Administration’s (“SBA”) 7(a) program and SBA’s

504 programs.

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

At December 31, 2023, commercial business loans amounted to $500.2 million, or 13.9% of our loan portfolio, and ranged in size from approximately $1,000 to $12.4 million, with an average loan size of approximately $282,000.

Commercial loans are generally considered to have greater risk than first or second mortgages on real estate because commercial loans may be unsecured, or if they are secured, the value of the collateral may be difficult to assess and more likely to decrease than real estate.

We are eligible to offer small business loans utilizing government enhancements such as the Small Business Administration’s (“SBA”) 7(a) program and SBA’s 504 programs.

These loans typically are partially guaranteed by the government, which helps to reduce their risk.

Government guarantees

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

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, 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.

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

As of December 31, 2023, we had originated seven loans utilizing government enhancements and over 30 loans engaged in state-based small business partnerships.

Real Estate Loans and Home Equity Loans.

At December 31, 2023 consumer real estate loans (other than construction loans)

amounted to $1.27 billion, or 35.1% of our loan portfolio.

Included in the consumer real estate loans was $1.08 billion, or 30.0% of

our loan portfolio, in first and second mortgages on individuals’ homes, while home equity loans represented $183.0 million,

or 5.1% of our total loan portfolio.

At December 31, 2023, our individual residential real estate loans ranged in size from $3,000

to $5.6 million, with an average loan size of approximately $472,000.

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 also offer

home equity lines of credit.

At December 31, 2023, our individual home equity lines of credit ranged in size from $1,000 to $1.8

million, with an average of approximately $86,000.

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

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

and value of collateral.

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

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

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

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

loan size of approximately $20,000.

At December 31, 2023, consumer loans other than real estate amounted to $48.8 million, or 1.4% of our loan portfolio, and ranged in size from $1,000 to $17.2 million, with an average loan size of approximately $35,000.

Our installment loans typically amortize over periods up to 60 months.

We will offer consumer loans

with a single maturity date when a specific source of repayment is available.

We typically require monthly payments of interest and a

portion of the principal on our revolving loan products.

Consumer loans are generally considered to have greater risk than first or second

mortgages on real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess

and more likely to decrease in value than real estate.

We will offer consumer loans with a single maturity date when a specific source of repayment is available.

We typically require monthly payments of interest and a portion of the principal on our revolving loan products.

Consumer loans are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess and more likely to decrease in value than real estate.

Deposit Services

Our principal source of funds is core deposits.

We offer a full range of deposit services, including checking accounts, commercial checking accounts, savings accounts, and other time

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

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.

offer a full range of deposit services, including checking accounts, commercial checking accounts, savings accounts, and other time deposits

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

At December 31, 2023, we had $379.4 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

Other Banking Services

In addition to deposit and loan services,

we offer other bank services such as internet banking, cash management, safe deposit boxes, direct deposit, automatic drafts, bill payment

and mobile banking services.

We earn fees for most of these services, including debit and credit card transactions, sales of checks, and

wire transfers.

In addition to deposit and loan services, we offer

other bank services such as internet banking, cash management, safe deposit boxes, direct deposit, automatic drafts, bill payment and

mobile banking services.

We earn fees for most of these services, including debit and credit card transactions, sales of checks, and wire

We also receive ATM transaction fees from transactions performed by our clients.

We are associated with the NYCE, Pulse,

STAR, and Cirrus networks, which are available to our clients throughout the country.

Since we outsource our ATM services, we are charged

related transaction fees from our ATM service provider.

We have contracted with Fidelity National Information Systems, an outside computer

service company, to provide our core data processing services and our ATM processing.

By outsourcing these services, we believe we are

able to reduce our overhead by matching the expense in each period to the transaction volume that occurs during the period, as a significant

portion of the fee charged is directly related to the number of loan and deposit accounts and the related number of transactions we have

during the period.

We believe that by being associated with a shared network of ATMs, we are better able to serve our clients and are

able to attract clients who are accustomed to the convenience of using ATMs, although we do not believe that maintaining this association

is critical to our success.

We are associated with the NYCE, Pulse, STAR,

and Cirrus networks, which are available to our clients throughout the country.

Since we outsource our ATM services, we are charged related

transaction fees from our ATM service provider.

We have contracted with Fidelity National Information Systems, an outside computer service

company, to provide our core data processing services and our ATM processing.

By outsourcing these services, we believe we are able to

reduce our overhead by matching the expense in each period to the transaction volume that occurs during the period, as a significant portion

of the fee charged is directly related to the number of loan and deposit accounts and the related number of transactions we have during

We believe that by being associated with a shared network of ATMs, we are better able to serve our clients and are able to

attract clients who are accustomed to the convenience of using ATMs, although we do not believe that maintaining this association is critical

to our success.

We also offer Internet banking services, bill payment services, and cash management and mobile banking services.

The banking business is highly competitive, and

we experience competition in our market from many other financial institutions.

Competition among financial institutions is based upon

interest rates offered on deposit accounts, interest rates charged on loans, other credit and service charges relating to loans, the quality

and scope of the services rendered, the convenience of banking facilities, and, in the case of loans to commercial borrowers, relative

lending limits.

We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance

companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional,

national, and international financial institutions that operate offices in Greenville, Columbia and Charleston, South Carolina;

Raleigh and Greensboro, North Carolina;

The banking business is highly competitive, and we

experience competition in our market from many other financial institutions.

Competition among financial institutions is based upon interest

rates offered on deposit accounts, interest rates charged on loans, other credit and service charges relating to loans, the quality and

scope of the services rendered, the convenience of banking facilities, and, in the case of loans to commercial borrowers, relative lending

We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies,

securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, national,

and international financial institutions that operate offices in Greenville, Columbia and Charleston, South Carolina;

Charlotte, Raleigh

and Greensboro, North Carolina;

Atlanta, Georgia and elsewhere.

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institutions in the Greensboro market, 49 financial institutions in the Charlotte market, and 82 financial institutions in the Atlanta

We compete with other financial institutions in our market areas both in attracting deposits and in making loans.

we have to attract our client base from other existing financial institutions and from new residents.

Many of our competitors are well-established,

larger financial institutions with substantially greater resources and lending limits, such as, Bank of America, Wells Fargo, and Truist.

These institutions offer some services, such as extensive and established branch networks and trust services that we do not provide.

addition, many of our non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies

and federally insured banks.

We believe the financial services industry will likely continue to become more competitive as further technological

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

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

With regard to such

accounts, we generally compete on the basis of client service and responsiveness to client needs, the convenience of our offices and hours,

and the availability and pricing of our products and services.

We compete with other financial institutions in our market areas both in

attracting deposits and in making loans.

In addition, we have to attract our client base from other existing financial institutions and

from new residents.

Many of our competitors are well-established, larger financial institutions with substantially greater resources and

lending limits, such as, Bank of America, Wells Fargo, and Truist.

These institutions offer some services, such as extensive and established

branch networks and trust services that we do not provide.

In addition, many of our non-bank competitors are not subject to the same extensive

federal regulations that govern bank holding companies and federally insured banks.

We believe the financial services industry will likely

continue to become more competitive as further technological 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.

Instead, we concentrate our efforts on attracting the business of individuals

and small and medium-size businesses.

With regard to such accounts, we generally compete on the basis of client service and responsiveness

to client needs, the convenience of our offices and hours, and the availability and pricing of our products and services.

We believe our commitment to quality and personalized

banking services through our ClientFIRST culture is a factor that contributes to our competitiveness and success.

At December 31, 2022, we employed a total of 293

FTE employees.

At December 31, 2023, we employed a total of 296 full-time

equivalent employees.

We provide our full-time employees and certain part-time employees with a comprehensive program of benefits, including

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Available Information

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 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

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Changes in applicable laws or regulations may have a material effect on our business and prospects.

The following discussion is not intended to be

a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on our operations.

is intended only to briefly summarize some material provisions.

The following summary is qualified by reference to the statutory and regulatory

provisions discussed.

The following discussion is not intended to be a complete

list of all the activities regulated by the banking laws or of the impact of such laws and regulations on our operations.

It is intended

only to briefly summarize some material provisions.

The following summary is qualified by reference to the statutory and regulatory provisions

Legislative and Regulatory Developments

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to have an impact on our operations.

The Dodd-Frank Wall Street Reform and Consumer

Protection Act

The Dodd-Frank Wall Street Reform and Consumer Protection

The Dodd-Frank Act was signed into law in July 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 receiver,

● Changing the manner in which deposit insurance

assessments are made,

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”),

● Capping interchange fees that banks charge merchants

for debit card transactions,

● Imposing more stringent requirements on mortgage

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, and

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.

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

condition and results of operations.

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 condition and

results of operations.

The Economic Growth, Regulatory Relief, and Consumer

Protection Act

On May 24, 2018, President Trump signed into law

the first major financial services reform bill since the enactment of the Dodd-Frank Act.

The Economic Growth, Regulatory Relief,

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

and nonbank financial institutions.

On May 24, 2018, President Trump signed into law the

first major financial services reform bill since the enactment of the Dodd-Frank Act.

The Economic Growth, Regulatory Relief, 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 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

below under “Basel Capital Standards”);

● banks with up to $3 billion in total consolidated

assets may be examined by their federal banking regulator every 18 months (as opposed to every 12 months).

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 rules;

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 below under “Basel Capital Standards”);

banks with up to $3 billion in total consolidated assets may be examined by their federal banking regulator every 18 months (as opposed to every 12 months).

Basel Capital Standards

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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%;

assets, $10 billion or more in total foreign exposures, or that have opted into 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%;

a Tier 1 risk-based capital ratio of 6%;

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When implemented, Basel III provided a one-time opportunity at the end of the first quarter of 2015 for

covered banking organizations to opt out of much of this treatment of AOCI.

We made this opt-out election and, as a result, retained our

pre-existing treatment for AOCI.

In addition, in order to avoid restrictions on

capital distributions or discretionary bonus payments to executives, under Basel III, a banking organization must maintain a 2.5% “capital

covered banking organizations to opt out of much of this treatment

We made this opt-out election and, as a result, retained our pre-existing treatment for AOCI.

In addition, in order to avoid restrictions on capital

distributions or discretionary bonus payments to executives, under Basel III, a banking organization must maintain a 2.5% “capital

conservation buffer” on top of its minimum risk-based capital requirements.

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The 2.5% capital conservation buffer

effectively results in the following minimum capital ratios (taking into account the capital conservation buffer):

effectively results in the

following minimum capital ratios (taking into account the capital conservation buffer):

(i) a CET1 capital

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%.

Proposed new rules for U.S.

implementation of capital

requirements under Basel IV rules, more recently referred to as the “Basel III Endgame”, were issued by the U.S.

federal banking

agencies on July 27, 2023.

These proposed rules include broad-based changes to the risk-weighting framework for various credit exposures

and operational risk capital requirements.

However, the proposed rules generally apply only to large banking organizations with total

assets of $100 billion or more, and are expected to not be applicable to us.

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

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not elect to utilize the five-year CECL transition.

In November 2019, the federal banking regulators

published final rules under the Reform Law (discussed above) implementing a simplified measure of capital adequacy for certain banking

organizations that have less than $10 billion in total consolidated assets.

Under the final rules, which went into effect on January 1,

2020, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets

and meet other qualifying criteria, including a leverage ratio of greater than 9%, off-balance-sheet exposures of 25% or less of total

consolidated assets and trading assets plus trading liabilities of 5% or less of total consolidated assets, are deemed “qualifying

community banking organizations” and are eligible to opt into the “community bank leverage ratio framework.” A qualifying

community banking organization that elects to use the community bank leverage ratio framework and that maintains a leverage ratio of greater

than 9% is considered to have satisfied the generally applicable risk-based and leverage capital requirements under the Basel III rules

and, if applicable, is considered to have met the “well capitalized” ratio requirements for purposes of its primary federal

regulator’s prompt corrective action rules, discussed below.

We do not have any immediate plans to elect to use the community bank

leverage ratio framework but may make such an election in the future.

In November 2019, the federal banking regulators published

final rules under the Reform Law (discussed above) implementing a simplified measure of capital adequacy for certain banking organizations

that have less than $10 billion in total consolidated assets.

Under the final rules, which went into effect on January 1, 2020, depository

institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other

qualifying criteria, including a leverage ratio of greater than 9%, off-balance-sheet exposures of 25% or less of total consolidated assets

and trading assets plus trading liabilities of 5% or less of total consolidated assets, are deemed “qualifying community banking

organizations” and are eligible to opt into the “community bank leverage ratio framework.” A qualifying community banking

organization that elects to use the community bank leverage ratio framework and that maintains a leverage ratio of greater than 9% is

considered to have satisfied the generally applicable risk-based and leverage capital requirements under the Basel III rules and, if applicable,

is considered to have met the “well capitalized” ratio requirements for purposes of its primary federal regulator’s

prompt corrective action rules, discussed below.

We do not have any immediate plans to elect to use the community bank leverage ratio

framework but may make such an election in the future.

As of December 31, 2023, the Bank was well-capitalized,

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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.

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.

In addition, 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 bank.

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

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.

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.

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

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

COVID-19 Pandemic

The COVID-19 pandemic has continued to cause extensive

disruptions to the global economy, to businesses, and to the lives of individuals throughout the world.

On March 27, 2020, the CARES Act

was signed into law.

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

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

borrowers affected by the COVID-19 pandemic.

Although these programs generally have expired, governmental authorities may take additional

actions in the future to limit the adverse impact of COVID-19 on borrowers and tenants.

The Paycheck Protection Program (“PPP”),

originally established under the CARES Act and extended under the Consolidated Appropriations Act of 2021, authorized financial institutions

to make federally-guaranteed loans to qualifying small businesses and non-profit organizations.

These loans carry an interest rate of

1% per annum and a maturity of two years for loans originated prior to June 5, 2020 and five years for loans originated on or after June

The PPP provides that such loans may be forgiven if the borrowers meet certain requirements with respect to maintaining employee

headcount and payroll and the use of the loan proceeds after the loan is originated.

The initial phase of the PPP, after being extended

multiple times by Congress, expired on August 8, 2020.

However, on January 11, 2021, the SBA reopened the PPP for First Draw PPP loans

to small businesses and non-profit organizations that did not receive a loan through the initial PPP phase.

Further, on January 13, 2021,

the SBA reopened the PPP for Second Draw PPP loans to small businesses and non-profit organizations that did receive a loan through the

initial PPP phase.

The PPP program ended in accordance with its terms on May 31, 2021.

While we were a participating lender in the PPP

in 2020, we sold our PPP loan portfolio in the second quarter of 2020.

We did not originate any new PPP loans during 2021.

The CARES Act, as extended by certain provisions

of the Consolidated Appropriations Act of 2021, also initially permitted banks to suspend requirements under GAAP for loan modifications

to borrowers affected by COVID-19 that would otherwise had been characterized as troubled debt restructurings and suspended any determination

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 January 1, 2022.

Federal bank regulatory authorities also issued

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

Additionally, the Federal Trade

Commission and DOJ jointly released the 2023 Draft Merger Guidelines for public comment to strengthen the agencies’ oversight over

mergers that would violate the federal antitrust laws.

If adopted as proposed in draft form, the Merger Guidelines would

substantially

modify the existing regulatory framework for merger enforcement.

It is not yet clear what effect, if any, the draft Merger Guidelines

will have on the federal banking agencies as they consider revising the requirements for mergers involving banks and bank holding companies.

On January 29, 2024, the OCC released a notice of proposed rulemaking to (i) amend its existing procedural regulation that provides for

expedited review of a limited set of business combinations involving a national bank or federal savings association and (ii) adopt a new

policy statement summarizing the OCC’s substantive approach to evaluating Bank Merger Act applications.

Comments on the OCC notice

of proposed rulemaking are due no later than 60 days following publication of the proposal in the Federal Register.

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.

Proposed Legislation and Regulatory Action

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Southern First Bancshares, Inc.

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.

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

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.

As a result, we

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

promulgated thereunder.

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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.

Activities that the Federal Reserve has found to

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

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 be

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

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;

● operating a non-bank depository institution, such

as a savings association;

operating a non-bank depository institution, such as a savings association;

trust company functions;

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conducting discount securities brokerage activities;

● underwriting and dealing in government obligations

and money market instruments;

● 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;

underwriting and dealing in government obligations and money market instruments;

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.

As a bank holding company we also can elect to

be treated as a “financial holding company,” which would allow us to engage in a broader array of activities.

a financial holding company can engage in activities that are financial in nature or incidental or complimentary to financial activities,

including insurance underwriting, sales and brokerage activities, providing financial and investment advisory services, underwriting services

and limited merchant banking activities.

We have not sought financial holding company status, but may elect such status in the future

as our business matures.

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 CRA as discussed below.

The Federal Reserve has the authority to order

a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary

when it has reasonable cause to believe that the Bank holding company’s continued ownership, activity or control constitutes a serious

As a bank holding company we also can elect to be treated

as a “financial holding company,” which would allow us to engage in a broader array of activities.

In summary, a financial

holding company can engage in activities that are financial in nature or incidental or complimentary to financial activities, including

insurance underwriting, sales and brokerage activities, providing financial and investment advisory services, underwriting services and

limited merchant banking activities.

We have not sought financial holding company status, but may elect such status in the future as our

business matures.

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 CRA as discussed below.

The Federal Reserve has the authority to order a bank

holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when

it has reasonable cause to believe that the Bank holding company’s continued ownership, activity or control constitutes a serious

risk to the financial safety, soundness or stability of it or any of its bank subsidiaries.

Change in Control .

Two statutes,

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;

Two statutes, 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%

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.

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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

or company is required to file a notice with the Federal Reserve if it will, as a result of the transaction, own or control 10% or more

of any class of voting securities or direct the management or policies of a bank or bank holding company and either if the bank or bank

holding company has registered securities or if the acquirer would be the largest holder of that class of voting securities after the

For a change in control at the holding company level, both the Federal Reserve and the subsidiary bank’s primary federal

regulator must approve the change in control;

Under the Change in Bank Control Act, a person or company

is required to file a notice with the Federal Reserve if it will, as a result of the transaction, own or control 10% or more of any class

of voting securities or direct the management or policies of a bank or bank holding company and either if the bank or bank holding company

has registered securities or if the acquirer would be the largest holder of that class of voting securities after the acquisition.

a change in control at the holding company level, both the Federal Reserve and the subsidiary bank’s primary federal regulator must approve

the change in control;

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

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.

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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to comply with such capital restoration plan.

The Federal Reserve also has the authority under

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”

provisions of the Federal Deposit Insurance Act (the “FDIA”) require insured depository institutions under common control

to reimburse the FDIC for any loss suffered or reasonably anticipated by the FDIC as a result of the default of a commonly controlled

insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger

The FDIC’s claim for damages is superior to claims of shareholders of the insured depository institution or its holding

company, but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the

commonly controlled insured depository institutions.

The FDIA also provides that amounts received from

the liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured

claims) to pay the deposit liabilities of the institution prior to payment of any other general or unsecured senior liability, subordinated

liability, general creditor or shareholder.

This provision would give depositors a preference over general and subordinated creditors

and shareholders in the event a receiver is appointed to distribute the assets of our Bank.

Any capital loans by a bank holding company to

any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank.

In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency

The Federal Reserve also has the authority under 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” provisions

of the Federal Deposit Insurance Act (the “FDIA”) require insured depository institutions under common control to reimburse

the FDIC for any loss suffered or reasonably anticipated by the FDIC as a result of the default of a commonly controlled insured depository

institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default.

FDIC’s claim for damages is superior to claims of shareholders of the insured depository institution or its holding company, but

is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled

insured depository institutions.

The FDIA also provides that amounts received from the

liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims)

to pay the deposit liabilities of the institution prior to payment of any other general or unsecured senior liability, subordinated liability,

general creditor or shareholder.

This provision would give depositors a preference over general and subordinated creditors and shareholders

in the event a receiver is appointed to distribute the assets of our Bank.

Any capital loans by a bank holding company to any

of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank.

the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency

to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Capital Requirements .

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.”

The Federal 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.

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

to the Bank by issuing securities without having to receive regulatory approval, subject to compliance with federal and state securities

Since the Company

is a bank holding company, its ability to declare and pay dividends is dependent on certain federal and state regulatory considerations,

including the guidelines of the Federal Reserve.

The Federal Reserve has issued a policy statement regarding the payment of dividends

by bank holding companies.

In general, the Federal Reserve’s policies provide that dividends should be paid only out of current

earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s

capital needs, asset quality and overall financial condition.

The Federal Reserve’s policies also require that a bank holding company

serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital

funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising

capacity to obtain additional resources for assisting its subsidiary banks where necessary.

Further, under the prompt corrective action

regulations, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized.

regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions.

In addition, since the Company is a legal entity

separate and distinct from the Bank and does not conduct stand-alone operations, its ability to pay dividends depends on the ability of

the Bank to pay dividends to it, which is also subject to regulatory restrictions as described below in “Southern First Bank –

Since the Company is a bank

holding company, its ability to declare and pay dividends is dependent on certain federal and state regulatory considerations, including

the guidelines of the Federal Reserve.

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

In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only

if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs,

asset quality and overall financial condition.

The Federal Reserve’s policies also require that a bank holding company serve as

a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds

to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity

to obtain additional resources for assisting its subsidiary banks where necessary.

Further, under the prompt corrective action regulations,

the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized.

These regulatory

policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions.

In addition, since the Company is a legal entity separate

and distinct from the Bank and does not conduct stand-alone operations, its ability to pay dividends depends on the ability of the Bank

to pay dividends to it, which is also subject to regulatory restrictions as described below in “Southern First Bank – Dividends.”

South Carolina State Regulation.

As a South Carolina bank holding company under the South Carolina Banking and Branching Efficiency Act, we are subject to limitations

on sale or merger and to regulation by the South Carolina Board of Financial Institutions (the “S.C.

South Carolina bank holding company under the South Carolina Banking and Branching Efficiency Act, we are subject to limitations on sale

or merger and to regulation by the South Carolina Board of Financial Institutions (the “S.C.

We are not required

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Southern First Bank

As a South Carolina bank, deposits in the Bank

are insured by the FDIC up to a maximum amount, which is currently $250,000 per depositor.

As a South Carolina bank, deposits in the Bank are

insured by the FDIC up to a maximum amount, which is currently $250,000 per depositor.

Board and the FDIC regulate or monitor

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adequacy of capitalization and loss reserves;

● investments;

● borrowings;

issuances of securities;

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maintenance of books and records;

● adequacy of staff training to carry on safe lending

and deposit gathering practices.

These agencies, and the federal and state laws

applicable to the Bank’s operations, extensively regulate various aspects of our banking business, including, among other things,

permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on

deposits, the maintenance of reserves on demand deposit liabilities, and the safety and soundness of our banking practices.

adequacy of staff training to carry on safe lending and deposit gathering practices.

These agencies, and the federal and state laws applicable

to the Bank’s operations, extensively regulate various aspects of our banking business, including, among other things, permissible

types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits, the

maintenance of reserves on demand deposit liabilities, and the safety and soundness of our banking practices.

All insured institutions must undergo regular on-site

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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 the required minimum level for each relevant capital measure.

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

becoming undercapitalized.

An adequately capitalized institution (i) has a total risk-based capital ratio of 8% or greater, (ii) has a

Tier 1 risk-based capital ratio of 6% or greater, (iii) has a common equity Tier 1 risk-based capital ratio of 4.5% or greater, and (iv)

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%.

● Significantly Undercapitalized — The institution

is significantly below the required minimum level for any relevant capital measure.

A significantly undercapitalized institution (i) has

a total risk-based capital ratio of less than 6%, (ii) has a Tier 1 risk-based capital ratio of less than 4%, (iii) has a common equity

Tier 1 risk-based capital ratio of less than 3% or greater, or (iv) has a leverage capital ratio of less than 3%.

● Critically Undercapitalized — The institution

fails to meet a critical capital level set by the appropriate federal banking agency.

A critically undercapitalized institution has a

ratio of tangible equity to total assets that is equal to or less than 2%.

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 becoming undercapitalized.

An adequately capitalized institution (i) has a total risk-based capital ratio of 8% or greater, (ii) has a Tier 1 risk-based capital ratio of 6% or greater, (iii) has a common equity Tier 1 risk-based capital ratio of 4.5% or greater, and (iv) 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%.

Significantly Undercapitalized — The institution is significantly below the required minimum level for any relevant capital measure.

A significantly undercapitalized institution (i) has a total risk-based capital ratio of less than 6%, (ii) has a Tier 1 risk-based capital ratio of less than 4%, (iii) has a common equity Tier 1 risk-based capital ratio of less than 3% or greater, or (iv) has a leverage capital ratio of less than 3%.

Critically Undercapitalized — The institution fails to meet a critical capital level set by the appropriate federal banking agency.

A critically undercapitalized institution has a ratio of tangible equity to total assets that is equal to or less than 2%.

If the FDIC determines, after notice and an opportunity

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its charter to conduct banking activities.

An insured depository institution may not pay a

management fee to a bank holding company controlling that institution or any other person having control of the institution if, after

making the payment, the institution would be undercapitalized.

In addition, an institution cannot make a capital distribution, such as

a dividend or other distribution, that is in substance a distribution of capital to the owners of the institution if following such a

distribution the institution would be undercapitalized.

Thus, if payment of such a management fee or the making of such would cause a

bank to become undercapitalized, it could not pay a management fee or dividend to the bank holding company.

As of December 31, 2022, the Bank was deemed to

be “well capitalized.”

An insured depository institution may not pay a management

fee to a bank holding company controlling that institution or any other person having control of the institution if, after making the

payment, the institution would be undercapitalized.

In addition, an institution cannot make a capital distribution, such as a dividend

or other distribution, that is in substance a distribution of capital to the owners of the institution if following such a distribution

the institution would be undercapitalized.

Thus, if payment of such a management fee or the making of such would cause a bank to become

undercapitalized, it could not pay a management fee or dividend to the bank holding company.

As of December 31, 2023, the Bank was deemed to be

“well capitalized.”

Standards for Safety and Soundness.

The FDIA also requires the federal banking regulatory agencies to prescribe, by regulation or guideline, operational and managerial standards

also requires the federal banking regulatory agencies to prescribe, by regulation or guideline, operational and managerial standards

for all insured depository institutions relating to:

(i) internal controls, information systems and internal audit systems;

documentation;

loan documentation;

(iii) credit underwriting;

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and (v) asset growth.

The agencies also must prescribe standards

for asset quality, earnings, and stock valuation, as well as standards for compensation, fees and benefits.

The federal banking agencies

have adopted regulations and Interagency Guidelines Prescribing Standards for Safety and Soundness to implement these required standards.

These guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at

insured depository institutions before capital becomes impaired.

Under the regulations, if the FDIC determines that the Bank fails to

meet any standards prescribed by the guidelines, the agency may require the Bank to submit to the agency an acceptable plan to achieve

compliance with the standard, as required by the FDIC.

The final regulations establish deadlines for the submission and review of such

safety and soundness compliance plans.

Insurance of Accounts and Regulation by the

The agencies also must

prescribe standards for asset quality, earnings, and stock valuation, as well as standards for compensation, fees and benefits.

federal banking agencies have adopted regulations and Interagency Guidelines

Prescribing Standards for Safety and Soundness to implement these required standards.

These guidelines set forth the safety and soundness

standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes

Under the regulations, if the FDIC determines that the Bank fails to meet any standards prescribed by the guidelines, the agency

may require the Bank to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDIC.

final regulations establish deadlines for the submission and review of such safety and soundness compliance plans.

Insurance of Accounts and Regulation by the FDIC.

The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC.

The Dodd-Frank

Act permanently increased the maximum amount of deposit insurance for banks to $250,000 per account.

As insurer, the FDIC imposes deposit

insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC insured institutions.

It also may prohibit

any FDIC insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the insurance

The Dodd-Frank Act permanently

increased the maximum amount of deposit

insurance for banks to $250,000 per account.

As insurer, the FDIC imposes deposit insurance premiums

and is authorized to conduct examinations of and to require reporting by FDIC insured institutions.

It also may prohibit any FDIC insured

institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the insurance fund.

As an FDIC-insured bank, the Bank must pay deposit

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described above, the FDIC has the ability to impose special assessments in certain instances.

In addition to the ordinary assessments described

above, the FDIC has the ability to impose special assessments in certain instances.

For example, under the Dodd-Frank Act, the minimum

designated reserve ratio for the deposit insurance fund was increased to 1.35% of the estimated total amount of insured deposits.

30, 2018, the deposit insurance fund reached 1.36%, exceeding the statutorily required minimum reserve ratio of 1.35%.

On reaching the

minimum reserve ratio of 1.35%, FDIC regulations provided for two changes to deposit insurance assessments:

(i) surcharges on insured

depository institutions with total consolidated assets of $10 billion or more (large institutions) ceased;

and (ii) small banks received

assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from between 1.15% and 1.35%,

to be applied when the reserve ratio is at or above 1.38%.

Our final assessment credit was invoiced in December 2019.

Assessment rates

are expected to decrease if the reserve ratio increases such that it exceeds 2%.

The FDIC may terminate the deposit insurance of

any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged in unsafe or

unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order

or condition imposed by the FDIC.

In addition to the ordinary assessments described above,

the FDIC has the ability to impose special assessments in certain instances.

For example, in November 2023, the FDIC implemented a special

assessment to recover the approximately $16.3 billion loss to the Deposit Insurance Fund associated with protecting uninsured depositors

following the closures of Silicon Valley Bank and Signature Bank earlier in the year.

However, the assessment was limited to banks with

in excess of $5 billion uninsured deposits as of December 31, 2022, so we did not receive any assessment.

The FDIC may terminate the deposit insurance of any

insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged in unsafe or unsound

practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or

condition imposed by the FDIC.

It also may suspend deposit insurance temporarily during the hearing process for the permanent termination

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Reserve decides to treat these subsidiaries as affiliates.

The Bank is also subject to certain restrictions

on extensions of credit to executive officers, directors, certain principal shareholders, and their related interests.

The Bank is also subject to certain restrictions on

extensions of credit to executive officers, directors, certain principal shareholders, and their related interests.

Extensions of credit

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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

which was set to expire on January 1, 2024;

however, on December 15, 2023, the federal banking agencies again issued a revised interagency

statement extending the temporary relief from such enforcement which will expire the sooner of January 1, 2025, 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.

The Company’s principal

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law, the Bank may open branch offices throughout South Carolina with the prior approval of the S.C.

In addition, with prior

regulatory approval, the Bank is able to acquire existing banking operations in South Carolina.

Furthermore, federal legislation

permits interstate branching, including out-of-state acquisitions by bank holding companies, interstate branching by banks, and interstate

merging by banks.

The Dodd-Frank Act removes previous state law restrictions on de novo interstate branching in states such as South

This change permits out-of-state banks to open de novo branches in states where the laws of the state where the de novo branch

to be opened would permit a bank chartered by that state to open a de novo branch.

In addition, with prior regulatory

approval, the Bank is able to acquire existing banking operations in South Carolina.

Furthermore, federal legislation permits interstate

branching, including out-of-state acquisitions by bank holding companies, interstate branching by banks, and interstate merging by banks.

The Dodd-Frank Act removes previous state law restrictions on de novo interstate branching in states such as South Carolina.

permits out-of-state banks to open de novo branches in states where the laws of the state where the de novo branch to be opened would

permit a bank chartered by that state to open a de novo branch.

Community Reinvestment Act.

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.

The 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 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

Comptroller of the Currency (the “OCC”) issued a notice of proposed rulemaking intended to (i) clarify which activities qualify

for CRA credit;

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 Comptroller

of the Currency (the “OCC”) issued a notice of proposed rulemaking intended to (i) clarify which activities qualify for

(ii) update where activities count for CRA credit;

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CRA performance;

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.

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

in December 2021, replacing it with a rule based on the rules adopted jointly by the federal banking agencies in 1995, as amended.

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.” 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.

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

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

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

was later rescinded in December 2021, replacing it with a rule based on the rules adopted jointly by the federal banking agencies in

1995, as amended.

On 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.” 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.

The comment period closed on August 5, 2022.

On October 24, 2023, the OCC, the FDIC, and the Federal Reserve

issued the final rule to strengthen and modernize regulations implementing the CRA.

The final rule will take effect on April 1,

however, compliance with the majority of the final rule’s provisions will not be required until January 1, 2026, and the

data reporting requirements of the final rule will not take effect until January 1, 2027.

The final rules, among other things,

(i) applying four new performance tests to evaluate the CRA performance of large banks (assets of $2 billion or more):

Retail Lending Test, Retail Services and Products Test, Community Development Financing Test, and Community Development Services

(ii) retaining a strategic plan option, with modifications to reflect the new performance tests and updates to the approval

(iii) clarifying community development activities by updating the definition of community development, providing a

process by which banks may request confirmation that an activity is eligible for community development consideration, and providing

for a publicly available interagency illustrative list of qualifying community development activities;

(iv) updating delineation

requirements for facility-based assessment areas and establishing new retail lending assessment areas for certain large banks;

updating data collection, maintenance, and reporting requirements for large banks, tailoring those requirements

based on large bank asset size and leveraging existing data where possible, while not imposing new data collection and reporting

requirements for small and intermediate banks;

and (vi) continuing public file and public notice disclosure requirements and creating

a new public comment process to facilitate public engagement.

Management has and will continue to evaluate any changes to the CRA’s

regulations and their impact to the Bank.

Fair Lending Requirements.

subject to certain fair lending requirements and reporting obligations involving lending operations.

A number of laws and regulations

provide these fair lending requirements and reporting obligations, including, at the federal level, the Equal Credit Opportunity Act (“ECOA”),

We are subject

to certain fair lending requirements and reporting obligations involving lending operations.

A number of laws and regulations provide

these fair lending requirements and reporting obligations, including, at the federal level, the Equal Credit Opportunity Act (“ECOA”),

as amended by the Dodd-Frank Act, and Regulation B, as well as the Fair Housing Act (“FHA”) and regulations implementing the

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any appraisal(s) and valuation(s) prepared in connection with certain loans secured by dwellings.

FHA prohibits discrimination in all

aspects of residential real-estate related transactions based on prohibited factors, including race or color, national origin, religion,

sex, familial status, and handicap.

In January 2023, the OCC revised its

“Fair Lending” booklet of the Comptroller’s Handbook to incorporate clarified details and risk factors for a variety

of examination scenarios addressing fair lending and to update references to supervisory guidance, sound risk management practices, and

applicable legal standards.

While this OCC guidance does not apply to the Bank explicitly, it represents best practices guidance for the

FHA prohibits discrimination in all aspects of residential real-estate related transactions based on prohibited factors, including

race or color, national origin, religion, sex, familial status, and handicap.

In addition to prohibiting discrimination in credit

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Consumer Protection Regulations.

The activities of the Bank are subject to a variety of statutes and regulations designed to protect consumers.

This includes Title X of

the Dodd-Frank Act, which prohibits engaging in any unfair, deceptive, or abusive acts or practices (“UDAAP”).

involve detecting and assessing risks to consumers and to markets for consumer financial products and services.

Interest and other charges

collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates.

The loan operations

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 Home Mortgage Disclosure

Act and Regulation C, requiring financial institutions to provide information to enable the public and public officials to determine whether

a financial institution is fulfilling its obligation to help meet the housing needs of the communities they serve;

● ECOA and Regulation B, prohibiting

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 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

escrow accounts, and loss mitigation procedures;

● The Secure and Fair Enforcement for Mortgage Licensing

Act (“SAFE Act”) which mandates a nationwide licensing and registration system for residential mortgage loan originators.

The SAFE Act also prohibits individuals from engaging in the business of a residential mortgage loan originator without first obtaining

and maintaining annually registration as either a federal or state licensed mortgage loan originator;

● The Homeowners Protection Act, or the PMI Cancellation

Act, provides requirements relating to private mortgage insurance on residential mortgages, including the cancelation and termination

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

● 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

Act requires making home ownership available to eligible homeowners.

activities of the Bank are subject to a variety of statutes and regulations designed to protect consumers.

This includes Title X of the

Dodd-Frank Act, which prohibits engaging in any unfair, deceptive, or abusive acts or practices (“UDAAP”).

UDAAP claims involve

detecting and assessing risks to consumers and to markets for consumer financial products and services.

Interest and other charges collected

or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates.

The loan operations 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 Home Mortgage Disclosure Act and Regulation C, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the communities they serve;

ECOA and Regulation B, prohibiting 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 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 escrow accounts, and loss mitigation procedures;

The Secure and Fair Enforcement for Mortgage Licensing Act (“SAFE Act”) which mandates a nationwide licensing and registration system for residential mortgage loan originators.

The SAFE Act also prohibits

individuals from engaging in the business of a residential mortgage loan originator without first obtaining and maintaining annually registration as either a federal or state licensed mortgage loan originator;

The Homeowners Protection Act, or the PMI Cancellation Act, provides requirements relating to private mortgage insurance on residential mortgages, including the cancelation and termination 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;

Section 106(c)(5) of the Housing and Urban Development Act requires making home ownership available to eligible homeowners.

The deposit operations of the Bank are also subject

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 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 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.

In light of the growing concern by regulators about

relationships between chartered financial institutions and their third-party service providers, the FDIC joined the other federal supervisory

agencies in passing the Interagency Guidance on Third-Party Relationships:

Risk Management.

This new guidance provided risk management

oversight guidelines for financial institutions to incorporate in their ongoing relationships with third party vendors.

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

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

that impact nearly every aspect of the lifecycle of consumer financial products and services, including rules regarding residential mortgage

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.

As such, 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 CFPB has issued a number of significant rules that

impact nearly every aspect of the lifecycle of consumer financial products and services, including rules regarding residential mortgage

These rules implement Dodd-Frank Act amendments to ECOA, TILA and RESPA.

Among other things, the rules adopted by the CFPB require

(i) develop and implement procedures to ensure compliance with a “reasonable ability-to-repay” test;

(ii) implement

new or revised disclosures, policies and procedures for originating and servicing mortgages, including, but not limited to, pre-loan counseling,

early intervention with delinquent borrowers and specific loss mitigation procedures for loans secured by a borrower’s principal

residence, and mortgage origination disclosures, which integrate existing requirements under TILA and RESPA;

(iii) comply with additional

restrictions on mortgage loan originator hiring and compensation;

and (iv) comply with new disclosure requirements and standards

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 CFPB continued its scrutiny of so called “pay-to-pay”

and “junk fee” regimes, proposing rules related to credit card penalties.

Further, the CFPB proposed rulemaking related to

Residential Property Assessed Clean Entergy Financing, quality control standards for automated valuation models, and personal financial

data rights (discussed in more detail above).

The CFPB’s focus on fees was emphasized through its ongoing enforcement activity,

including a notable enforcement action taken against Bank of America that required the payment of more than $100 million to customers,

with similar size fines paid to both the CFPB and the OCC.

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

Financial institutions must maintain anti-money laundering programs that include established internal policies, procedures,

and controls;

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

Treasury, is responsible for helping to insure that U.S.

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

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 Act .

Financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls;

a designated compliance officer;

an ongoing employee training program;

and testing of the program by an independent audit

The program must comply with the anti-money laundering provisions of the Bank Secrecy Act (“BSA”).

The Company and

the Bank are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards

for due diligence and “knowing your customer” in their dealings with foreign financial institutions, foreign customers, and

other high risk customers.

Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to

guard against money laundering and to report any suspicious transactions, and certain laws provide law enforcement authorities with increased

and testing of the program by an independent audit function.

program must comply with the anti-money laundering provisions of the Bank Secrecy Act (“BSA”).

The Company and the Bank are

also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due

diligence and “knowing your customer” in their dealings with foreign financial institutions, foreign customers, and other

high risk customers.

Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard

against money laundering and to report any suspicious transactions, and certain laws provide law enforcement authorities with increased

access to financial information maintained by banks.

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requirements.

The USA PATRIOT Act amended the Bank Secrecy Act

and provides, in part, for the facilitation of information sharing among governmental entities and financial institutions for the purpose

The USA PATRIOT Act amended the Bank Secrecy Act and

provides, in part, for the facilitation of information sharing among governmental entities and financial institutions for the purpose

of combating terrorism and money laundering by enhancing anti-money laundering and financial transparency laws, as well as enhanced information

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Notably, changes

● expansion of coordination and information sharing

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

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.

expansion of coordination and information sharing 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.

In August 2023, the FFIEC revised and updated the examination

procedures in the FFIEC’s Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual to provide greater transparency into

the examination process and support risk-based examination work.

The FFIEC, OCC, and the FDIC also continued their emphasis on the importance

of oversight of third-party vendors in the BSA/AML process through updated guidance, as well as continued examine and enforcement activity

against financial institutions who failed to properly supervise their third-party service providers’ BSA/AML activity.

Following the enactment of the Anti-Money Laundering

Act of 2020, FinCEN began publishing rules pursuant to the Corporate Transparency Act which establishes a regime for many corporate entities

to file a form with FinCEN disclosing their beneficial owners.

The first of these rules, the “Reporting Rule,” sets forth

which entities are required to disclose their beneficial ownership information to FinCEN and the date for compliance.

Companies that qualify

as either a “domestic reporting company” or a “foreign reporting company” must file with FinCEN unless one of

the 23 exemptions (such as the exemptions for select banks and credit unions) apply.

Following Russia’s invasion of Ukraine, OFAC

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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.

Increased FinCEN scrutiny and sanctions against Russian entities continued in 2023.

The Financial

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

In October 2023, FATF removed Albania,

Cayman Islands, Jordan, and Panama from its lists of Jurisdictions under Increased Monitoring and added Bulgaria.

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,

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Privacy, Data Security and Credit Reporting.

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

breach under applicable state laws.

Multiple states and Congress are considering laws or regulations which could create new individual

privacy rights and impose increased obligations on companies handling personal data.

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 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.

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

Consumers must be notified in the event of a data breach

under applicable state laws.

Multiple states and Congress are considering laws or regulations which could create new individual privacy

rights and impose increased obligations on companies handling personal data.

For example, on November 18, 2021, the federal financial

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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

Credit Transactions Act of 2003 (the “FACT Act”) and the implementing regulations of the federal banking agencies and Federal

Trade Commission, the Bank is required to have in place an “identity theft red flags” program to detect, prevent and mitigate

identity theft.

The Bank has implemented an identity theft red flags program designed to meet the requirements of the FACT Act and the

joint final rules.

Additionally, the FACT Act amends the Fair Credit Reporting Act to generally prohibit a person from using information

received from an affiliate to make a solicitation for marketing purposes to a consumer, unless the consumer is given notice and a reasonable

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

9, 2022, the Federal Trade Commission’s amendments to GLBA’s

Safeguards Rule went into effect and financial institutions are

continuing to implement this rule including its ongoing monitoring and risk assessment protocols.

In February 2023, Congress introduced a new bill which

would expand personal information protections that currently apply to customers and expand the notice requirements that apply to the collection

of individual data.

Under the bill, financial institutions must (1) inform individuals for what purpose their data is collected and how

the data will be used, and (2) give individuals the opportunity to opt out of data collection.

An individual may also end the sharing

of the individual’s data with third parties, as well as demand the deletion of the individual’s data.

While this bill has

not been passed yet, it demonstrates ongoing activity in Congress and a desire to pass more stringent privacy laws.

In 2023 alone, at

least six bills related to consumer privacy were introduced in Congress.

At the state level, seven additional states passed some form

of consumer privacy protection laws, only some of which include an exemption for entities regulated under GLBA.

The CFPB also took additional action related to consumer

privacy, At the beginning of the year, the CFPB issued a request for information about data brokers and invited public comment in order

to understand brokers’ data collection practices and the commercial uses of personal data.

The CFPB also began rulemaking to implement

section 1033 of the Consumer Financial Protection Act of 2010 (CFPA).

CFPA section 1033 provides that, subject to rules prescribed by

the CFPB, a covered entity (for example, a bank) must make available to consumers, upon request, transaction data and other information

concerning a consumer financial product or service that the consumer obtained from the covered entity.

In addition, pursuant to the Fair and Accurate Credit

Transactions Act of 2003 (the “FACT Act”) and the implementing regulations of the federal banking agencies and Federal Trade

Commission, the Bank is required to have in place an “identity theft red flags” program to detect, prevent and mitigate identity

The Bank has implemented an identity theft red flags program designed to meet the requirements of the FACT Act and the joint final

Additionally, the FACT Act amends the Fair Credit Reporting Act to generally prohibit a person from using information received

from an affiliate to make a solicitation for marketing purposes to a consumer, unless the consumer is given notice and a reasonable opportunity

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

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.

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.

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.

It is funded 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

All advances 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.

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

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%.

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, 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%.

Throughout 2023, the target

federal funds rate increased to 5.50%.

Incentive Compensation.

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

In addition 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 risk-taking.

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 and reward;

(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 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.

and (iii) be supported by strong corporate governance,

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

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

In 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.

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

traded companies.

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,

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.

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.

The final rules directed 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.

As of December 1, 2023, the final clawback rules from The NASDAQ Stock Market were effective.

The Company’s updated clawback policies were effective November 21, 2023.

Concentrations in Commercial Real Estate .

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

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.

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 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.

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

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

Based on the Bank’s loan portfolio

as of December 31, 2023, 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