What changed in this filing

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Item 1. Business

2025-03-03 compared with 2024-03-05 · 762 added, 583 removed, 951 unchanged (59% of the section changed)

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in, Georgia and is the world headquarters of corporations such as

Coca-Cola, Home Depot, UPS, Delta Airlines

and Turner Broadcasting.

Coca-Cola, Home Depot, UPS, Delta Airlines and Turner

Broadcasting.

The median household income for the Atlanta-Sandy Springs-Alpharetta MSA is $86,505 for 2023.

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Arthur Seaver, Jr., Calvin C.

Andrew Borrmann,

Aiken, and Silvia T.

King, and whose biographies are included below.

These executives lead a team of 28 additional senior team

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

Hurst, Christian J.

Zych, William M.

Aiken, Silvia T.

King, and Julie A.

Fairchild, and whose biographies are included below.

These executives lead a team

of 28 additional senior team members which we believe compares favorably to any community bank management team assembled in South Carolina.

Arthur “Art” Seaver, Jr .

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

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.

Zych has served as Chief Financial

Officer of our Company and our Bank since May 2024.

He has 30 years of experience in the banking industry.

Zych is a highly accomplished

leader with a proven track record of financial management and analysis, formulation and execution of corporate and financial strategy,

and investor relations management.

Zych holds a Master of Business Administration from Wake Forest University School of Business and

a bachelor’s degree in finance from Bentley University.

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.

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

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

Fairchild has served as Chief Accounting

Officer and principal accounting officer of our Company and our Bank since October 2024.

Fairchild joined the bank in 2005, serving

in various roles, most recently as Executive Vice President of Accounting and Finance.

Prior to joining the Bank, Ms.

Fairchild served

as audit manager for Elliott Davis LLC, a regional public accounting and consulting firm.

Fairchild holds a Bachelor of Science degree

in accounting from Bob Jones University and is a certified public accountant in the State of South Carolina.

In addition to Messrs.

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.

Seaver, Hurst, Zych, Aiken,

King and Fairchild, our executive management team consists of 14 individuals who bring an average of 30 years of experience in the

banking industry.

The management team is complemented by our dedicated

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We believe that our management’s and board’s incentives are closely aligned with our shareholders

through the ownership of a substantial amount of our stock.

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.

ownership of a substantial amount of our stock.

of December 31, 2024, our executive officers and board of directors owned an aggregate of 643,642 shares of our common stock, including

options to purchase shares of our common stock, which represented approximately 7.93% of the fully-diluted amount of our common stock

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

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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.

In addition, each week is started with a meeting of all 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.

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Our management team continually analyzes emerging fraud and security risks

and utilizes tools, strategies and policies to manage risk while delivering an optimal and appropriate client experience.

We believe our

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

that our personnel are following prudent

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

and utilizes tools,

strategies and policies to manage risk while delivering

an optimal and appropriate client experience.

We believe our risk management structure allows our board and senior management to maintain

effective oversight of our risks to ensure that our personnel are following prudent and appropriate risk management practices resulting

in strong loan quality and minimal credit losses.

Attract Talented Banking Professionals With A

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relationship banking approach will continue to help us attract these established bankers.

In recent years, we have invested in our internal

infrastructure, including support and back office personnel, and we believe that we can continue to add experienced frontline bankers

to our existing markets, which will drive our efficient growth.

We have carefully invested in our internal infrastructure,

including support and back office personnel, and we believe that we can continue to add experienced frontline bankers to our existing

markets, which will drive our efficient growth.

We will continue to expand our franchise, but only

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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,

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.

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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

· Commercial Real Estate Loans (Commercial Owner

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

At December 31, 2024, commercial owner occupied and non-owner occupied

real estate loans (other than construction loans) amounted to $1.58 billion, or 43.4% of our loan portfolio.

Of our commercial real estate

loan portfolio, $924.4 million in loans were non-owner occupied properties, representing 41.4% of our commercial loan portfolio and 25.5%

of our total loan portfolio.

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.

The remainder of our commercial real estate loan portfolio, $651.6 million in loans or 29.2% of the commercial

loan portfolio, were owner occupied.

Owner occupied loans represented 17.9% of our total loan portfolio.

At December 31, 2024, our individual

commercial real estate loans ranged in size from approximately $15,000 to $21.0 million, with an average loan size of approximately $871,000.

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

We also generally require that a borrower’s cash flow exceeds 115% of monthly debt service obligations.

As of December 31,

2024, $214.0 million, or 5.9% of our total loan portfolio, was collateralized by office properties, $170.6 million, or 4.7%, was collateralized

by retail properties, $125.6 million, or 3.5%, was collateralized by hotels, and $96.7 million, or 2.7% was collateralized by multifamily

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

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

· Construction Real Estate Loans.

We offer adjustable and fixed rate construction real estate loans for commercial and consumer projects, typically to builders and developers and to consumers who wish to build their own homes.

At December 31, 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.

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, 2024, total commercial and consumer construction loans amounted to $124.1 million,

or 3.4% of our loan portfolio.

Commercial construction loans represented $103.2 million, or 2.8%, of our total loan portfolio, while consumer

construction loans represented $20.9 million, or 0.6% of our total loan portfolio.

At December 31, 2024, our commercial construction real

estate loans ranged in size from approximately $3,000 to $13.9 million, with an average loan balance of approximately $2.2 million.

December 31, 2024, our consumer or residential construction loans ranged in size from approximately $8,000 to $3.1 million, with an average

loan size of approximately $580,000.

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, 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.

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

service areas.

At December 31, 2024, commercial business loans amounted to $556.1 million, or 15.3% of our loan portfolio, and ranged

in size from approximately $1,000 to $21.0 million, with an average loan size of approximately $287,000.

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

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, 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.

Government guarantees of

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

As of December 31, 2024, we had originated ten loans utilizing

government enhancements and over 35 loans engaged in state-based small business partnerships.

· Consumer Real Estate Loans

and Home Equity Loans.

At December 31, 2024 consumer real estate loans (other than construction loans) amounted to $1.33 billion,

or 36.7% of our loan portfolio.

Included in the consumer real estate loans was $1.13 billion, or 31.1% of our loan portfolio, in first

and second mortgages on individuals’ homes, while home equity loans represented $204.9 million, or 5.6% of our total loan portfolio.

At December 31, 2024, our individual residential real estate loans ranged in size from $5,000 to $5.3 million, with an average loan size

of approximately $469,000.

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, 2024, our individual

home equity lines of credit ranged in size from $1,000 to $1.8 million, with an average of approximately $93,000.

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.

lines of credit typically have terms of ten years or less.

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

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

· Other Consumer Loans.

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

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, 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.

At December 31, 2024,

consumer loans other than real estate amounted to $42.1 million, or 1.2% of our loan portfolio, and ranged in size from $1,000 to $17.1

million, with an average loan size of approximately $33,000.

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.

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

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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

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.

We also receive ATM transaction fees from transactions performed by our non-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 also offer purchasing cards to our business clients which are designed for business expenses and procurement

The banking business is highly competitive, and we

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market data is available, there were 40 financial institutions in our primary market of Greenville County, 27 financial institutions in

the Columbia market, 35 financial institutions in the Charleston market, 36 financial institutions in the Raleigh market, 24 financial

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.

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.

the Columbia market, 36 financial institutions in the Charleston and Raleigh markets, 25 financial institutions in the Greensboro market,

50 financial institutions in the Charlotte market, and 81 financial institutions in the Atlanta market.

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

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

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

be accessed free of charge.

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

into, this Annual Report on Form 10-K.

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

at the SEC’s website at www.sec.gov .

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

can also be accessed free of charge.

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

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

SUPERVISION AND REGULATION

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Legislative and Regulatory Developments

Although the 2008 financial crisis has now passed,

two legislative and regulatory responses – the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank

Act”) and the Basel III-based capital rules – will continue to have an impact on our operations.

Two legislative and regulatory responses to the 2008

financial crisis – the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the Basel

III-based capital rules –continue to have an impact on our operations.

In addition, newer regulatory developments implemented

in response to the COVID-19 pandemic, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and

the Consolidated Appropriations Act, 2021, which enhanced and expanded certain provisions of the CARES Act, have had and will continue

to have an impact on our operations.

in response to the COVID-19 pandemic and the bank failures in 2023 will continue to have an impact on our operations.

The Dodd-Frank Wall Street Reform and Consumer Protection

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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,

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 lenders, and

Limiting banks’ proprietary trading activities.

· 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 lenders, and

· Limiting banks’ proprietary

trading activities.

There are many provisions in the Dodd-Frank Act mandating

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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.

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 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).

· 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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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%;

a total risk-based capital ratio of 8%;

· a common equity Tier 1 (“CET1”)

risk-based capital ratio of 4.5%;

· a Tier 1 risk-based capital ratio

· a total risk-based capital ratio

· a leverage ratio of 4%.

Under Basel III, Tier 1 capital includes two components:

Under Basel III, Tier 1 capital includes two

CET1 capital and additional Tier 1 capital.

The highest form of capital, CET1 capital, consists solely of common stock (plus related surplus),

retained earnings, accumulated other comprehensive income, otherwise referred to as AOCI, and limited amounts of minority interests that

are in the form of common stock.

Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock, Tier 1 minority

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

Tier 2 capital generally includes the allowance for credit

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

any deductions in Tier 2 instruments of an unconsolidated financial institution.

Cumulative perpetual preferred stock is included only

in Tier 2 capital, except that the Basel III rules permit bank holding companies with less than $15 billion in total consolidated assets

to continue to include trust preferred securities and cumulative perpetual preferred stock issued before May 19, 2010 in Tier 1 Capital

(but not in CET1 capital), subject to certain restrictions.

AOCI is presumptively included in CET1 capital and often would operate to

reduce this category of capital.

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

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

The highest form of capital, CET1 capital, consists solely of common stock (plus

related surplus), retained earnings, accumulated other comprehensive income, otherwise referred to as AOCI, and limited amounts of minority

interests that are in the form of common stock.

Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred

stock, Tier 1 minority interests and grandfathered trust preferred securities (as discussed below).

Tier 2 capital generally includes

the allowance for credit losses up to 1.25% of risk-weighted assets, qualifying preferred stock, subordinated debt and qualifying tier

2 minority interests, less any deductions in Tier 2 instruments of an unconsolidated financial institution.

Cumulative perpetual preferred

stock is included only in Tier 2 capital, except that the Basel III rules permit bank holding companies with less than $15 billion in

total consolidated assets to continue to include trust preferred securities and cumulative perpetual preferred stock issued before May

19, 2010 in Tier 1 Capital (but not in CET1 capital), subject to certain restrictions.

AOCI is presumptively included in CET1 capital

and often would operate to reduce this category of capital.

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

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

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

Recent regulatory developments have introduced uncertainty

regarding the implementation of the Basel III Endgame rules.

Changes in leadership and evolving policy priorities within regulatory agencies

have led to speculation about potential delays or modifications to the final rulemaking process.

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

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

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.

On September 17, 2024, the FDIC approved a final Statement

of Policy on Bank Merger Transactions, updating its approach to evaluating bank mergers under the Bank Merger Act.

The new policy emphasizes

a principles-based

evaluation, focusing on factors such as the effect

of the transaction on competition, financial stability, and the convenience and needs of the community to be served.

The OCC concurrently

approved a final rule updating its regulations for business combinations involving national banks and federal savings associations, including

a policy statement summarizing the principles used during its review of Bank Merger Act applications.

Importantly, the Federal Reserve

did not join with the FDIC and the OCC in this updated guidance.

Additionally, the DOJ announced its withdrawal from the 1995 Bank Merger

Competitive Review Guidelines, indicating that it would apply its 2023 Merger Guidelines to the banking industry.

These developments

reflect a heightened regulatory focus on bank mergers, with an emphasis on maintaining competition, ensuring financial stability, and

addressing community needs.

However, given the shift in administration under President Trump, regulatory priorities may change.

institutions considering mergers or acquisitions should monitor potential regulatory shifts under the new administration, as changes in

policy priorities may impact the level of scrutiny and the application of existing regulatory frameworks.

Proposed Legislation and Regulatory Action

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to the Company or the Bank could have a material effect on the business of the Company.

On October 2, 2024, the FDIC released a notice of proposed

rulemaking to strengthen recordkeeping requirements for certain types of custodial accounts.

Under the proposed rule, FDIC-insured banks

holding certain custodial accounts, as defined in the proposal, would be required to take certain steps to ensure accurate account records

are maintained in order to determine the individual owner of the funds, including a requirement to reconcile the account for each individual

owner on a daily basis.

These requirements, as well as others, apply if the bank uses a third party to maintain records.

The FDIC extended

the comment period to January 16, 2025.

It is unclear how President Trump’s administration will approach proposals under the previous

administration.

Southern First Bancshares, Inc.

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of any company engaged in, the following activities:

banking or managing or controlling banks;

furnishing services to or performing services for our subsidiaries;

any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking.

· banking or managing or controlling

· 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

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· factoring accounts receivable;

making, acquiring, brokering or servicing loans and usual related activities;

· making, acquiring, brokering

or servicing loans and usual related activities;

· leasing personal or real property;

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;

financial and investment advisory activities;

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;

performing selected insurance underwriting activities.

· financial and investment advisory

· 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;

· performing selected insurance

underwriting activities.

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

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

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

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

The final rule established four categories of

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

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

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

without falling outside of the presumption of noncontrol.

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

management interlocks, business relationship and restrictive contractual covenants.

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

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

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

Reserve’s standards for determining whether one company has control over another establish four categories of tiered presumptions

of noncontrol that are based on the percentage of voting shares held by the investor (less than 5%, 5-9.9%, 10-14.9% and 15-24.9%) and

the presence of other indicia of control.

As the percentage of ownership increases, fewer indicia of control are permitted without falling

outside of the presumption of noncontrol.

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

interlocks, business relationship and restrictive contractual covenants.

Under the standards, investors can hold up to 24.9% of the voting

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

State laws generally, including

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

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

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by the state bank regulator as well.

In August 2024, the FDIC proposed amendments to its

regulations implementing the Change in Bank Control Act.

The proposed rule aims to remove certain existing exemptions and seeks public

comment on the FDIC’s overall approach to changes in control affecting FDIC-supervised institutions.

If adopted, these amendments

could result in more transactions being subject to the Change in Bank Control Act notice requirements and FDIC review.

Source of Strength .

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

have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails

have been necessary) to bring the institution

into compliance with all applicable capital standards as of the time the institution fails

to comply with such capital restoration plan.

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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

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.

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

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to obtain the approval of the S.C.

Board prior to acquiring the capital stock of a national bank, but we must notify them at least 15

days prior to doing so.

Board prior to acquiring

the capital stock of a national bank, but we must notify

them at least 15 days prior to doing so.

We must receive the S.C.

Board’s approval prior to engaging in the acquisition of a South Carolina state

chartered bank or another South Carolina bank holding company.

Board’s approval prior to engaging in the acquisition of a South

Carolina state chartered bank or another South Carolina bank holding company.

Southern First Bank

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· security devices and procedures;

adequacy of capitalization and loss reserves;

· adequacy of capitalization and

loss reserves;

· investments;

· borrowings;

· issuances of securities;

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· interest rates payable on deposits;

interest rates or fees chargeable on loans;

· interest rates or fees chargeable

· establishment of branches;

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· maintenance of books and records;

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

· adequacy of staff training to

carry on safe lending and deposit gathering practices.

These agencies, and the federal and state laws applicable

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· internal controls;

information systems and audit systems;

· information systems and audit

· loan documentation;

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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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capital category (other than critically undercapitalized) and require the submission of a plan to correct the unsafe or unsound condition.

If a bank is not well capitalized, it cannot accept

brokered deposits without prior regulatory approval.

Even if approved, rate restrictions will govern the rate a bank may pay on brokered

In addition, a bank that is not well capitalized cannot offer an effective yield in excess of 75 basis points over interest

paid on deposits of comparable size and maturity in such institution’s normal market area for deposits accepted from within its

normal market area, or national rate paid on deposits of comparable size and maturity for deposits accepted outside the bank’s normal

Moreover, the FDIC generally prohibits a depository institution from making any capital distributions (including payment

of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be categorized

as undercapitalized.

Undercapitalized institutions are subject to growth limitations (an undercapitalized institution may not acquire

another institution, establish additional branch offices or engage in any new line of business unless determined by the appropriate federal

banking agency to be consistent with an accepted capital restoration plan, or unless the FDIC determines that the proposed action will

further the purpose of prompt corrective action) and are required to submit a capital restoration plan.

The agencies may not accept a

capital restoration plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed

in restoring the depository institution’s capital.

In addition, for a capital restoration plan to be acceptable, the depository

institution’s parent holding company must guarantee that the institution will comply with the capital restoration plan.

The aggregate

liability of the parent holding company is limited to the lesser of an amount equal to 5.0% of the depository institution’s total

assets at the time it became categorized as undercapitalized or the amount that is necessary (or would have been necessary) to bring the

institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with

If a depository institution fails to submit an acceptable plan, it is categorized as significantly undercapitalized.

If a bank is not well

capitalized, it cannot accept brokered deposits without prior regulatory approval.

Even if approved, rate restrictions will govern

the rate a bank may pay on brokered deposits.

In addition, a bank that is not well capitalized cannot offer an effective yield in

excess of 75 basis points over interest paid on deposits of comparable size and maturity in such institution’s normal market

area for deposits accepted from within its normal market area, or national rate paid on deposits of comparable size and maturity for

deposits accepted outside the bank’s normal market area.

Moreover, the FDIC generally prohibits a depository institution from

making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the

depository institution would thereafter be categorized as undercapitalized.

Undercapitalized institutions are subject to growth

limitations (an undercapitalized institution may not acquire another institution, establish additional branch offices or engage in

any new line of business unless determined by the appropriate federal banking agency to be consistent with an accepted capital

restoration plan, or unless the FDIC determines that the proposed action will further the purpose of prompt corrective action) and

are required to submit a capital restoration plan.

The agencies may not accept a capital restoration plan without determining, among

other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository

institution’s capital.

In addition, for a capital restoration plan to be acceptable, the depository institution’s parent

holding company must guarantee that the institution will comply with the capital restoration plan.

The aggregate liability of the

parent holding company is limited to the lesser of an amount equal to 5.0% of the depository institution’s total assets at the

time it became categorized as undercapitalized or the amount that is necessary (or would have been necessary) to bring the

institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply

with the plan.

If a depository institution fails to submit an acceptable plan, it is categorized as significantly

undercapitalized.

Significantly undercapitalized categorized depository

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Standards for Safety and Soundness.

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

FDIA 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;

loan documentation;

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.

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.

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.

The FDIC requested comments on a proposal that would amend

the regulations implementing section 29 of the Federal Deposit Insurance Act.

Section 29 contains brokered deposits restrictions that

apply to less than well capitalized depository institutions.

The proposed changes include:

(i) modifying the definition of “deposit

(ii) eliminating the exclusive deposit placement arrangement exception;

and (ii) revising the interpretation of the primary

purpose exception to consider a third party’s intent in placing customer funds at a particular insured depository institution.

FDIC extended the comment-period, which concluded on November 21, 2024.

Insurance of Accounts and Regulation by the FDIC.

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The Dodd-Frank Act permanently

increased the maximum amount of deposit

insurance for banks to $250,000 per account.

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

As insurer, the FDIC imposes deposit insurance premiums

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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, 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.

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

As of March 2025, no

further special assessments have been imposed.

The FDIC may terminate the deposit insurance of any

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with nonaffiliated companies.

If there are no comparable transactions, a bank’s (or one of its subsidiaries’) affiliate transaction

must be on terms and under circumstances, including credit standards, that in good faith would be offered to, or would apply to, nonaffiliated

These requirements apply to all transactions subject to Section 23A as well as to certain other transactions.

no comparable transactions, a bank’s (or one

of its subsidiaries’) affiliate transaction must be on terms and under circumstances, including credit standards, that in good faith

would be offered to, or would apply to, nonaffiliated companies.

These requirements apply to all transactions subject to Section 23A as

well as to certain other transactions.

The affiliates of a bank include any holding company

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

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

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 federal banking agencies have extended the temporary

relief from enforcement actions related to Regulation O multiple times, most recently on December 27, 2024.

The relief, which applies

to banks and asset managers that become principal stockholders of banks, will now expire on the earlier of January 1, 2026, or the effective

date of a final Federal Reserve rule revising Regulation O.

This extension allows additional time for regulators to address the treatment

of bank credit extensions to complex-controlled portfolio companies that qualify as insiders.

Financial institutions and asset managers

should continue monitoring updates, as a final rule could impact the relief before its expiration.

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 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.

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 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.

Reinvestment Act.

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 February 27, 2025, the date of the most recent examination report, the Bank received a Satisfactory

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

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

(ii) update where activities count for CRA credit;

(iii) create a more transparent and objective method for measuring

CRA performance;

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.

(iii) create a more transparent and objective method for measuring CRA performance;

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

Federal Reserve did not join the proposed rulemaking.

In January 2025, the OCC, FDIC, and Federal Reserve issued additional

guidance clarifying that digital and fintech-driven

activities may be eligible for CRA credit provided they meet established criteria.

This guidance reflects efforts to modernize CRA evaluations

in light of evolving banking practices.

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,

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.

as amended and superseded by an updated joint framework.

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.

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 took effect on April 1, 2024;

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, include:

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

the Retail Lending Test, Retail

Services and Products Test, Community Development Financing Test, and Community Development Services Test;

(ii) retaining a strategic

plan option, with modifications to reflect the new performance tests and updates to the approval standards;

(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;

(v) 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.

Several banking industry groups filed a lawsuit

seeking to invalidate the CRA final rule, in which they argued that the federal banking agencies exceeded their statutory authority in

adopting the CRA final rule.

In March 2024, a federal judge granted an injunction to extend the CRA final rule’s effective date,

originally set for April 1, 2024.

The effective date will be extended each day the injunction remains in place, pending the resolution

of the lawsuit.

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

Fair Lending Requirements.

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a disparate treatment of or have a disparate impact on a protected class of persons.

If a pattern or practice of lending discrimination

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

In December 2012, the DOJ and CFPB

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

generally committed to strengthen their coordination efforts.

In June 2024, the CFPB released its 2023 Fair Lending

Annual Report to Congress, reporting that it took action against Citibank for intentional, illegal discrimination against Armenian Americans

applying for credit cards.

The CFPB also identified significant issues around institutions failing to report demographic information required

under the Home Mortgage Disclosure Act (HMDA).

If a pattern or practice of lending discrimination is alleged by a regulator, then the

matter may be referred by the agency to the DOJ for investigation.

In December 2012, the DOJ and CFPB entered into a Memorandum of Understanding

under which the agencies have agreed to share information, coordinate investigations, and have generally committed to strengthen their

coordination efforts.

In addition to substantive penalties and corrective

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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 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 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

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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.

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 broad authority to regulate the offering and provision of consumer financial products and services.

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

federal consumer laws.

The authority to supervise and examine depository institutions with $10 billion or less in assets, such as

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

However, the CFPB may

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

against such institutions to their primary regulators.

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

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

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.

On July 18, 2024 regulators, including the CFPB, issued

interagency guidance on reconsideration of value (ROVs) of residential real estate transactions.

The CFPB continued its scrutiny of so

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

In March 2024, the

CFPB finalized a rule that addresses late fees charged by card issuers that together with their affiliates have one million or more open

credit card accounts.

Further, the CFPB proposed rulemaking related to Residential Property Assessed Clean Energy 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.

In February 2025, President Trump took significant

actions affecting the CFPB.

He dismissed Director Rohit Chopra and appointed Treasury Secretary Scott Bessent as Acting Director.

Subsequently,

Office of Management and Budget Director Russell Vought was named Acting Director, during which time the CFPB’s operations were

halted, its headquarters closed, and its employees instructed to cease work.

These moves have been met with legal challenges and public

debate regarding the future of the agency.

The Office of Foreign Assets Control.

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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.

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

The Bank has appointed an OFAC compliance officer to oversee

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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 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.

Financial institutions must comply with requirements regarding risk-based procedures

for conducing ongoing customer due diligence, which requires the institutions to take appropriate steps to understand the nature and purpose

of customer relationships and identify and verify the identity of the beneficial owners of legal entity customers.

Anti-money laundering obligations have been substantially

strengthened as a result of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism

Act (which we refer to as the “USA PATRIOT Act”).

Bank regulators routinely examine institutions for compliance with these

obligations and are required to consider compliance in connection with the regulatory review of applications.

The regulatory authorities

have been active in imposing cease and desist orders and money penalty sanctions against institutions that have not complied with these

requirements.

Anti-Money Laundering and Countering the Financing

of Terrorism (AML/CFT);

the USA PATRIOT Act;

the Office of Foreign Asset Control.

Financial institutions must maintain AML/CFT

programs, including internal policies, compliance officers, training, and independent audits, in accordance with the Bank Secrecy Act

(“BSA”) and other federal laws.

They must adhere to know your customer and enhanced due diligence requirements, particularly

for high-risk customers and foreign institutions, to prevent money laundering and terrorism financing.

Institutions must also report suspicious

activities to law enforcement and ensure compliance with risk-based customer due diligence procedures.

The USA PATRIOT Act amended the

BSA to enhance financial transparency and information-sharing between institutions, regulators, and law enforcement.

It mandates customer

identification programs, increased due diligence for non-U.S.

persons, and stricter reporting of transactions over $10,000 to FinCEN.

Financial institutions must also monitor and report transactions involving individuals or entities suspected of terrorist financing.

actively enforce compliance, imposing penalties on institutions failing to meet AML/CFT obligations.

The USA PATRIOT Act amended the Bank Secrecy Act and

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

collection tools and enforcement mechanics for the U.S.

collection tools and

enforcement mechanics for the U.S.

government, including:

(i) requiring standards for verifying customer identification

at account opening;

(ii) rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying

parties that may be involved in terrorism or money laundering;

(iii) reports by nonfinancial trades and businesses filed with the U.S.

Treasury Department’s Financial Crimes Enforcement Network for transactions exceeding $10,000;

(iv) filing suspicious activities

reports if a bank believes a customer may be violating U.S.

(i) requiring standards for verifying customer identification at account opening;

(ii) rules to promote cooperation among financial institutions,

regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering;

(iii) reports by

nonfinancial trades and businesses filed with the U.S.

Treasury Department’s Financial Crimes Enforcement Network for transactions

exceeding $10,000;

(iv) filing suspicious activities reports if a bank believes a customer may be violating U.S.

laws and regulations;

and (v) requires enhanced due diligence requirements

for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S.

Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection

with the regulatory review of applications.

and (v) requires enhanced due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts

or correspondent accounts for non-U.S.

Bank regulators routinely examine institutions for compliance with these obligations and

are required to consider compliance in connection with the regulatory review of applications.

Under the USA PATRIOT Act, the regulators can provide

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activity report and contact the applicable governmental authorities.

On January 1, 2021, Congress overrode former President

Trump’s veto and thereby enacted the National Defense Authorization Act for Fiscal Year 2021 (“NDAA”).

The NDAA provides

for one of the most significant overhauls of the BSA and related anti-money laundering laws since the USA Patriot Act.

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 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.

The Office of Foreign Assets Control (“OFAC”),

which is a division of the U.S.

Department of the Treasury (the “Treasury”), is responsible for helping to ensure that United

States entities do not engage in transactions with “enemies” of the United States, as defined by various Executive Orders

and Acts of Congress.

OFAC publishes lists of names of persons and organizations with which the Bank is prohibited from engaging in business.

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.

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.

In August 2023, the FFIEC updated its BSA/AML Examination

Manual to clarify risk-based compliance expectations.

The FDIC emphasizes oversight of third-party AML/CFT service providers, with enforcement

actions against institutions that fail to monitor vendors effectively.

The Anti-Money Laundering Act of 2020 led to FinCEN’s

Corporate Transparency Act (“CTA”), requiring many corporate entities to disclose beneficial ownership information.

rulings deeming the CTA unconstitutional, creating uncertainty regarding its future enforcement.

However, on February 18, 2025, a federal

judge lifted this previous nationwide injunction that had blocked the enforcement of the CTA.

In response, FinCEN announced that reporting

companies are now required to comply with the CTA’s beneficial ownership information reporting requirements.

To provide entities

additional time to meet these obligations, FinCEN has extended the filing deadline to March 21, 2025.

FinCEN also indicated plans to assess

options for further modifying deadlines and intends to initiate a process to revise the BOI reporting rule to reduce burdens for lower-risk

entities, including many U.S.

small businesses.

Following Russia’s invasion of Ukraine, OFAC

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

February 2022 including:

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

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

(ii) correspondent or payable-through

account and payment processing prohibitions on certain Russian financial institutions;

(iii) the blocking of certain Russian financial

institutions;

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

(v) prohibitions related to

new debt and equity for certain Russian entities;

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

including the Central Bank of the Russian Federation.

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

Russian Sanctions Evasion Attempts.

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,

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

If the Bank finds any relationships or transactions,

it must file a suspicious activity report and contact FinCEN.

imposed extensive sanctions under Executive Order 14024, including restrictions on Russian financial institutions, expanded sovereign

debt prohibitions, and increased scrutiny of sanctions evasion.

FinCEN issued an alert in March 2022, advising heightened vigilance.

enforcement continued through 2023 and 2024.

Globally, the Financial Action Task Force (“FATF”) updates its high-risk jurisdiction

lists, affecting due diligence requirements for international transactions.

In October 2023, FATF removed Albania, Cayman Islands, Jordan,

and Panama from its monitoring list and added Bulgaria.

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 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.

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

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for significant cybersecurity incidents.

Specifically, the final rule requires banking organizations to notify their primary federal regulator

as soon as possible and no later than 36 hours after the discovery of a “computer-security incident” that rises to the level

of a “notification incident” within the meaning attributed to those terms by the final rule.

Banks’ service providers

are required under the final rule to notify any affected bank to or on behalf of which the service provider provides services “as

soon as possible” after determining that it has experienced an incident that materially disrupts or degrades, or is reasonably likely

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

The final rule took effect on April

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

Effective December

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

Safeguards Rule went into effect 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.

Specifically, the final rule requires banking organizations to notify their primary

federal regulator as soon as possible and no later

than 36 hours after the discovery of a “computer-security incident” that rises to the level of a “notification incident”

within the meaning attributed to those terms by the final rule.

Banks’ service providers are required under the final rule to notify

any affected bank to or on behalf of which the service provider provides services “as soon as possible” after determining

that it has experienced an incident that materially disrupts or degrades, or is reasonably likely to materially disrupt or degrade, covered

services provided to such bank for as much as four hours.

The final rule took effect on April 1, 2022 and banks and their service providers

must have complied with the requirements of the rule by May 1, 2022.

Effective December 9, 2022, the Federal Trade Commission’s

amendments to GLBA’s Safeguards Rule went into effect and financial institutions are continuing to implement this rule including

its ongoing monitoring and risk assessment protocols.

States continue to take the lead in passing privacy

focused legislation.

Nine additional states passed some form of consumer privacy protection laws, only some of which include an exemption

for entities regulated under GLBA.

Congress has proposed significant privacy focused legislation largely targeting technology companies,

however, to date, none of these laws have been passed.

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 October 2024, the CFPB issued a final rule implementing Section 1033 of the Consumer Financial Protection Act, requiring banks

to provide consumers with access to their financial transaction data upon request.

This rule is expected to require updates to data access

policies by 2026.

In addition, pursuant to the Fair and Accurate Credit

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

Effect of Governmental Monetary Policies.

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

On September 30,

2024, the Federal Housing Finance Agency issued a notice of proposed rulemaking on that would improve FHLBs ability to provide liquidity

to members by aligning the treatment of interest-bearing deposit accounts and other authorized overnight investments with the treatment

of Federal Funds sales.

Effect of Governmental Monetary

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

and its agencies.

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

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

or combat a recession.

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

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

government securities and through its regulation of the discount rate on

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

It is not possible to predict the nature or

impact of future changes in monetary and fiscal policies.

In response to the COVID-19 pandemic, 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%.

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%.

early 2024, with signs of moderating inflation and a slowing growth outlook, the FOMC initiated a gradual easing of monetary policy, reducing

the target range to approximately 4.0% to 4.25% by the end of 2024.

In January 2025, amid mixed economic signals, the FOMC maintained

this target range while emphasizing its readiness to adjust policy further as economic conditions evolve.

Incentive Compensation.

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incentive compensation arrangements should comply with the following principles:

(i) provide employees incentives that appropriately balance

risk and reward;

(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.

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

In 2016, federal agencies proposed regulations which could significantly change the regulation of incentive compensation

programs at financial institutions.

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

Concentrations in Commercial Real Estate .

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

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.

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

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

The CRE Guidance does not limit banks’

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

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

On December 18, 2015, the federal

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

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

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

The federal bank agencies reminded FDIC-insured

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

the risks arising from commercial real estate lending.

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

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

Based on the Bank’s loan portfolio

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

What changed 10-K

Item 1. Business