What changed in this filing

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Item 1. Business

2026-02-24 compared with 2025-03-03 · 1158 added, 1146 removed, 567 unchanged (80% of the section changed)

Southern First Bancshares, Inc.

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

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

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

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

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

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

and one retail office in Atlanta, Georgia.

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

South Carolina during 2023.

(the “Company”)

was incorporated in March 1999 under the laws of South Carolina and is a bank holding company registered under the Bank Holding Company

Act of 1956 (the “BHCA”).

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

a South Carolina state bank.

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

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

in Atlanta, Georgia.

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

2023 and expect to open a retail office in Cary, North Carolina in late 2026.

The Bank is primarily engaged in the business of accepting

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consumer and mortgage loans to the general public.

Unless the context requires otherwise, references to

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

Unless the context requires otherwise, references to the “Company,”

“we,” “us,” “our,” or similar references mean Southern First Bancshares, Inc.

and its subsidiaries.

Our Competitive Strengths

We believe that the following business strengths have

been instrumental to the success of our core operations.

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

remaining fundamentally sound and driving value to our shareholders.

We believe that the following business strengths have been

instrumental to the success of our core operations.

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

fundamentally sound and driving value to our shareholders.

Simple and Efficient ClientFIRST Model.

We operate our Bank using a simple and efficient style of banking that is focused on providing core banking products and services to our

clients through a team of talented and experienced bankers.

We refer to this model as “ClientFIRST” and it is structured to

deliver superior client service via “relationship teams,” which provide each client with a specific banker contact and a consistent

our Bank using a simple and efficient style of banking that is focused on providing core banking products and services to our clients

through a team of talented and experienced bankers.

We refer to this model as “ClientFIRST” and it is structured to deliver

superior client service via “relationship teams,” which provide each client with a specific banker contact and a consistent

support team responsible for all of the client’s banking needs.

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competitors, as evidenced by our 64.0% efficiency ratio for the year ended December 31, 2025.

We continue to make significant investments in our

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

We believe that our

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

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

advantage over other community banks.

Attractive South Carolina, North Carolina, and

Georgia Markets.

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

largest markets in South Carolina;

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

largest markets in North Carolina;

We continue to make significant investments in our IT systems

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

We believe that our current mobile

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

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

over other community banks.

Attractive South Carolina, North Carolina, and Georgia

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

markets in South Carolina;

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

markets in North Carolina;

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

The following

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

The following table

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

Total Offices

Our Market Deposits at

June 30, 2024

Our Market Deposits at June 30, 2025

(Dollars in thousands)

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

(2) The total market deposits data displayed are as of June 30, 2024 as reported by the FDIC.

The city of Greenville is located

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

The Greenville-Anderson MSA is the most populous market in South Carolina with an estimated population of 975,480 as reported for 2023.

The median household income for the Greenville-Anderson-Mauldin MSA was $69,413 for 2023.

A large and diverse metropolitan area, the Greenville-Anderson

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

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

The city of Charleston is located

in Charleston County, South Carolina.

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

population of 849,417 for 2023.

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

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

The median household income for the

Charleston-North Charleston MSA was approximately $85,165 for 2023.

One of our retail offices in the Charleston market is located in the

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

The city of Columbia is located in

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

Columbia is the state capital,

the largest city in the state and the home of the University of South Carolina and Fort Jackson, the Army’s largest Initial Entry

Training Center.

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

for each market.

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

2025 as reported by the FDIC.

The city of Greenville is located in Greenville

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

The Greenville-Anderson-Greer

MSA is the most populous market in South Carolina with an estimated population of 996,680 as reported for 2024.

The median household income

for the Greenville-Anderson-Greer MSA was $75,881 for 2024.

A large and diverse metropolitan area, the Greenville-Anderson-Greer MSA is one

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

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

The city of Charleston is located in Charleston

County, South Carolina.

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

of 869,940 for 2024.

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

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

The median household income for the Charleston-North

Charleston MSA was approximately $90,307 for 2024.

One of our retail offices in the Charleston market is located in the city of Mount

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

The city of Columbia is located in Richland

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

Columbia is the state capital, the largest

city in the state and the home of the University of South Carolina and Fort Jackson, the Army’s largest Initial Entry Training Center.

The Columbia MSA is the second most populous market in the state with an estimated population of 870,193 for 2024.

median household income for the Columbia MSA was $67,189 for 2023.

The median household

income for the Columbia MSA was $70,788 for 2024.

The city of Raleigh is the second largest

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The median household income for the Raleigh-Cary MSA was approximately $102,144

The city of Greensboro is the third

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

The Greensboro-High Point MSA is one of the most populous

markets in the state of North Carolina with an estimated population of 789,842 for 2023.

Greensboro has traditionally been a fixture in

the textiles, tobacco and furniture industries while also moving towards an increased presence of high-tech, aviation and transportation/logistics

Greensboro, along with Winston-Salem and High Point, is commonly referred to as the Triad region of North Carolina and is home

to companies such as Honda Aircraft, Lincoln Financial Group and Volvo Trucks of North America.

The city of Greensboro is the third largest

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

The Greensboro-High Point MSA is one of the most populous markets

in the state of North Carolina with an estimated population of 800,722 for 2024.

Greensboro has traditionally been a fixture in the textiles,

tobacco and furniture industries while also moving towards an increased presence of high-tech, aviation and transportation/logistics sectors.

Greensboro, along with Winston-Salem and High Point, is commonly referred to as the Triad region of North Carolina and is home to companies

such as Honda Aircraft, Lincoln Financial Group and Volvo Trucks of North America.

The median household income for the Greensboro-High

Point MSA was approximately $66,072 for 2024.

The city of Charlotte is the largest

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

The Charlotte-Concord-Gastonia MSA is the most populous market

in the state of North Carolina with an estimated population of 2.81 million for 2023.

Charlotte is the second largest banking city in

the United States after New York and is home to the corporate headquarters of Bank of America, Truist Financial, and the east coast headquarters

The city of Charlotte is the largest city

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

The Charlotte-Concord-Gastonia MSA is the most populous market in the

state of North Carolina with an estimated population of 2.88 million for 2024.

Charlotte is the second largest banking city in the United

States after New York and is home to the corporate headquarters of Bank of America, Truist Financial, and the east coast headquarters

of Wells Fargo.

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income for the Charlotte-Concord-Gastonia MSA was approximately $85,938 for 2024.

The Atlanta-Sandy Springs-Alpharetta

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

The Atlanta-Sandy Springs-Roswell MSA has

the nineth largest population in the U.S.

estimated at 6.41 million for 2024.

Atlanta is the state capital of, and largest city

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

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

Broadcasting.

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

Atlanta is the state capital of, and largest city in, Georgia

and is the world headquarters of corporations such as

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

The median household

income for the Atlanta-Sandy Springs-Roswell MSA is $92,344 for 2024.

We believe that the demographics and growth characteristics

of these seven markets will provide us with significant opportunities to further develop existing client relationships and expand our

Data related to the estimated population and median

household income for each of the markets presented above is from the Federal Reserve Economic Data (“FRED”) online database.

Experienced Management Team, Dedicated Board

of Directors and Talented Employees.

Data related to the estimated population and median household

income for each of the markets presented above is from the United States Census Bureau online database.

Experienced Management Team, Dedicated Board of Directors

and Talented Employees.

Our senior management team is led by R.

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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.

Fairchild, Wesley C.

Wilbanks, and Silvia T.

King, whose biographies are included below.

Arthur “Art” Seaver, Jr .

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

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

He has over 35 years of banking experience.

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

From 1992 until February 1999,

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

He was the Senior Vice President in lending and was

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

Seaver is a 1986

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

Community Bank Management.

Hurst has served as Chief Banking

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

From 1992 until February 1999, he

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

He was the Senior Vice President in lending and was also

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

Seaver is a 1986 graduate

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

Bank Management.

Hurst has served as Chief Banking Officer

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

Hurst has over 15 years of banking experience.

From 2006 to 2008, Mr.

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

manager for PNC Bank.

2006 to 2008, Mr.

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

for PNC Bank.

Before joining Southern First, Mr.

Hurst served as regional vice president for TD Bank.

Hurst is a 2005 graduate

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

Zych has served as Chief Financial

Officer of our Company and our Bank since May 2024.

Hurst is a 2005 graduate of

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

Zych has served as Chief Financial Officer

of our Company and our Bank since May 2024.

Prior to joining us, Mr.

Zych held various roles at United Community Bank, most recently serving

as Director of Corporate Development and Investor Relations for over a decade.

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

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

officer since 2020.

He has over 25 years in the banking industry.

Aiken has served in various roles at several banks during

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

He is a 1996 graduate of Clemson University,

with a degree in Financial Management.

including 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.

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.

Wilbanks has served as Chief Credit Officer

of the Bank since April 2025.

Wilbanks joined us in September 2021 as a Senior Credit Risk Officer before serving as Executive Director

of Market Support.

Wilbanks has over 25 years of banking experience, and prior to joining Southern First, served in various senior

credit roles at SouthState Bank for 11 years.

Wilbanks is a graduate of Palm Beach Atlantic University with a Bachelor’s degree

in Finance and a graduate of the School of Banking at LSU.

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, 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

board of directors with extensive local market knowledge and a wide range of experience including accounting, business, banking, manufacturing,

Seaver, Hurst, Zych, Wilbanks, Mses.

Fairchild and King, our executive management team consists of 13 individuals who bring an average of 30 years of experience in the banking

The management team is complemented by our dedicated board

of directors with extensive local market knowledge and a wide range of experience including accounting, business, banking, manufacturing,

insurance, management and finance.

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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

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

As of December 31, 2025, our executive officers and board of directors owned

an aggregate of 567,422 shares of our common stock, including options to purchase shares of our common stock, which represented approximately

7.014% of the fully-diluted amount of our common stock outstanding.

We believe that our officers’ and directors’ experience

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

In addition, we believe that we have assembled a group of

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

We employed a total of 315 FTE employees as of December

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Our Business Strategy

We are focused on growing business relationships and

building core deposits, profitable loans and noninterest income.

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

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

We are focused on growing business relationships and building

core deposits, profitable loans and noninterest income.

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

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

of our local markets.

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Focus on Profitable and Efficient Growth.

Our executive management team and board of directors are dedicated to producing profits and returns for our shareholders.

manage the mix of assets and liabilities on our balance sheet to optimize our net interest margin while also maintaining expense controls

and developing noninterest income streams.

executive management team and board of directors are dedicated to producing profits and returns for our shareholders.

We actively manage

the mix of assets and liabilities on our balance sheet to optimize our net interest margin while also maintaining expense controls and

developing noninterest income streams.

By continually striving to build a well-structured balance sheet, we seek to increase profitability

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Provide a Distinctive Client Experience.

Our markets have been subject to consolidation of local community banks primarily by larger, out-of-state financial institutions.

markets have been subject to consolidation of local community banks primarily by larger, out-of-state financial institutions.

there is a large client base in our markets that prefers doing business with a local institution and may be dissatisfied with the service

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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

“ClientFIRST” Focus.

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

relationships and significant knowledge of our markets will continue to drive our success and grow our business in an efficient manner.

By focusing on experienced, established bankers who deliver exceptional client service through our ClientFIRST model, we believe we can

enhance our market position and add profitable growth opportunities.

We believe that the strength of our exceptional client service and

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

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

in a controlled manner and as permitted by our regulators.

We may choose to open new locations, but only after rigorous due diligence

and substantial quantitative analysis regarding the financial and capital impacts of such investments.

We may also seek to enter new metropolitan

markets contiguous to, or nearby, our current South Carolina footprint, such as our recently opened expansions in Greensboro and Charlotte,

North Carolina, but only after careful study and the identification and vetting of a local, senior level banking team with significant

experience and reputational strength in that market and receipt of any applicable regulatory approvals.

We have not yet supplemented our

historic strategy of organic deposit and loan growth with traditional mergers or acquisitions.

We evaluate potential acquisition opportunities

that we believe would be complementary to our business as part of our growth strategy.

However, we have not yet identified any specific

acquisition opportunity that meets our strict requirements and do not have any immediate plans, arrangements or understandings relating

to any acquisition.

Furthermore, we do not believe an acquisition is necessary to successfully drive our growth and execute our ClientFIRST

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 “ClientFIRST”

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

knowledge of our markets will continue to drive our success and grow our business in an efficient manner.

By focusing on experienced,

established bankers who deliver exceptional client service through our ClientFIRST model, we believe we can enhance our market position

and add profitable growth opportunities.

We believe that the strength of our exceptional client service and relationship banking approach

will continue to help us attract these established bankers.

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 in a controlled

We may choose to open new locations, but only after rigorous due diligence and substantial quantitative analysis regarding the

financial and capital impacts of such investments.

We may also seek to enter new metropolitan markets contiguous to, or nearby, our current

footprint, such as our recent expansion in Charlotte, North Carolina, but only after careful study and the identification and

vetting of a local, senior level banking team with significant experience and reputational strength in that market and receipt of any

applicable regulatory approvals.

We have not yet supplemented our historic strategy of organic deposit and loan growth with traditional

mergers or acquisitions.

We evaluate potential acquisition opportunities that we believe would be complementary to our business as part

of our growth strategy.

However, we have not yet identified any specific acquisition opportunity that meets our strict requirements and

do not have any immediate plans, arrangements or understandings relating to any acquisition.

Furthermore, we do not believe an acquisition

is necessary to successfully drive our growth and execute our ClientFIRST model.

Lending Activities

We offer a full complement of loan

services to businesses and individuals.

We offer a full complement of loan services

to businesses and individuals.

This includes commercial, real estate, and consumer loans.

Our underwriting standards vary for

each type of loan, as described below.

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

we invest a substantial percentage of our earning assets in our loan portfolio.

At December 31, 2024, we had net loans of $3.59 billion,

representing 87.9% of our total assets.

We focus our lending to businesses and individuals

that reside in the markets that we serve.

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

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

December 31, 2024, our average loan size was approximately $375,000.

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

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

As of December 31, 2024, our ten largest client loan relationships represented

approximately $289.0 million, or 7.95%, of our loan portfolio.

In October 2023, we announced the opening of the Dream

Mortgage Center in Columbia, South Carolina.

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

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

Our underwriting standards vary for each type

of loan, as described below.

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

a substantial percentage of our earning assets in our loan portfolio.

At December 31, 2025, we had net loans of $3.80 billion, representing

86.4% of our total assets.

We focus our lending to businesses and individuals that reside

in the markets that we serve.

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

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

As of December 31,

2025, our average loan size was approximately $382,000.

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

limit the amount of our loans to any single client.

As of December 31, 2025, our ten largest client loan relationships represented approximately

$288 million, or 7.48%, of our loan portfolio.

In October 2023, we opened our Dream Mortgage Center in Columbia,

South Carolina.

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

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

Loan Approval .

Certain credit risks are inherent

in making loans.

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

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

Certain credit risks are inherent in

making loans.

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

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

We attempt to mitigate repayment

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

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

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

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

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Loan Portfolio Segments.

Our loan portfolio

is comprised of commercial and consumer loans made to small businesses and individuals for various business and personal purposes.

our loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers, the principal component

of our loan portfolio is loans secured by real estate mortgages on either commercial or residential property.

These loans will generally

fall into one of the following six categories:

commercial owner occupied real estate, commercial non-owner occupied real estate, commercial

construction, consumer real estate, consumer construction, and home equity loans.

We obtain a security interest in real estate whenever

possible, in addition to any other available collateral, in order to increase the likelihood of the ultimate repayment of the loan.

December 31, 2024, loans secured by first or second mortgages on commercial and consumer real estate made up approximately 83.5% of our

loan portfolio.

In addition to loans secured by real estate, our loan portfolio includes commercial business loans and other consumer

loans which comprised 15.3% and 1.2%, respectively, of our total loan portfolio at December 31, 2024.

Interest rates for all real estate loan categories

may be fixed or adjustable, and will more likely be fixed for shorter-term loans.

We generally charge an origination fee for each loan

which is taken into income over the life of the loan as an adjustment to the loan yield.

Other loan fees consist primarily of late charge

Real estate loans are subject to the same general risks as other loans and are particularly sensitive to fluctuations in the value

of real estate.

Fluctuations in the value of real estate, as well as other factors arising after a loan has been made, could negatively

affect a borrower’s cash flow, creditworthiness, and ability to repay the loan.

Our loan portfolio is comprised

of commercial and consumer loans made to small businesses and individuals for various business and personal purposes.

While our loan portfolio

is not concentrated in loans to any single borrower or a relatively small number of borrowers, the principal component of our loan portfolio

is loans secured by real estate mortgages on either commercial or residential property.

These loans will generally fall into one of the

following six categories:

commercial owner-occupied real estate, commercial non-owner occupied real estate, commercial construction, consumer

real estate, consumer construction, and home equity loans.

We obtain a security interest in real estate whenever possible, in addition

to any other available collateral, in order to increase the likelihood of the ultimate repayment of the loan.

At December 31, 2025, loans

secured by first or second mortgages on commercial and consumer real estate made up approximately 82.8% of our loan portfolio.

to loans secured by real estate, our loan portfolio includes commercial business loans and other consumer loans which comprised 16.0%

and 1.1%, respectively, of our total loan portfolio at December 31, 2025.

Interest rates for all real estate loan categories may be

fixed or adjustable, and will more likely be fixed for shorter-term loans.

We generally charge an origination fee for each loan which

is taken into income over the life of the loan as an adjustment to the loan yield.

Other loan fees consist primarily of late charge fees.

Real estate loans are subject to the same general risks as other loans and are particularly sensitive to fluctuations in the value of

Fluctuations in the value of real estate, as well as other factors arising after a loan has been made, could negatively affect

a borrower’s cash flow, creditworthiness, and ability to repay the loan.

Although, the loans are collateralized by real estate,

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

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, 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.

The following describes the types of loans in our loan portfolio.

· Commercial Real Estate Loans (Commercial Owner Occupied

and Commercial Non-owner Occupied Real Estate Loans).

At December 31, 2025, commercial owner occupied and non-owner occupied real

estate loans (other than construction loans) amounted to $1.69 billion, or 44.1% of our loan portfolio.

Of our commercial real estate

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of our total loan portfolio.

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

The remainder of our commercial real estate loan portfolio, $737.0 million of loans or 31.0% of the commercial

loan portfolio, were owner occupied.

Owner occupied loans represented 19.2% 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.

At December 31, 2025, the original

balances of our individual commercial real estate loans ranged in size from approximately $15,000 to $25.0 million, with an average loan

size of approximately $916,000.

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, 2025, $221.4 million, or 5.8% of

our total loan portfolio, was collateralized by office properties, $186.7 million, or 4.9%, was collateralized by retail properties, $144.2

million, or 3.8%, was collateralized by hotels, and $101.7 million, or 2.6% was collateralized by multifamily properties.

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.

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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.

At December 31, 2025, total commercial and consumer construction loans amounted to $88.7 million, or

2.3% of our loan portfolio.

Commercial construction loans represented $63.7 million, or 1.7%, of our total loan portfolio, while consumer

construction loans represented $25.0 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.

At December 31, 2025, the original balances of our

commercial construction real estate loans ranged in size from approximately $100,000 to $11.2 million, with an average loan balance of

approximately $1.4 million.

At December 31, 2025, the original balances of our consumer or residential construction loans ranged in size

from approximately $195,000 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, 2024, commercial business loans amounted to $556.1 million, or 15.3% of our loan portfolio, and ranged

We make loans for commercial

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

At December 31,

2025, commercial business loans amounted to $620.0 million, or 16.0% of our loan portfolio, and the original balances of the loans ranged

in size from approximately $1,000 to $14.0 million, with an average loan size of approximately $285,000.

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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

We are eligible to offer small business loans utilizing

government enhancements such as the Small Business Administration’s (“SBA”) 7(a) program and SBA’s 504 programs.

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

Government guarantees of

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

As of December 31, 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.

Government guarantees of SBA loans

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

As of December 31, 2025, we had originated 12 loans utilizing government

enhancements and over 26 loans engaged in state-based small business partnerships.

· Consumer Real Estate Loans and Home Equity Loans.

December 31, 2025 consumer real estate loans (other than construction loans) amounted to $1.40 billion, or 36.5% of our loan portfolio.

Included in the consumer real estate loans was $1.15 billion, or 30.0% of our loan portfolio, in first and second mortgages on individuals’

homes, while home equity loans represented $248.7 million, or 6.5% of our total loan portfolio.

At December 31, 2025, the original balances

of our individual residential real estate loans ranged in size from $1,500 to $5.9 million, with an average loan size of approximately

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

We offer fixed and adjustable

rate consumer real estate loans with terms of up to 30 years.

We 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.

At December 31, 2025, the original balances

of our individual home equity lines of credit ranged in size from $8,200 to $3.6 million, with an average of approximately $108,000.

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

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

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.

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, 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.

At December 31, 2025, consumer loans other than

real estate amounted to $41.0 million, or 1.1% of our loan portfolio, and the original balances of the loans ranged in size from $100

to $15.7 million, with an average loan size of approximately $34,000.

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

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

We typically require monthly payments

of interest and a portion of the principal on our revolving loan products.

Consumer loans are generally considered to have greater risk

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

be difficult to assess and more likely to decrease in value than real estate.

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

We typically require monthly

payments of interest and a portion of the principal on our revolving loan products.

Consumer loans are generally considered to have greater

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

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

Deposit Services

Our principal source of funds is core deposits.

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

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

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

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

At December 31, 2025, we had $552.9 million

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Other Banking Services

In addition to deposit and loan services, we offer

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

mobile banking services.

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

In addition to deposit and loan services, we offer other

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

banking services.

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

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

experience competition in our market from many other financial institutions.

Competition among financial institutions is based upon interest

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

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

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

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

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

Charlotte, Raleigh

and Greensboro, North Carolina;

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 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 purposes.

The banking business is highly competitive, and we experience

competition in our market from many other financial institutions.

Competition among financial institutions is based upon interest rates

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

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

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

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

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

Charlotte, Raleigh and Greensboro,

North Carolina;

Atlanta, Georgia and elsewhere.

As of June 30, 2024, the most recent date for which

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

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

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

As of June 30, 2025, the most recent date for which market

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

market, 38 financial institutions in the Charleston and Raleigh markets, 25 financial institutions in the Greensboro market, 49 financial

institutions in the Charlotte market, and 80 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 banks.

We believe the

financial services industry will likely continue to become more competitive as further technological advances enable more financial institutions

to provide expanded financial services without having a physical presence in our markets.

Because larger competitors have advantages in

attracting business from larger corporations, we do not generally compete for that business.

Instead, we concentrate our efforts on attracting

the business of individuals and small and medium-size businesses.

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

service and responsiveness to client needs, the convenience of our offices and hours, and the availability and pricing of our products

and services.

We believe our commitment to quality and personalized banking

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

At December 31, 2025, we employed a total of 315 full-time

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Available Information

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

at the SEC’s website at www.sec.gov .

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

can also be accessed free of charge.

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

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

We 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

Both the Company and the Bank are subject to extensive

state and federal banking laws and regulations that impose specific requirements or restrictions on and provide for general regulatory

oversight of virtually all aspects of our operations.

Both the Company and the Bank are subject to extensive state

and federal banking laws and regulations that impose specific requirements or restrictions on and provide for general regulatory oversight

of virtually all aspects of our operations.

These laws and regulations are generally intended to protect depositors, not shareholders.

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Legislative and Regulatory Developments

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 and the bank failures in 2023 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 and the bank failures in 2023 will continue to have an impact on our operations.

The Dodd-Frank Wall Street Reform and Consumer Protection

The Dodd-Frank Act was signed into law in July 2010

and impacts financial institutions in numerous ways, including:

· The creation of a Financial Stability

Oversight Council responsible for monitoring and managing systemic risk,

· Granting additional authority

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

· Granting new authority to the

FDIC as liquidator and receiver,

· Changing the manner in which

deposit insurance assessments are made,

· 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 Dodd-Frank Act was signed into law in July 2010 and impacts

financial institutions in numerous ways, including:

· The creation of a Financial Stability Oversight Council responsible

for monitoring and managing systemic risk,

· Granting additional authority to the Board of Governors of

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

· Granting new authority to the FDIC as liquidator and receiver,

· Changing the manner in which deposit insurance assessments

· Requiring regulators to modify capital standards,

· Establishing the Consumer Financial Protection Bureau (the

· Capping interchange fees that banks charge merchants for debit

card transactions,

· Imposing more stringent requirements on mortgage lenders,

· Limiting banks’ proprietary trading activities.

There are many provisions in the Dodd-Frank Act mandating

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results of operations.

The Economic Growth, Regulatory Relief, and Consumer

Protection Act

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

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

The Economic Growth, Regulatory Relief, and

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

nonbank financial institutions.

The Economic Growth, Regulatory Relief, and Consumer Protection

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

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

The Economic Growth, Regulatory Relief, and Consumer Protection

Act (the “Reform Law”) modified or eliminated certain requirements on community and regional banks and nonbank financial institutions.

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

· banks that have less than $10

billion in total consolidated assets and total trading assets and trading liabilities of less than five percent of total consolidated

assets is excluded from Section 619 of the Dodd-Frank Act, known as the “Volcker Rule”, which prohibits “proprietary

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

· the asset threshold for bank

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

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

capital 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 are 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

Regulatory capital rules known as Basel III impose

minimum capital requirements for bank holding companies and banks.

The Basel III rules apply to all national and state banks and savings

and loan associations regardless of size and bank holding companies and savings and loan holding companies other than “small bank

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

More stringent requirements are

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

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

The Basel III rules require the Company and the Bank

to maintain the following minimum capital requirements:

· a common equity Tier 1 (“CET1”)

risk-based capital ratio of 4.5%;

· a Tier 1 risk-based capital ratio

· a total risk-based capital ratio

Regulatory capital rules known as Basel III impose minimum

capital requirements for bank holding companies and banks.

The Basel III rules apply to all national and state banks and savings and loan

associations regardless of size and bank holding companies and savings and loan holding companies other than “small bank holding

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

More stringent requirements are imposed

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

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

The Basel III rules require the Company and the Bank to maintain

the following minimum capital requirements:

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

ratio of 4.5%;

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

· a total risk-based capital ratio of 8%;

· a leverage ratio of 4%.

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 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.

This buffer must consist solely of CET1 capital, but

the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital).

The 2.5% capital conservation buffer

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

(i) a CET1 capital

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

Under Basel III, Tier 1 capital includes two components:

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 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.

This buffer must consist solely of CET1 capital, but the buffer applies

to all three risk-based measurements (CET1, Tier 1 capital and total capital).

The 2.5% capital conservation buffer effectively results

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

(i) a CET1 capital ratio of 7.0%, (ii)

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

Proposed new rules for U.S.

implementation of capital

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

federal banking

agencies on July 27, 2023.

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

and operational risk capital requirements.

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

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

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

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

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

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

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

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

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

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

not elect to utilize the five-year CECL transition.

implementation of capital requirements

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

federal banking agencies

on July 27, 2023.

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

risk capital requirements.

However, the proposed rules generally apply only to large banking organizations with total assets of $100 billion

or more, and are expected to not be applicable to us.

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 of the date of this filing, the Basel III Endgame rules have

not been finalized, and their scope, and ultimate implementation remain uncertain.

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

in the first quarter of 2020, U.S.

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

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

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

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

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

In connection with our adoption of CECL on January 1, 2022, we did not elect to

utilize the five-year CECL transition.

In November 2019, the federal banking regulators published

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prompt corrective action rules, discussed below.

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

framework but may make such an election in the future.

As of December 31, 2024, the Bank was well-capitalized,

as defined by FDIC regulations.

In November 2025, federal banking regulators proposed changes to increase flexibility

under the community bank leverage ratio framework, including lowering the leverage ratio threshold from 9% to 8% and extending the grace

period for falling below the threshold from two quarters to four quarters, subject to certain conditions.

Public comments on the proposal

were open through January 30, 2026.

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

may make such an election in the future.

As of December 31, 2025, the Bank was well-capitalized, as

defined by FDIC regulations.

As of December 31, 2025, the Company had regulatory capital in excess of the Federal Reserve’s requirements

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Acquisition Activity

The primary purpose of a bank holding company is to

control and manage banks.

The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding

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

In addition, the prior approval of the FDIC

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

In determining whether

to approve a proposed bank acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on competition,

The primary purpose of a bank holding company is to control

and manage banks.

The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company

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

In addition, the prior approval of the FDIC is required

for a bank to merge with another bank or purchase the assets or assume the deposits of another bank.

In determining whether to approve

a proposed bank acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on competition,

the public benefits expected to be received from the acquisition, the projected capital ratios and levels on a post-acquisition basis,

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moderate income neighborhoods, consistent with the safe and sound operation of the bank, under the Community Reinvestment Act (“CRA”).

On July 9, 2021, President Biden issued an Executive

Order on Promoting Competition in the American Economy.

On July 9, 2021, President Biden issued an Executive Order

on Promoting Competition in the American Economy.

Among other initiatives, the Executive Order encouraged the federal banking agencies

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The comment period closed on February 15, 2022.

2022, the FDIC published a Request for Information seeking information and comments regarding the laws, practices, rules, regulations,

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

laws, practices, rules, regulations,

guidance, and statements of policy that apply to merger transactions involving one or more insured depository institutions, including

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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.

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.

The Federal Reserve did not join with the FDIC and the OCC in issuing comparable guidance.

Additionally, the DOJ announced its withdrawal from the 1995 Bank Merger Competitive Review Guidelines, indicating that it would apply

its general merger enforcement framework, including its 2023 Merger Guidelines, in reviewing banking industry transactions.

In May 2025, the OCC rescinded its 2024 final rule and related policy statement through an interim final rule that restored expedited review procedures

and streamlined application processes.

In early 2025, the FDIC

announced that it would rescind its 2024 Statement of Policy on Bank Merger Transactions, citing concerns that the revised framework created

uncertainty in the merger review process.

By May 2025, the FDIC approved rescission of the 2024 Statement of policy and reinstatement of its prior Statement of Policy, originally adopted in

1998 and last revised in 2008, which became effective on August 4, 2025, Accordingly, the FDIC is currently applying its reinstated pre-2024

Statement of Policy.

These developments highlight the evolving nature of regulatory

policy in this area and the potential for further changes to merger review standards.

Proposed Legislation and Regulatory Action

From time to time, various legislative and regulatory

initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies.

Such initiatives may include proposals

to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial

institution regulatory system.

Such legislation could change banking statutes and the operating environment of the Company in substantial

and unpredictable ways.

If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible

activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions.

predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have

on the financial condition or results of operations of the Company.

A change in statutes, regulations or regulatory policies applicable

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

From time to time, various legislative and regulatory initiatives

are introduced in Congress and state legislatures, as well as by regulatory agencies.

Such initiatives may include proposals to expand

or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution

regulatory system.

Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable

If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect

the competitive balance among banks, savings associations, credit unions, and other financial institutions.

We cannot predict whether

any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial

condition or results of operations of the Company.

A change in statutes, regulations or regulatory policies applicable 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

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Southern First Bancshares, Inc.

We own 100% of the outstanding capital stock of the

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

As a result, we

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

promulgated thereunder.

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

Banking and Branching Efficiency Act.

We own 100% of the outstanding capital stock of the Bank,

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

As a result, we are primarily

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

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

and Branching Efficiency Act.

Permitted Activities.

Under the BHCA,

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

of any company engaged in, the following activities:

· banking or managing or controlling

· furnishing services to or performing

services for our subsidiaries;

· any activity that the Federal

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

Activities that the Federal Reserve has found to be

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

Under the BHCA, a bank

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

company engaged in, the following activities:

· banking or managing or controlling banks;

· furnishing services to or performing services for our subsidiaries;

· any activity that the Federal Reserve determines to be so

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

Activities that the Federal Reserve has found to be so closely

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

· factoring accounts receivable;

· making, acquiring, brokering

or servicing loans and usual related activities;

· making, acquiring, brokering or servicing loans and usual

related activities;

· leasing personal or real property;

· operating a non-bank depository

institution, such as a savings association;

· operating a non-bank depository institution, such as a savings

· trust company functions;

· 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.

· 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.

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

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

The Federal Reserve has the authority to order a bank

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

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

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

The Federal Reserve has the authority to order a bank holding

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

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

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

Change in Control .

Two statutes, the

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

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

Under the BHCA, control is deemed to exist if a company

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

controls the election of a majority of the members of

the board of directors;

Two statutes, the BHCA and

the Change in Bank Control Act, together with regulations promulgated under them, require some form of regulatory review before any company

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

Under the BHCA, control is deemed to exist if a company acquires

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

controls the election of a majority of the members of the board

of directors;

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

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.

The Federal 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.

Most recently, the FDIC rescinded its proposed rule issued

in August 2024 that would have amended its filing requirements under the CBCA.

That proposal sought to remove an exemption allowing acquisitions

of voting securities in a depository institution holding company to rely on Federal Reserve review without a separate FDIC filing.

2025, the FDIC withdrew the proposal, citing concerns about duplicative requirements and the need for further consideration.

Source of Strength .

There are a number

of obligations and restrictions imposed by law and regulatory policy on bank holding companies with regard to their depository institution

subsidiaries that are designed to minimize potential loss to depositors and to the FDIC insurance funds in the event that the depository

institution becomes in danger of defaulting under its obligations to repay deposits.

Under a policy of the Federal Reserve, a bank holding

company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support

such institutions in circumstances where it might not do so absent such policy.

There are a number of obligations

and restrictions imposed by law and regulatory policy on bank holding companies with regard to their depository institution subsidiaries

that are designed to minimize potential loss to depositors and to the FDIC insurance funds in the event that the depository institution

becomes in danger of defaulting under its obligations to repay deposits.

Under a policy of the Federal Reserve, a bank holding company

is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such

institutions in circumstances where it might not do so absent such policy.

Under the Federal Deposit Insurance Corporation Improvement

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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.

The Federal Reserve also has the authority under the

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

The Federal Reserve also has the authority under the BHCA

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

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

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insured depository institutions.

The FDIA also provides that amounts received from the

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

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

The FDIA also provides that amounts received from the liquidation

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

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

general creditor or shareholder.

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

Any capital loans by a bank holding company to any

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

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

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

Any capital loans by a bank holding company to any of its

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

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

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

Capital Requirements .

The Federal Reserve

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

of “qualifying” capital to risk-weighted assets.

These requirements are essentially the same as those that apply to the Bank

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

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

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

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

We are also able to raise capital for contribution

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

Since the Company

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

including the guidelines of the Federal Reserve.

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

by bank holding companies.

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

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

capital needs, asset quality and overall financial condition.

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

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

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

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

Further, under the prompt corrective action

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

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

The Federal Reserve imposes

certain capital requirements on the bank holding company under the BHCA, including a minimum leverage ratio and a minimum ratio of “qualifying”

capital to risk-weighted assets.

These requirements are essentially the same as those that apply to the Bank and are described above under

“Basel III Capital Standards.” Subject to certain restrictions, we are able to borrow money to make a capital contribution

to the Bank, and these loans may be repaid from dividends paid from the Bank to the Company.

Our ability to pay dividends depends on,

among other things, the Bank’s ability to pay dividends to us, which is subject to regulatory restrictions as described below in

“Southern First Bank—Dividends.”

We are also able to raise capital for contribution to the

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

Since the Company is a bank holding

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

of the Federal Reserve.

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

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

rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and

overall financial condition.

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

of financial strength to its subsidiary banks by standing

ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and

by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks

where necessary.

Further, under the prompt corrective action regulations, the ability of a bank holding company to pay dividends may

be restricted if a subsidiary bank becomes undercapitalized.

Likewise, under the proposed Basel III Endgame rules, banks subject to the

new framework could face increased capital requirements that may impact dividend policies and capital distribution strategies.

and implemented, these rules could introduce new capital constraints for institutions seeking to maintain or increase dividend payments.

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

In addition, since the Company is a legal entity separate

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South Carolina State Regulation.

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

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

We are not required

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.

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

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

We are not required 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.

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

As a South Carolina bank, deposits in the Bank are

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

Board and the FDIC regulate or monitor

virtually all areas of the Bank’s operations, including;

As a South Carolina bank, deposits in the Bank are insured

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

Board and the FDIC regulate or monitor virtually

all areas of the Bank’s operations, including;

· security devices and procedures;

· adequacy of capitalization and

loss reserves;

· adequacy of capitalization and loss reserves;

· investments;

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· interest rates payable on deposits;

· interest rates or fees chargeable

· interest rates or fees chargeable on loans;

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

All insured institutions must undergo regular on-site

examinations by their appropriate banking agency.

The cost of examinations of insured depository institutions and any affiliates may be

assessed by the appropriate federal banking agency against each institution or affiliate as it deems necessary or appropriate.

institutions are required to submit annual reports to the FDIC, their federal regulatory agency, and state supervisor when applicable.

The FDIC has developed a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value

of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition or any

other report of any insured depository institution.

The FDIC and the other federal banking regulatory agencies also have issued standards

for all insured depository institutions relating, among other things, to the following:

All insured institutions must undergo regular on-site examinations

by their appropriate banking agency.

The cost of examinations of insured depository institutions and any affiliates may be assessed by

the appropriate federal banking agency against each institution or affiliate as it deems necessary or appropriate.

Insured institutions

are required to submit annual reports to the FDIC, their federal regulatory agency, and state supervisor when applicable.

developed a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value of assets

and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition or any other report

of any insured depository institution.

The FDIC and the other federal banking regulatory agencies also have issued standards for all insured

depository institutions relating, among other things, to the following:

· internal controls;

· information systems and audit

· information systems and audit systems;

· loan documentation;

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Prompt Corrective Action.

As an insured

depository institution, the Bank is required to comply with the capital requirements promulgated under the FDIA and the prompt corrective

action regulations thereunder, which set forth five capital categories, each with specific regulatory consequences.

As an insured depository

institution, the Bank is required to comply with the capital requirements promulgated under the FDIA and the prompt corrective action

regulations thereunder, which set forth five capital categories, each with specific regulatory consequences.

Under these regulations,

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%.

If the FDIC determines, after notice and an opportunity

for hearing, that the Bank is in an unsafe or unsound condition, the regulator is authorized to reclassify the Bank to the next lower

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 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

· 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 (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 (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 for

hearing, that the Bank is in an unsafe or unsound condition, the regulator is authorized to reclassify the Bank to the next lower 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 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.

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

Significantly undercapitalized categorized depository

institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become categorized

as adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks.

The appropriate

federal banking agency may take any action authorized for a significantly undercapitalized institution if an undercapitalized institution

fails to submit an acceptable capital restoration plan or fails in any material respect to implement a plan accepted by the agency.

critically undercapitalized institution is subject to having a receiver or conservator appointed to manage its affairs and for loss of

its charter to conduct banking activities.

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

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 institutions

may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become categorized as

adequately capitalized, requirements to reduce total assets, restrictions on deposit interest rates, orders for election of new directors

or forced dismissal of executive officers, divestment of certain subsidiaries, and cessation of receipt of deposits from correspondent

The appropriate federal banking agency may take any action authorized for a significantly undercapitalized institution if an undercapitalized

institution fails to submit an acceptable capital restoration plan or fails in any material respect to

implement a plan accepted by the

A critically undercapitalized institution is subject to having a receiver or conservator appointed to manage its affairs and for

loss of its charter to conduct banking activities.

An insured depository institution may not pay a management

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

As of December 31, 2024, the Bank was deemed to be

“well capitalized.”

As of December 31, 2025, the Bank was deemed to be “well

capitalized.”

Standards for Safety and Soundness.

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:

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

all insured depository institutions relating to:

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

documentation;

(ii) loan documentation;

(iii) credit underwriting;

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and (v) asset growth.

The agencies also must prescribe standards

for asset quality, earnings,

and stock valuation, as well as standards for compensation,

fees and benefits.

The federal banking agencies have adopted regulations and Interagency Guidelines Prescribing Standards for Safety and

Soundness to implement these required standards.

These guidelines set forth the safety and soundness standards that the federal banking

agencies use to identify and address problems at insured depository institutions before capital becomes impaired.

Under the regulations,

if the FDIC determines that the Bank fails to meet any standards prescribed by the guidelines, the agency may require the Bank to submit

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

The final regulations establish deadlines

for the submission and review of such safety and soundness compliance plans.

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.

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 previously requested comments on a proposal that would amend the regulations implementing section 29 of the

Federal Deposit Insurance Act which contains brokered deposits restrictions that apply to less than well capitalized depository institutions.

The proposed changes, however, were withdrawn in March 2025, due to the FDIC’s concern that the changes would disrupt the existing

deposit landscape.

Insurance of Accounts and Regulation by the FDIC.

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

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

insurance assessments to the FDIC based on its average total assets minus its average tangible equity.

The Bank’s assessment rates

are currently based on its risk classification (i.e., the level of risk it poses to the FDIC’s deposit insurance fund).

classified as higher risk pay assessments at higher rates than institutions that pose a lower risk.

In addition to ordinary assessments

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 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

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

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

condition imposed by the FDIC.

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

of insurance if the institution has no tangible capital.

If insurance of accounts is terminated, the accounts at the institution at the

time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined

Management is not aware of any practice, condition or violation that might lead to termination of the Bank’s deposit

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

assessments to the FDIC based on its average total assets minus its average tangible equity.

The Bank’s assessment rates are currently

based on its risk classification (i.e., the level of risk it poses to the FDIC’s deposit insurance fund).

Institutions classified

as higher risk pay assessments at higher rates than institutions that pose a lower risk.

The initial base assessment rates currently range

from approximately five basis points to approximately 32 basis points.

In addition to ordinary assessments 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

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 insured

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

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

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

the institution has no tangible capital.

If insurance of accounts is terminated, the accounts at the institution at the time of the termination,

less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC.

is not aware of any practice, condition or violation that might lead to termination of the Bank’s deposit insurance.

Transactions with Affiliates and Insiders.

The Company is a legal entity separate and distinct from the Bank and its other subsidiaries.

Company is a legal entity separate and distinct from the Bank and its other subsidiaries.

Various legal limitations restrict the Bank

from lending or otherwise supplying funds to the Company or its non-bank subsidiaries.

from lending or otherwise supplying funds to the Company

or its non-bank subsidiaries.

The Company and the Bank are subject to Sections

23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W.

Section 23A of the Federal Reserve Act places limits

on the amount of loans or extensions of credit by a bank to any affiliate, including its holding company, and on a bank’s investments

in, or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or

obligations of any affiliates of the bank.

Section 23A also applies to derivative transactions, repurchase agreements and securities lending

and borrowing transactions that cause a bank to have credit exposure to an affiliate.

The aggregate of all covered transactions is limited

in amount, as to any one affiliate, to 10% of the Bank’s capital and surplus and, as to all affiliates combined, to 20% of the Bank’s

Section 23A of the Federal Reserve Act places limits on the

amount of loans or extensions of credit by a bank to any affiliate, including its holding company, and on a bank’s investments in,

or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or obligations

of any affiliates of the bank.

Section 23A also applies to derivative transactions, repurchase agreements and securities lending and borrowing

transactions that cause a bank to have credit exposure to an affiliate.

The aggregate of all covered transactions is limited in amount,

as to any one affiliate, to 10% of the Bank’s capital and surplus and, as to all affiliates combined, to 20% of the Bank’s

capital and surplus.

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The Bank is forbidden to purchase low quality assets from an affiliate.

Section 23B of the Federal Reserve Act, among other

things, prohibits an institution from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially

Section 23B of the Federal Reserve Act, among other things,

prohibits an institution from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially

the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions

with nonaffiliated companies.

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

of the bank, any other company under common control with the bank (including any company controlled by the same shareholders who control

the bank), any subsidiary of the bank that is itself a bank, any company in which the majority of the directors or trustees also constitute

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.

The affiliates of a bank include any holding company of the

bank, any other company under common control with the bank (including any company controlled by the same shareholders who control the

bank), any subsidiary of the bank that is itself a bank, any company in which the majority of the directors or trustees also constitute

a majority of the directors or trustees of the bank or holding company of the bank, any company sponsored and advised on a contractual

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Reserve decides to treat these subsidiaries as affiliates.

The Bank is also subject to certain restrictions on

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

Extensions of credit

include derivative transactions, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions to the

extent that such transactions cause a bank to have credit exposure to an insider.

Any extension of credit to an insider (i) must be made

on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable

transactions with unrelated third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable

On December 22, 2020, the federal banking agencies

issued an interagency statement extending the temporary relief from enforcement action against banks or asset managers, which become principal

The Bank is also subject to certain restrictions on extensions

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

Extensions of credit include

derivative transactions, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions to the extent

that such transactions cause a bank to have credit exposure to an insider.

Any extension of credit to an insider (i) must be made on substantially

the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with

unrelated third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable features.

On December 22, 2020, the federal banking agencies issued

an interagency statement extending the temporary relief from enforcement action against banks or asset managers, which become principal

shareholders of banks, with respect to certain extensions of credit by banks that otherwise would violate Regulation O, provided the asset

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

source of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from the Bank.

The federal banking agencies have extended the temporary relief

from enforcement actions related to Regulation O multiple times, most recently on December 19, 2025.

The relief, which applies to banks

and asset managers that become principal stockholders of banks, will now expire on the earlier of January 1, 2027, 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 source

of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from the Bank.

Statutory and regulatory

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distributions, including dividends, as described above.

Under current South Carolina

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

In addition, with prior

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

Furthermore, federal legislation

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

merging by banks.

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

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

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

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

Under current South Carolina 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 February 27, 2025, the date of the most recent examination

report, the Bank received a Satisfactory CRA rating.

In December 2019, the FDIC and the Office of the Comptroller

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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,

That proposed rulemaking was later superseded and is no longer in effect.

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

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

as amended and superseded by an updated joint framework.

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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

The final rule was scheduled to take effect

on April 1, 2024;

however, its effectiveness was enjoined by a federal court and compliance with the majority of the final rule’s

provisions has been deferred.

As originally adopted, compliance with the most substantive provisions would not have been required until

January 1, 2026, and the data reporting requirements would not have taken 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):

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

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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.

In March 2024, a federal judge granted an injunction preventing the CRA final rule from taking effect.

OCC, the FDIC, and the Federal Reserve appealed the injunction.

However, in March 2025, the federal banking agencies filed an unopposed

motion to stay the appeal pending completion of a new rulemaking that would propose rescinding the enjoined 2023 CRA Final Rule and reinstating

the CRA framework that existed prior to the final rule.

In April 2025, the Fifth Circuit granted the agencies’ motion.

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

Fair Lending Requirements.

We are subject

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

A number of laws and regulations provide

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

We are subject to

certain fair lending requirements and reporting obligations involving lending operations.

A number of laws and regulations provide these

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

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

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

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

of examination scenarios addressing fair lending and to update references to

supervisory guidance, sound risk management practices, and

applicable legal standards.

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

In addition to prohibiting discrimination in credit

transactions on the basis of prohibited factors, these laws and regulations can cause a lender to be liable for policies that result in

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

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

In April 2025, President Trump issued Executive Order (EO)

14281, which directed agencies to eliminate the use of disparate impact liability in all contexts.

Following the Executive Order, the

OCC announced the removal of references to “disparate impact” in its Fair Lending booklet.

The FDIC likewise updated the Fair

Lending Laws and Regulation section of its Consumer Compliance Examination Manual to remove all references to disparate impact and how

to evaluate disparate impact risk.

Federal fair lending laws and regulations, as interpreted

by courts and regulatory agencies, continue to recognize both disparate treatment and disparate impact theories of liability.

agencies periodically review and update supervisory guidance related to fair lending risk management and examination practices.

In addition to prohibiting discrimination in credit transactions

on the basis of prohibited factors, these laws and regulations can cause a lender to be liable for policies that result in a disparate

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

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.

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coordination efforts.

In addition to substantive penalties and corrective

measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with fair

lending requirements into account when regulating and supervising other activities of the bank, including in acting on expansionary proposals.

In addition to substantive penalties and corrective measures

that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with fair lending

requirements into account when regulating and supervising other activities of the bank, including in acting on expansionary proposals.

Consumer Protection Regulations.

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

This includes Title X of the

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

UDAAP claims involve

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

Interest and other charges collected

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

The activities

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

This includes Title X of the Dodd-Frank

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

UDAAP claims involve detecting

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

Interest and other charges collected or

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

The loan operations of the Bank

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

· the Truth-In-Lending Act (“TILA”)

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

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

· the Home Mortgage Disclosure

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

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

· ECOA and Regulation B, prohibiting

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

· the Fair Credit Reporting Act,

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

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

and other disclosures;

· the Fair Debt Collection Practices

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

abusive, deceptive, and unfair debt collection practices;

· the Real Estate Settlement Procedures

Act (“RESPA”) and Regulation X, which governs various aspects of residential mortgage loans, including the settlement and

servicing process, dictates certain disclosures to be provided to consumers, and imposes other requirements related to compensation of

service providers, insurance escrow accounts, and loss mitigation procedures;

· The Secure and Fair Enforcement

for Mortgage Licensing Act (“SAFE Act”) which mandates a nationwide licensing and registration system for residential mortgage

loan originators.

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

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

· The Homeowners Protection Act,

or the PMI Cancellation Act, provides requirements relating to private mortgage insurance on residential mortgages, including the cancelation

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

· The Fair Housing Act prohibits

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

and other prohibited factors;

· The Servicemembers Civil Relief

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

dependents and others;

· Section 106(c)(5) of the Housing

and Urban Development Act requires making home ownership available to eligible homeowners.

The deposit operations of the Bank are also subject

to federal laws, such as:

· the Federal Deposit Insurance

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

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

· the Right to Financial Privacy

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

subpoenas of financial records;

· the Electronic Funds Transfer

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

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

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

deposits to and withdrawals from deposit accounts;

· The Expedited Funds Availability

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

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

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

· the Truth in Savings Act and

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

institutions and accounts.

In light of the growing concern by regulators about

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

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

· 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.

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

maintaining annual 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

· the Electronic Funds Transfer Act and Regulation E, which

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

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

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

from deposit accounts;

· The Expedited Funds Availability Act and Regulation CC, setting

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

policies to customers, and relating to the collection and return of checks and electronic checks, including the rules regarding the creation

or receipt of substitute checks;

· the Truth in Savings Act and Regulation DD, which requires

depository institutions to provide disclosures so that consumers can make meaningful comparisons about depository institutions and accounts.

In light of the growing concern by regulators about relationships

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

in issuing the Interagency Guidance on Third-Party Relationships:

Risk Management.

This new guidance provided risk management

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

The CFPB is an independent regulatory authority housed

within the Federal Reserve.

This guidance provided risk management oversight guidelines

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

The CFPB is an independent regulatory authority housed within

the Federal Reserve.

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

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

The CFPB has issued a number of significant rules that

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

The CFPB has issued a number of significant rules that impact

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

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

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.

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.

April 15, 2025, this final rule, the “Credit Card Penalty Fees Final Rule” was vacated pursuant to a court order in Chamber

Of Commerce of the United States of America, et al.

v Consumer Financial Protection Bureau, et al.

4:24-cv-00213-P (N.D.

The Office of Foreign Assets Control.

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

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

The Office of

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

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

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

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wire transfers and customer files.

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

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

time a modification is made

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

Anti-Money Laundering and Countering the Financing

of Terrorism (AML/CFT);

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

the Office of Foreign Assets 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 “knowing your customer” and enhanced due diligence requirements, particularly

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

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

The USA PATRIOT Act amended the Bank Secrecy Act and

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

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

collection tools and

enforcement mechanics for the U.S.

The USA PATRIOT Act amended the Bank Secrecy Act and provides,

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

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

(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.

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.

Under the USA PATRIOT Act, the regulators can provide

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 the applicable governmental authorities.

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.

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 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 the applicable governmental authorities.

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.

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

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

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 FFIEC and the FDIC emphasize oversight of third-party AML/CFT service providers,

with examination enforcement actions against institutions that fail to monitor vendors effectively.

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

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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

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

debt prohibitions, and increased scrutiny of sanctions evasion.

Subsequently, on March 21, 2025, FinCEN

removed Beneficial Ownership reporting requirements for domestic reporting companies.

FinCEN has also indicated continuing plans to assess

options for further modification when considering the public interest and the burdens imposed by regulation.

Following Russia’s invasion of Ukraine, OFAC 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.

Sanctions 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 2025, FATF removed Burkina Faso, Mozambique, Nigeria and

South Africa from its lists of Jurisdictions under Increased Monitoring.

BSA/AML oversight by financial institutions continues to be a

significant source of enforcement activity by all prudential regulators and FinCEN and therefore requires ongoing focus by the Bank.

Privacy, Data Security and Credit Reporting.

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

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

Financial institutions are required

to disclose their policies for collecting and protecting confidential information.

Customers generally may prevent financial institutions

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

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

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

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

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

unless required by law.

Consumers must be notified in the event of a data breach

under applicable state laws.

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

rights and impose increased obligations on companies handling personal data.

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

regulatory agencies published a final rule that will impose upon banking organizations and their service providers new notification requirements

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.

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

Consumers must be notified in the event of a data breach under

applicable state laws.

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

and impose increased obligations on companies handling personal data.

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

agencies published a final rule that required banking organizations and their service providers to implement new notification requirements

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.

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

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

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

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

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

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

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

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 became effective for institutions subject to

the FTC’s jurisdiction;

banking organizations subject to federal banking agency oversight are subject to substantially similar information

security requirements enforced by their prudential regulators.

In 2024 and 2025, federal banking agencies issued guidance emphasizing

ransomware preparedness and third-party risk management.

Banks are expected to maintain robust incident response plans, conduct resilience

exercises, and strengthen cybersecurity controls.

Additionally, regulators reinforced that institutions remain fully accountable for risks

posed by third-party service providers, requiring comprehensive due diligence, ongoing monitoring and governance oversight.

States continue to take the lead in passing privacy focused

A majority of states have now enacted some form of consumer privacy protection laws, many of which include exemptions or

partial exemptions 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 enacted.

The CFPB also took additional action related to consumer privacy.

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.

In early 2025, a federal district court enjoined enforcement of

the rule nationwide.

In July 2025, the CFPB announced its intent to initiate a new rulemaking process to reconsider the final rule.

issues the CFPB has indicated it intends to focus on include:

(a) the proper understanding of who can serve as a “representative”

making a request on behalf of the consumer;

(b) the appropriate approach to the assessment of fees to defray the costs incurred by a “covered

person” in responding to a customer-driven request;

1033 compliance;

and (d) data privacy risks associated with Section 1033 compliance.

Comments on the CFPB’s proposed approach were

requested by October 21, 2025.

In addition, pursuant to the Fair and Accurate Credit Transactions

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

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

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

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

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

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

Federal Home Loan Bank System.

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

financing credit for depository institutions.

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

credit for depository institutions.

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

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

It makes loans or advances

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

of the Federal Housing Financing Board.

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

It makes loans or advances to members in

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

Housing Financing Board.

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

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

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

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

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.

On January 14, 2025, the Federal Housing Finance Agency finalized the rule originally proposed in September 2024.

These changes became

effective in April 2025.

Effect of Governmental Monetary Policies.

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.

government and its

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”)

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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.

target federal funds rate increased to a maximum of between 4.25% and 4.50%.

Throughout 2023, the target federal funds rate increased

as far as 5.50%.

In 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 4.25% to 4.50% 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.

of 2025, the rate had dropped to between 3.50% and 3.75%.

Incentive Compensation.

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

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

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

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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.

The scope and content of federal

bank regulatory agencies’ policies on executive compensation are continuing to develop and are likely to continue evolving in the

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

programs at financial institutions.

and (iii) be supported by strong corporate governance,

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

The scope and content of federal bank regulatory agencies’

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

In 2016, federal

agencies proposed regulations which could significantly change the regulation of incentive compensation programs at financial institutions.

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

Institutions in the top

two tiers would be subject to rules much more detailed and proscriptive than are currently in effect.

If interpreted aggressively by the

regulators, the proposed rules could be used to prevent, as a practical matter, larger institutions from engaging in certain lines of

business where substantial commission and bonus pool arrangements are the norm.

In the 2016 proposal, the top two tiers included institutions

with more than $50 billion of assets, which would not currently apply to us.

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

they may be implemented and, therefore, it cannot be determined at this time whether compliance with such policies will adversely affect

our ability to hire, retain and motivate our key employees.

Institutions in the top two tiers would be subject to rules

much more detailed and proscriptive than are currently in effect.

If interpreted aggressively by the regulators, the proposed rules could

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

and bonus pool arrangements are the norm.

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

assets, which would not currently apply to us.

In May 2024, the federal banking agencies reissued a Notice of Proposed Rulemaking under

Section 956 of the Dodd-Frank Act to strengthen oversight of incentive compensation arrangements.

The proposal would apply to institutions

with $1 billion or more in total consolidated assets and includes requirements for risk-adjusted awards, mandatory deferrals, forfeiture

and clawback provisions, and enhanced governance standards.

As of the date of this filing, these proposed rules have not been finalized.

This marks the latest effort to finalize rules originally proposed in 2011 and 2016, signaling continued regulatory focus on aligning

compensation practices with safety and soundness objectives.

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

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

retain and motivate our key employees.

Corporate Governance .

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

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

traded companies.

8 unchanged sentences

to implement these provisions.

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

However, on October 14, 2021, the SEC signaled a renewed

interest in this rulemaking initiative by re-opening

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

5 unchanged sentences

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

Concentrations in Commercial

Real Estate .

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

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

The interagency Concentrations in Commercial Real Estate

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

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

that may warrant greater supervisory scrutiny:

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

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

The CRE Guidance does not limit banks’

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

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

On December 18, 2015, the federal

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

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

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

The federal bank agencies reminded FDIC-insured

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

the risks arising from commercial real estate lending.

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

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

Concentrations in Commercial Real Estate .

Concentration

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

A concentration in commercial real estate

is one example of regulatory concern.

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

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

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

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

and land development loans exceeding 100% of capital.

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

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

level and nature of their commercial real estate concentrations.

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

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

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

easing of commercial real estate underwriting standards.

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

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

estate lending.

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

real estate concentration risk.

Since 2023, the OCC, FDIC, and Federal Reserve have issued multiple reminders and risk bulletins emphasizing

prudent CRE risk management due to rising interest rates, declining office valuations, and stress in certain property sectors.

Based on the Bank’s loan portfolio

2 unchanged sentences

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