# Southern First Bancshares (SFST) 10-Q SEC filing - Q1 FY2023

- Filed: May 2, 2023
- Fiscal quarter: Q1 FY2023
- Calendar quarter: Q1 2023
- Accession: 0001206774-23-000655
- OpenCapital page: https://www.opencapital.sh/filings/0001206774-23-000655
- Markdown URL: https://www.opencapital.sh/filings/0001206774-23-000655.md
- Official SEC filing index: https://www.sec.gov/Archives/edgar/data/1090009/0001206774-23-000655-index.htm

## Filing documents

- [10-Q (sfst-20230331.htm)](https://www.sec.gov/Archives/edgar/data/1090009/000120677423000655/sfst-20230331.htm)
- [EMPLOYMENT AGREEMENT (e419475ex10-1_southernfirst.htm)](https://www.sec.gov/Archives/edgar/data/1090009/000120677423000655/e419475ex10-1_southernfirst.htm)
- [RULE 13A-14(A) CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER (e419475ex31-1_southernfirst.htm)](https://www.sec.gov/Archives/edgar/data/1090009/000120677423000655/e419475ex31-1_southernfirst.htm)
- [RULE 13A-14(A) CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER (e419475ex31-2_southernfirst.htm)](https://www.sec.gov/Archives/edgar/data/1090009/000120677423000655/e419475ex31-2_southernfirst.htm)
- [SECTION 1350 CERTIFICATIONS (e419475ex32_southernfirst.htm)](https://www.sec.gov/Archives/edgar/data/1090009/000120677423000655/e419475ex32_southernfirst.htm)

---

## 10-Q

SEC source: [sfst-20230331.htm](https://www.sec.gov/Archives/edgar/data/1090009/000120677423000655/sfst-20230331.htm)

[**Table of Contents**](#toc)

**UNITED
STATES**

**SECURITIES
AND EXCHANGE COMMISSION**

**Washington,
D.C. 20549**

**FORM 10-Q**

☒ **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For
the Quarterly Period Ended March 31, 2023**

**OR**

**☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For
the Transition Period from to**

**Commission
file number 000-27719**

**Southern
First Bancshares, Inc.**

(Exact
name of registrant as specified in its charter)

| South Carolina | 58-2459561 |
| --- | --- |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 6 Verdae Boulevard |  |
| Greenville, S.C. | 29607 |
| (Address of principal executive offices) | (Zip Code) |

**864-679-9000**

(Registrant’s telephone number, including area code)

**Not
Applicable**

(Former name, former address, and former fiscal year, if changed since last report)

Securities
registered pursuant to Section 12(b) of the Act:

**Title of each class** **Trading Symbol(s)** **Name of each exchange on which registered**

Common Stock SFST The Nasdaq Global Market

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes ☒ No ☐

Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☒

Non-accelerated filer ☐ Smaller Reporting Company ☐

Emerging growth company ☐

If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate
the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

8,047,975
shares of common stock, par value $0.01 per share, were issued and outstanding as of April 27, 2023.

*SOUTHERN
FIRST BANCSHARES, INC. AND SUBSIDIARY*

March
31, 2023 Form 10-Q

INDEX

|  |  | **Page** |
| --- | --- | --- |
| [**PART I – CONSOLIDATED FINANCIAL INFORMATION**](#m_001) |  | 1 |
| Item  1. | [Consolidated Financial Statements](#m_002) | 1 |
|  | [Consolidated Balance Sheets](#m_003) | 1 |
|  | [Consolidated Statements of Income](#m_004) | 2 |
|  | [Consolidated Statements of Comprehensive Income](#m_005) | 3 |
|  | [Consolidated Statements of Shareholders’ Equity](#m_006) | 4 |
|  | [Consolidated Statements of Cash Flows](#m_007) | 5 |
|  | [Notes to Unaudited Consolidated Financial Statements](#m_008) | 6 |
| Item  2. | [Management’s Discussion and Analysis of Financial Condition and Results of Operations](#m_009) | 23 |
| Item  3. | [Quantitative and Qualitative Disclosures about Market Risk](#m_010) | 37 |
| Item  4. | [Controls and Procedures](#m_011) | 37 |
| [**PART II – OTHER INFORMATION**](#m_012) |  | 38 |
| Item  1. | [Legal Proceedings](#m_013) | 38 |
| Item  1A. | [Risk Factors](#m_014) | 38 |
| Item  2. | [Unregistered Sales of Equity Securities and Use of Proceeds](#m_015) | 39 |
| Item  3. | [Defaults upon Senior Securities](#m_016) | 39 |
| Item  4. | [Mine Safety Disclosures](#m_017) | 39 |
| Item  5. | [Other Information](#m_018) | 39 |
| Item  6. | [Exhibits](#m_019) | 40 |

PART
I. CONSOLIDATED FINANCIAL INFORMATION

Item
1. CONSOLIDATED FINANCIAL STATEMENTS

***SOUTHERN
FIRST BANCSHARES, INC. AND SUBSIDIARY***

***CONSOLIDATED
BALANCE SHEETS***

_(Unaudited) · (Audited)_

| (dollars in thousands, except share data) | March 31, 2023 | December 31, 2022 |
| --- | --- | --- |
| ASSETS |  |  |
| Cash and cash equivalents: |  |  |
| Cash and due from banks | $22,213 | 18,788 |
| Federal funds sold | 242,642 | 101,277 |
| Interest-bearing deposits with banks | 7,350 | 50,809 |
| Total cash and cash equivalents | 272,205 | 170,874 |
| Investment securities: |  |  |
| Investment securities available for sale | 94,036 | 93,347 |
| Other investments | 10,097 | 10,833 |
| Total investment securities | 104,133 | 104,180 |
| Mortgage loans held for sale | 6,979 | 3,917 |
| Loans | 3,417,945 | 3,273,363 |
| Less allowance for credit losses | (40,435) | (38,639) |
| Loans, net | 3,377,510 | 3,234,724 |
| Bank owned life insurance | 51,453 | 51,122 |
| Property and equipment, net | 97,806 | 99,183 |
| Deferred income taxes, net | 12,087 | 12,522 |
| Other assets | 15,967 | 15,459 |
| Total assets | $3,938,140 | 3,691,981 |
| LIABILITIES |  |  |
| Deposits | $3,426,774 | 3,133,864 |
| FHLB advances and related debt | 125,000 | 175,000 |
| Subordinated debentures | 36,241 | 36,214 |
| Other liabilities | 50,775 | 52,391 |
| Total liabilities | 3,638,790 | 3,397,469 |
| SHAREHOLDERS’ EQUITY |  |  |
| Preferred stock, par value $.01 per share, 10,000,000 shares authorized | - | - |
| Common stock, par value $.01 per share, 10,000,000 shares authorized, 8,047,975 and 8,011,045 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively | 80 | 80 |
| Nonvested restricted stock | (4,462) | (3,306) |
| Additional paid-in capital | 120,683 | 119,027 |
| Accumulated other comprehensive loss | (11,775) | (13,410) |
| Retained earnings | 194,824 | 192,121 |
| Total shareholders’ equity | 299,350 | 294,512 |
| Total liabilities and shareholders’ equity | $3,938,140 | 3,691,981 |

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

**SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY**

### CONSOLIDATED STATEMENTS OF INCOME

_(Unaudited)_

| (dollars in thousands, except share data) | For the three months / ended March 31, 2023 | For the three months / ended March 31, 2022 |
| --- | --- | --- |
| Interest income |  |  |
| Loans | $36,748 | 23,931 |
| Investment securities | 613 | 474 |
| Federal funds sold and interest-bearing deposits with banks | 969 | 59 |
| Total interest income | 38,330 | 24,464 |
| Interest expense |  |  |
| Deposits | 17,179 | 908 |
| Borrowings | 727 | 392 |
| Total interest expense | 17,906 | 1,300 |
| Net interest income | 20,424 | 23,164 |
| Provision for credit losses | 1,825 | 1,105 |
| Net interest income after provision for credit losses | 18,599 | 22,059 |
| Noninterest income |  |  |
| Mortgage banking income | 622 | 1,494 |
| Service fees on deposit accounts | 325 | 303 |
| ATM and debit card income | 555 | 514 |
| Income from bank owned life insurance | 332 | 315 |
| Other income | 210 | 301 |
| Total noninterest income | 2,044 | 2,927 |
| Noninterest expenses |  |  |
| Compensation and benefits | 10,356 | 9,455 |
| Occupancy | 2,457 | 1,779 |
| Outside service and data processing costs | 1,629 | 1,534 |
| Insurance | 689 | 261 |
| Professional fees | 660 | 599 |
| Marketing | 366 | 266 |
| Other | 947 | 791 |
| Total noninterest expenses | 17,104 | 14,685 |
| Income before income tax expense | 3,539 | 10,301 |
| Income tax expense | 836 | 2,331 |
| Net income | $2,703 | 7,970 |
| Earnings per common share |  |  |
| Basic | $0.34 | 1.00 |
| Diluted | 0.33 | 0.98 |
| Weighted average common shares outstanding |  |  |
| Basic | 8,025,876 | 7,931,855 |
| Diluted | 8,092,270 | 8,096,310 |

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

**SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY**

### CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

_(Unaudited)_

| (dollars in thousands) | For the three months ended March 31, 2023 | For the three months ended March 31, 2022 |
| --- | --- | --- |
| Net income | $2,703 | 7,970 |
| Other comprehensive income (loss): |  |  |
| Unrealized gain (loss) on securities available for sale: |  |  |
| Unrealized holding gain (loss) arising during the period, pretax | 2,070 | (7,141) |
| Tax benefit (expense) | (435) | 1,500 |
| Reclassification of realized gain | - | (15) |
| Tax expense | - | 3 |
| Other comprehensive income (loss) | 1,635 | (5,653) |
| Comprehensive income | $4,338 | 2,317 |

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

**SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY**

### CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

_(Unaudited)_

| (dollars in thousands, except share data) | For the three months ended March 31, / Common stock / Shares | For the three months ended March 31, / Common stock / Amount | For the three months ended March 31, / Preferred stock / Shares | For the three months ended March 31, / Preferred stock / Amount | For the three months ended March 31, / Nonvested restricted / stock | For the three months ended March 31, / Additional paid-in / capital | For the three months ended March 31, / Accumulated other comprehensive / income (loss) | For the three months ended March 31, / Retained / earnings | For the three months ended March 31, / Total |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| December 31, 2021 | 7,925,819 | $79 | - | - | $(1,435) | $114,226 | $(740) | $165,771 | $277,901 |
| Net income | - | - | - | - | - | - | - | 7,970 | 7,970 |
| Proceeds from exercise of stock options | 18,125 | - | - | - | - | 579 | - | - | 579 |
| Issuance of restricted stock | 36,575 | 1 | - | - | (2,235) | 2,234 | - | - | - |
| Adoption of ASU 2016-13 | - | - | - | - | - | - | - | (2,765) | (2,765) |
| Compensation expense related to restricted stock, net of tax | - | - | - | - | 245 | - | - | - | 245 |
| Compensation expense related to stock options, net of tax | - | - | - | - | - | 247 | - | - | 247 |
| Other comprehensive loss | - | - | - | - | - | - | (5,653) | - | (5,653) |
| March 31, 2022 | 7,980,519 | $80 | - | - | $(3,425) | $117,286 | $(6,393) | $170,976 | $278,524 |
| December 31, 2022 | 8,011,045 | $80 | - | - | $(3,306) | $119,027 | $(13,410) | $192,121 | $294,512 |
| Net income | - | - | - | - | - | - | - | 2,703 | 2,703 |
| Proceeds from exercise of stock options | 1,000 | - | - | - | - | 17 | - | - | 17 |
| Issuance of restricted stock | 35,930 | - | - | - | (1,521) | 1,521 | - | - | - |
| Compensation expense related to restricted stock, net of tax | - | - | - | - | 365 | - | - | - | 365 |
| Compensation expense related to stock options, net of tax | - | - | - | - | - | 118 | - | - | 118 |
| Other comprehensive income | - | - | - | - | - | - | 1,635 | - | 1,635 |
| March 31, 2023 | 8,047,975 | $80 | - | - | $(4,462) | $120,683 | $(11,775) | $194,824 | $299,350 |

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

**SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY**

### CONSOLIDATED STATEMENTS OF CASH FLOWS

_(Unaudited)_

| (dollars in thousands) | For the three months ended March 31, 2023 | For the three months ended March 31, 2022 |
| --- | --- | --- |
| Operating activities |  |  |
| Net income | $2,703 | 7,970 |
| Adjustments to reconcile net income to cash provided by operating activities: |  |  |
| Provision for credit losses | 1,825 | 1,105 |
| Depreciation and other amortization | 1,203 | 583 |
| Accretion and amortization of securities discounts and premium, net | 129 | 210 |
| Gain on sale of securities | - | (15) |
| Net change in operating leases | 53 | 108 |
| Compensation expense related to stock options and restricted stock grants | 483 | 492 |
| Gain on sale of loans held for sale | (530) | (899) |
| Loans originated and held for sale | (17,892) | (75,729) |
| Proceeds from sale of loans held for sale | 15,360 | 72,344 |
| Increase in cash surrender value of bank owned life insurance | (331) | (315) |
| Increase in other assets | (508) | (447) |
| Increase (decrease) in other liabilities | (1,258) | 2,460 |
| Net cash provided by operating activities | 1,237 | 7,867 |
| Investing activities |  |  |
| Increase (decrease) in cash realized from: |  |  |
| Increase in loans, net | (144,641) | (170,787) |
| Purchase of property and equipment | (180) | (5,869) |
| Purchase of investment securities: |  |  |
| Available for sale | - | (10,094) |
| Other investments | (18,264) | (2,265) |
| Payments and maturities, calls and repayments of investment securities: |  |  |
| Available for sale | 1,252 | 16,046 |
| Other investments | 19,000 | 2,182 |
| Net cash used for investing activities | (142,833) | (170,787) |
| Financing activities |  |  |
| Increase (decrease) in cash realized from: |  |  |
| Increase in deposits, net | 292,910 | 144,348 |
| Decrease in Federal Home Loan Bank advances and other borrowings, net | (50,000) | - |
| Proceeds from the exercise of stock options | 17 | 579 |
| Net cash provided by financing activities | 242,927 | 144,927 |
| Net increase (decrease) in cash and cash equivalents | 101,331 | (17,993) |
| Cash and cash equivalents at beginning of the period | 170,874 | 167,209 |
| Cash and cash equivalents at end of the period | $272,205 | 149,216 |
| Supplemental information |  |  |
| Cash paid for |  |  |
| Interest | $16,801 | 1,789 |
| Income taxes | - | - |
| Schedule of non-cash transactions |  |  |
| Unrealized gain (loss) on securities, net of income taxes | 1,635 | (5,641) |

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

*SOUTHERN
FIRST BANCSHARES, INC. AND SUBSIDIARY*

*NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS*

### NOTE 1 – Summary of Significant Accounting Policies

Nature
of Business

***Southern
First Bancshares, Inc.*** (the “Company”) is a South Carolina corporation that owns all of the capital stock of Southern
First Bank (the “Bank”) and all of the stock of Greenville First Statutory Trusts I and II (collectively, the “Trusts”).
The Trusts are special purpose non-consolidated entities organized for the sole purpose of issuing trust preferred securities. The Bank’s
primary federal regulator is the Federal Deposit Insurance Corporation (the “FDIC”). The Bank is also regulated and examined
by the South Carolina Board of Financial Institutions. The Bank is primarily engaged in the business of accepting demand deposits and
savings deposits insured by the FDIC, and providing commercial, consumer and mortgage loans to the general public.

Basis
of Presentation

The
accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”)
for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three-month period ended March 31, 2023 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2023. For further information, refer to the consolidated financial statements and footnotes
thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the U.S. Securities
and Exchange Commission (“SEC”) on February 13, 2023. The consolidated financial statements include the accounts of the Company
and the Bank. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
810, “Consolidation,” the financial statements related to the Trusts have not been consolidated.

*Business
Segments*

The
Company, through the Bank, provides a broad range of financial services to individuals and companies in South Carolina, North Carolina,
and Georgia. These services include demand, time and savings deposits; lending services; ATM processing and mortgage banking services.
While the Company’s management periodically reviews limited production information for these revenue streams, that information
is not complete as it does not include a full allocation of revenue, costs and capital from key corporate functions. Management will
continue to evaluate these lines of business for separate reporting as facts and circumstances change. Accordingly, the Company’s
various banking operations are not considered by management to constitute more than one reportable operating segment.

Risk
and Uncertainties

There
were two significant bank failures in the first part of March 2023, primarily due to the failed banks’ lack of liquidity as depositors
sought to withdraw their deposits. Due to rising interest rates, the failed banks were unable to sell investment securities held to meet
liquidity needs without realizing substantial losses. As a result of the March 2023 bank closures and in an effort to strengthen public
confidence in the banking system and protect depositors, regulators have announced that any losses to the Deposit Insurance Fund to support
uninsured depositors will be recovered by a special assessment on banks, as required by law, which could increase the cost of our FDIC
insurance assessments. Additionally, the Federal Reserve announced the creation of a new Bank Term Funding Program in an effort to minimize
the need for banks to sell securities at a loss in times of stress. The future impact of these failures on the economy, financial institutions
and their depositors, as well as any governmental regulatory responses or actions resulting from the same, is difficult to predict at
this time.

Use
of Estimates

The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated
financial statements and the reported amount of income and expenses during the reporting periods. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of
the allowance for credit losses, real estate acquired in the settlement of loans, fair value of financial instruments, and valuation
of deferred tax assets.

Reclassifications

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

Subsequent
Events

Subsequent
events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent
events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including
the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence
about conditions that did not exist at the date of the balance sheet but arose after that date.

**Adoption of New Accounting Standard**

In
January 2023, the Company adopted ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings
and Vintage Disclosures” (“ASU 2022-02”), which eliminated the accounting guidance for troubled debt restructurings
(“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower
is experiencing financial difficulty. In addition, for public business entities, the guidance requires disclosure of current-period gross
write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20. The Company
adopted the guidance using the modified retrospective method. Upon adoption of this guidance, the Company no longer establishes a specific
reserve for modifications to borrowers experiencing financial difficulty. Instead, these modifications are included in their respective
cohort and a historical loss rate is applied to the current loan balance to arrive at the quantitative baseline portion of the allowance.
The difference between the allowance previously determined and the current allowance was not material to the Company’s financial
statements.

*Newly
Issued, But Not Yet Effective Accounting Standards*

In
December 2022, the FASB issued amendments to defer the sunset date of the Reference Rate Reform Topic of the Accounting Standards Codification
from December 31, 2022 to December 31, 2024, because the current relief in Reference Rate Reform Topic may not cover a period of time
during which a significant number of modifications may take place. The amendments were effective upon issuance. The Company does not
expect these amendments to have a material effect on its financial statements.

### **NOTE 2 – Investment Securities**

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

_March 31, 2023_

| (dollars in thousands) | Amortized / Cost | Gross Unrealized / Gains | Gross Unrealized / Losses | Fair / Value |
| --- | --- | --- | --- | --- |
| Available for sale |  |  |  |  |
| Corporate bonds | $2,166 | - | 250 | 1,916 |
| US treasuries | 999 | - | 107 | 892 |
| US government agencies | 13,008 | - | 2,024 | 10,984 |
| State and political subdivisions | 22,844 | 8 | 3,203 | 19,649 |
| Asset-backed securities | 5,966 | - | 147 | 5,819 |
| Mortgage-backed securities |  |  |  |  |
| FHLMC | 23,876 | 1 | 3,467 | 20,410 |
| FNMA | 34,612 | - | 5,029 | 29,583 |
| GNMA | 5,471 | - | 688 | 4,783 |
| Total mortgage-backed securities | 63,959 | 1 | 9,184 | 54,776 |
| Total investment securities available for sale | $108,942 | 9 | 14,915 | 94,036 |

_December 31, 2022_

| Line item | Amortized / Cost | Gross Unrealized / Gains | Gross Unrealized / Losses | Fair / Value |
| --- | --- | --- | --- | --- |
| Available for sale |  |  |  |  |
| Corporate bonds | $2,172 | - | 289 | 1,883 |
| US treasuries | 999 | - | 128 | 871 |
| US government agencies | 13,007 | - | 2,390 | 10,617 |
| State and political subdivisions | 22,910 | - | 4,004 | 18,906 |
| Asset-backed securities | 6,435 | - | 206 | 6,229 |
| Mortgage-backed securities |  |  |  |  |
| FHLMC | 24,086 | - | 3,745 | 20,341 |
| FNMA | 35,141 | - | 5,520 | 29,621 |
| GNMA | 5,573 | - | 694 | 4,879 |
| Total mortgage-backed securities | 64,800 | - | 9,959 | 54,841 |
| Total investment securities available for sale | $110,323 | - | 16,976 | 93,347 |

Contractual
maturities and yields on the Company’s investment securities at March 31, 2023 and December 31, 2022 are shown in the following
table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment penalties.

_March 31, 2023_

| (dollars in thousands) | Less than one year / Amount | Less than one year / Yield | One to five years / Amount | One to five years / Yield | Five to ten years / Amount | Five to ten years / Yield | Over ten years / Amount | Over ten years / Yield | Total / Amount | Total / Yield |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Available for sale |  |  |  |  |  |  |  |  |  |  |
| Corporate bonds | - | - | - | - | $1,916 | 2.00% | - | - | $1,916 | 2.00% |
| US treasuries | - | - | - | - | 892 | 1.27% | - | - | 892 | 1.27% |
| US government agencies | - | - | 3,291 | 0.85% | 7,693 | 1.55% | - | - | 10,984 | 1.34% |
| State and political subdivisions | - | - | 465 | 2.13% | 5,598 | 1.80% | 13,586 | 2.16% | 19,649 | 2.06% |
| Asset-backed securities | - | - | - | - | 452 | 4.43% | 5,367 | 5.62% | 5,819 | 5.53% |
| Mortgage-backed securities | - | - | 4,902 | 1.17% | 3,712 | 1.57% | 46,162 | 1.95% | 54,776 | 1.85% |
| Total investment securities | - | - | $8,658 | 1.10% | $20,263 | 1.72% | $65,115 | 2.30% | $94,036 | 2.06% |

_December 31, 2022_

| (dollars in thousands) | Less than one year / Amount | Less than one year / Yield | One to five years / Amount | One to five years / Yield | Five to ten years / Amount | Five to ten years / Yield | Over ten years / Amount | Over ten years / Yield | Total / Amount | Total / Yield |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Available for sale |  |  |  |  |  |  |  |  |  |  |
| Corporate bonds | - | - | - | - | $1,883 | 2.00% | - | - | $1,883 | 2.00% |
| US treasuries | - | - | - | - | 871 | 1.27% | - | - | 871 | 1.27% |
| US government agencies | - | - | 3,223 | 0.85% | 7,394 | 1.55% | - | - | 10,617 | 1.34% |
| State and political subdivisions | - | - | 460 | 2.13% | 5,382 | 1.80% | 13,064 | 2.16% | 18,906 | 2.05% |
| Asset-backed securities | - | - | - | - | 554 | 4.77% | 5,675 | 5.14% | 6,229 | 5.10% |
| Mortgage-backed securities | - | - | 4,594 | 1.13% | 3,959 | 1.60% | 46,288 | 1.90% | 54,841 | 1.82% |
| Total investment securities | - | - | $8,277 | 1.08% | $20,043 | 1.75% | $65,027 | 2.24% | $93,347 | 2.03% |

The
tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities at March
31, 2023 and December 31, 2022, aggregated by investment category and length of time that individual securities have been in a continuous
unrealized loss position.

_March 31, 2023_

|  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | Less than 12 months |  |  |  | 12 months or longer |  |  |  | Total |  |  |  |
| (dollars in thousands) | # |  | Fair value | Unrealized losses | # |  | Fair value | Unrealized losses | # |  | Fair value | Unrealized losses |
| Available for sale |  |  |  |  |  |  |  |  |  |  |  |  |
| Corporate bonds |  | - | - | - |  | $1 | $1,916 | 250 |  | $1 | $1,916 | 250 |
| US treasuries |  | - | - | - |  | 1 | 892 | 107 |  | 1 | 892 | 107 |
| US government agencies |  | - | - | - |  | 10 | 10,984 | 2,024 |  | 10 | 10,984 | 2,024 |
| State and political subdivisions |  | 1 | 465 | 5 |  | 29 | 18,404 | 3,198 |  | 30 | 18,869 | 3,203 |
| Asset-backed |  | 2 | 1,228 | 16 |  | 6 | 4,591 | 131 |  | 8 | 5,819 | 147 |
| Mortgage-backed securities |  |  |  |  |  |  |  |  |  |  |  |  |
| FHLMC |  | 1 | 1,504 | 12 |  | 19 | 17,486 | 3,455 |  | 20 | 18,990 | 3,467 |
| FNMA |  | 1 | 5 | - |  | 36 | 29,578 | 5,029 |  | 37 | 29,583 | 5,029 |
| GNMA |  | - | - | - |  | 7 | 4,783 | 688 |  | 7 | 4,783 | 688 |
| Total investment securities |  | $5 | $3,202 | 33 |  | $109 | $88,634 | 14,882 |  | $114 | $91,836 | 14,915 |

_December 31, 2022_

|  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | Less than 12 months |  |  |  | 12 months or longer |  |  |  | Total |  |  |  |
| (dollars in thousands) | # |  | Fair value | Unrealized losses | # |  | Fair value | Unrealized losses | # |  | Fair value | Unrealized losses |
| Available for sale |  |  |  |  |  |  |  |  |  |  |  |  |
| Corporate bonds |  | - | - | - |  | $1 | $1,883 | 289 |  | $1 | $1,883 | 289 |
| US treasuries |  | - | - | - |  | 1 | 871 | 128 |  | 1 | 871 | 128 |
| US government agencies |  | - | - | - |  | 10 | 10,617 | 2,390 |  | 10 | 10,617 | 2,390 |
| State and political subdivisions |  | 10 | 5,101 | 763 |  | 22 | 13,805 | 3,241 |  | 32 | 18,906 | 4,004 |
| Asset-backed |  | 5 | 4,291 | 135 |  | 3 | 1,938 | 71 |  | 8 | 6,229 | 206 |
| Mortgage-backed securities |  |  |  |  |  |  |  |  |  |  |  |  |
| FHLMC |  | 4 | 3,712 | 155 |  | 17 | 16,629 | 3,590 |  | 21 | 20,341 | 3,745 |
| FNMA |  | 9 | 2,208 | 201 |  | 28 | 27,413 | 5,319 |  | 37 | 29,621 | 5,520 |
| GNMA |  | 1 | 103 | 7 |  | 6 | 4,776 | 687 |  | 7 | 4,879 | 694 |
| Total investment securities |  | $29 | $15,415 | 1,261 |  | $88 | $77,932 | 15,715 |  | $117 | $93,347 | 16,976 |

At
March 31, 2023 the Company had 114 individual investments that were in an unrealized loss position. The unrealized losses were primarily
attributable to changes in interest rates, rather than deterioration in credit quality. The individual securities are each investment
grade securities. The Company considers factors such as the financial condition of the issuer including credit ratings and specific events
affecting the operations of the issuer, volatility of the security, underlying assets that collateralize the debt security, and other
industry and macroeconomic conditions. The Company does not intend to sell these securities, and it is more likely than not that the
Company will not be required to sell these securities before recovery of the amortized cost. The issuers of these securities continue
to make timely principal and interest payments under the contractual terms of the securities. As such, there is no allowance
for credit losses on available for sale securities recognized as of March 31, 2023.

Other
investments are comprised of the following and are recorded at cost which approximates fair value.

| (dollars in thousands) | March 31, 2023 | December 31, 2022 |
| --- | --- | --- |
| Federal Home Loan Bank stock | $7,534 | 9,250 |
| Other nonmarketable investments | 2,160 | 1,180 |
| Investment in Trust Preferred subsidiaries | 403 | 403 |
| Total other investments | $10,097 | 10,833 |

The
Company has evaluated other investments for impairment and determined that the other investments are not impaired as of March 31, 2023
and that ultimate recoverability of the par value of the investments is probable. All of the FHLB stock is used to collateralize advances
with the FHLB.

### NOTE 3 – Mortgage Loans Held for Sale

Mortgage
loans originated and intended for sale in the secondary market are reported as loans held for sale and carried at fair value under the
fair value option with changes in fair value recognized in current period earnings. At the date of funding of the mortgage loan held
for sale, the funded amount of the loan, the related derivative asset or liability of the associated interest rate lock commitment, less
direct loan costs becomes the initial recorded investment in the loan held for sale. Such amount approximates the fair value of the loan.
At March 31 2023, mortgage loans held for sale totaled $7.0 million compared to $3.9 million at December 31, 2022.

### NOTE 4 – Loans and Allowance for Credit Losses

The
following table summarizes the composition of our loan portfolio. Total gross loans are recorded net of deferred loan fees and costs,
which totaled $7.4 million as of March 31, 2023 and $7.3 million as of December 31, 2022.

| (dollars in thousands) | March 31, 2023 / Amount | March 31, 2023 / % of Total | December 31, 2022 / Amount | December 31, 2022 / % of Total |
| --- | --- | --- | --- | --- |
| Commercial |  |  |  |  |
| Owner occupied RE | $615,094 | 18.0% | $612,901 | 18.7% |
| Non-owner occupied RE | 928,059 | 27.2% | 862,579 | 26.3% |
| Construction | 94,641 | 2.8% | 109,726 | 3.4% |
| Business | 495,161 | 14.5% | 468,112 | 14.3% |
| Total commercial loans | 2,132,955 | 62.5% | 2,053,318 | 62.7% |
| Consumer |  |  |  |  |
| Real estate | 993,258 | 29.1% | 931,278 | 28.4% |
| Home equity | 180,974 | 5.3% | 179,300 | 5.5% |
| Construction | 71,137 | 2.1% | 80,415 | 2.5% |
| Other | 39,621 | 1.0% | 29,052 | 0.9% |
| Total consumer loans | 1,284,990 | 37.5% | 1,220,045 | 37.3% |
| Total gross loans, net of deferred fees | 3,417,945 | 100.0% | 3,273,363 | 100.0% |
| Less—allowance for credit losses | (40,435) |  | (38,639) |  |
| Total loans, net | $3,377,510 |  | $3,234,724 |  |

Maturities
and Sensitivity of Loans to Changes in Interest Rates  

The
information in the following tables summarizes the loan maturity distribution by type and related interest rate characteristics based
on the contractual maturities of individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal
of such loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may
differ from the maturities reflected below, because borrowers have the right to prepay obligations with or without prepayment penalties.

| (dollars in thousands) | One year or less | After one but within five years | March 31, 2023 / After five but within fifteen years | March 31, 2023 / After fifteen years | March 31, 2023 / Total |
| --- | --- | --- | --- | --- | --- |
| Commercial |  |  |  |  |  |
| Owner occupied RE | $9,295 | 144,602 | 418,450 | 42,747 | 615,094 |
| Non-owner occupied RE | 57,909 | 449,859 | 394,421 | 25,870 | 928,059 |
| Construction | 2,742 | 30,409 | 59,103 | 2,387 | 94,641 |
| Business | 92,502 | 211,145 | 187,033 | 4,481 | 495,161 |
| Total commercial loans | 162,448 | 836,015 | 1,059,007 | 75,485 | 2,132,955 |
| Consumer |  |  |  |  |  |
| Real estate | 9,871 | 46,324 | 280,204 | 656,859 | 993,258 |
| Home equity | 1,028 | 20,452 | 154,189 | 5,305 | 180,974 |
| Construction | 1,014 | 227 | 32,358 | 37,538 | 71,137 |
| Other | 3,569 | 21,975 | 13,272 | 805 | 39,621 |
| Total consumer loans | 15,482 | 88,978 | 480,023 | 700,507 | 1,284,990 |
| Total gross loans, net of deferred fees | $177,930 | 924,993 | 1,539,030 | 775,992 | 3,417,945 |

_December 31, 2022_

| (dollars in thousands) | One year or less | After one but within five years | After five but within fifteen years | After fifteen years | Total |
| --- | --- | --- | --- | --- | --- |
| Commercial |  |  |  |  |  |
| Owner occupied RE | $10,574 | 133,017 | 420,881 | 48,429 | 612,901 |
| Non-owner occupied RE | 44,570 | 419,976 | 371,208 | 26,825 | 862,579 |
| Construction | 5,509 | 36,537 | 61,009 | 6,671 | 109,726 |
| Business | 96,157 | 194,489 | 173,259 | 4,207 | 468,112 |
| Total commercial loans | 156,810 | 784,019 | 1,026,357 | 86,132 | 2,053,318 |
| Consumer |  |  |  |  |  |
| Real estate | 12,137 | 38,948 | 260,005 | 620,188 | 931,278 |
| Home equity | 1,336 | 20,933 | 151,696 | 5,335 | 179,300 |
| Construction | 665 | 182 | 23,788 | 55,780 | 80,415 |
| Other | 3,926 | 21,890 | 2,458 | 778 | 29,052 |
| Total consumer loans | 18,064 | 81,953 | 437,947 | 682,081 | 1,220,045 |
| Total gross loans, net of deferred fees | $174,874 | 865,972 | 1,464,304 | 768,213 | 3,273,363 |

The
following table summarizes the loans due after one year by category.

| (dollars in thousands) | March 31, 2023 / Interest Rate / Fixed | March 31, 2023 / Interest Rate / Floating or Adjustable | December 31, 2022 / Fixed | December 31, 2022 / Interest Rate / Floating or Adjustable |
| --- | --- | --- | --- | --- |
| Commercial |  |  |  |  |
| Owner occupied RE | $602,302 | 3,497 | 598,513 | 3,814 |
| Non-owner occupied RE | 784,868 | 85,282 | 742,763 | 75,246 |
| Construction | 75,041 | 16,858 | 90,246 | 13,971 |
| Business | 310,976 | 91,683 | 298,866 | 73,089 |
| Total commercial loans | 1,773,187 | 197,320 | 1,730,388 | 166,120 |
| Consumer |  |  |  |  |
| Real estate | 983,376 | 11 | 919,130 | 11 |
| Home equity | 13,508 | 166,438 | 14,173 | 163,791 |
| Construction | 70,123 | - | 79,750 | - |
| Other | 19,173 | 16,879 | 19,113 | 6,013 |
| Total consumer loans | 1,086,180 | 183,328 | 1,032,166 | 169,815 |
| Total gross loans, net of deferred fees | $2,859,367 | 380,648 | 2,762,554 | 335,935 |

Credit
Quality Indicators

The
Company tracks credit quality based on its internal risk ratings. Upon origination, a loan is assigned an initial risk grade, which is
generally based on several factors such as the borrower’s credit score, the loan-to-value ratio, the debt-to-income ratio, etc.
After loans are initially graded, they are monitored regularly for credit quality based on many factors, such as payment history, the
borrower’s financial status, and changes in collateral value. Loans can be downgraded or upgraded depending on management’s
evaluation of these factors. Internal risk-grading policies are consistent throughout each loan type.

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

- Pass—  A pass loan ranges from minimal to average credit risk; however, still has acceptable credit  risk.
- Watch—A  watch loan exhibits above average credit risk due to minor weaknesses and warrants closer  scrutiny by management.
- Special  mention—A special mention loan has potential weaknesses that deserve management’s  close attention. If left uncorrected, these potential weaknesses may result in deterioration  of the repayment prospects for the loan or the institution’s credit position at some  future date.
- Substandard—A  substandard loan is inadequately protected by the current sound worth and paying capacity  of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined  weakness, or weaknesses, that may jeopardize the liquidation of the debt. A substandard loan  is characterized by the distinct possibility that the Bank will sustain some loss if the  deficiencies are not corrected.
- Doubtful—A  doubtful loan has all of the weaknesses inherent in one classified as substandard with the  added characteristic that the weaknesses make collection or liquidation in full, on the basis  of the currently existing facts, conditions and values, highly questionable and improbable.

The
following table presents loan balances classified by credit quality indicators by year of origination as of March 31, 2023.

_March 31, 2023_

| (dollars in thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving | Revolving Converted to Term | Total |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Commercial |  |  |  |  |  |  |  |  |  |
| Owner occupied RE |  |  |  |  |  |  |  |  |  |
| Pass | $19,874 | 160,403 | 143,384 | 76,171 | 65,408 | 121,520 | - | 169 | 586,929 |
| Watch | - | 3,548 | 475 | 9,281 | 3,628 | 6,716 | - | - | 23,648 |
| Special Mention | - | 196 | - | - | - | 3,133 | - | - | 3,329 |
| Substandard | - | - | - | - | - | 1,188 | - | - | 1,188 |
| Total Owner occupied RE | 19,874 | 164,147 | 143,859 | 85,452 | 69,036 | 132,557 | - | 169 | 615,094 |
| Non-owner occupied RE |  |  |  |  |  |  |  |  |  |
| Pass | 47,280 | 298,161 | 177,421 | 112,850 | 59,025 | 181,699 | 623 | - | 877,059 |
| Watch | 200 | 972 | 9,496 | - | 7,555 | 13,070 | - | - | 31,293 |
| Special Mention | - | - | 201 | - | 8,893 | 906 | - | - | 10,000 |
| Substandard | - | 615 | - | - | 7,996 | 1,096 | - | - | 9,707 |
| Total Non-owner occupied RE | 47,480 | 299,748 | 187,118 | 112,850 | 83,469 | 196,771 | 623 | - | 928,059 |
| Construction |  |  |  |  |  |  |  |  |  |
| Pass | 942 | 62,604 | 22,778 | 6,737 | 246 | - | - | - | 93,307 |
| Watch | - | 1,334 | - | - | - | - | - | - | 1,334 |
| Special Mention | - | - | - | - | - | - | - | - | - |
| Substandard | - | - | - | - | - | - | - | - | - |
| Total Construction | 942 | 63,938 | 22,778 | 6,737 | 246 | - | - | - | 94,641 |
| Business |  |  |  |  |  |  |  |  |  |
| Pass | 17,705 | 140,684 | 54,235 | 21,675 | 20,611 | 58,086 | 147,734 | 442 | 461,172 |
| Watch | 145 | 14,571 | 2,031 | 1,627 | 1,061 | 3,607 | 5,420 | - | 28,462 |
| Special Mention | - | 1,259 | 236 | 463 | 279 | 424 | 15 | 99 | 2,775 |
| Substandard | - | 495 | - | 28 | 202 | 1,344 | 683 | - | 2,752 |
| Total Business | 17,850 | 157,009 | 56,502 | 23,793 | 22,153 | 63,461 | 153,852 | 541 | 495,161 |
| Total Commercial loans | 86,146 | 684,842 | 410,257 | 228,832 | 174,904 | 392,789 | 154,475 | 710 | 2,132,955 |
| Consumer |  |  |  |  |  |  |  |  |  |
| Real estate |  |  |  |  |  |  |  |  |  |
| Pass | 49,330 | 253,611 | 284,238 | 183,939 | 69,806 | 112,705 | - | - | 953,629 |
| Watch | 494 | 5,765 | 8,023 | 4,016 | 2,086 | 4,582 | - | - | 24,966 |
| Special Mention | - | 2,346 | 1,687 | 2,152 | 2,444 | 3,127 | - | - | 11,756 |
| Substandard | - | - | 646 | 224 | 330 | 1,707 | - | - | 2,907 |
| Total Real estate | 49,824 | 261,722 | 294,594 | 190,331 | 74,666 | 122,121 | - | - | 993,258 |
| Home equity |  |  |  |  |  |  |  |  |  |
| Pass | - | - | - | - | - | - | 167,694 | - | 167,694 |
| Watch | - | - | - | - | - | - | 6,701 | - | 6,701 |
| Special Mention | - | - | - | - | - | - | 3,861 | - | 3,861 |
| Substandard | - | - | - | - | - | - | 2,718 | - | 2,718 |
| Total Home equity | - | - | - | - | - | - | 180,974 | - | 180,974 |
| Construction |  |  |  |  |  |  |  |  |  |
| Pass | 2,656 | 47,570 | 20,066 | 845 | - | - | - | - | 71,137 |
| Watch | - | - | - | - | - | - | - | - | - |
| Special Mention | - | - | - | - | - | - | - | - | - |
| Substandard | - | - | - | - | - | - | - | - | - |
| Total Construction | 2,656 | 47,570 | 20,066 | 845 | - | - | - | - | 71,137 |
| Other |  |  |  |  |  |  |  |  |  |
| Pass | 390 | 3,375 | 2,829 | 1,645 | 1,433 | 3,205 | 25,359 | - | 38,236 |
| Watch | 10 | 42 | 363 | 11 | 4 | 183 | 118 | - | 731 |
| Special Mention | - | 11 | - | - | 37 | 90 | 93 | - | 231 |
| Substandard | - | 327 | 88 | - | 3 | - | 5 | - | 423 |
| Total Other | 400 | 3,755 | 3,280 | 1,656 | 1,477 | 3,478 | 25,575 | - | 39,621 |
| Total Consumer loans | 52,880 | 313,047 | 317,940 | 192,832 | 76,143 | 125,599 | 206,549 | - | 1,284,990 |
| Total loans | $139,026 | 997,889 | 728,197 | 421,664 | 251,047 | 518,388 | 361,024 | 710 | 3,417,945 |
| Current period gross write-offs |  | (160) |  | (1) |  |  |  |  | (161) |

The
following table presents loan balances classified by credit quality indicators by year of origination as of December 31, 2022.

_December 31, 2022_

| (dollars in thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving | Revolving Converted to Term | Total |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Commercial |  |  |  |  |  |  |  |  |  |
| Owner occupied RE |  |  |  |  |  |  |  |  |  |
| Pass | $169,083 | 122,654 | 85,867 | 66,299 | 36,718 | 93,915 | - | - | 574,536 |
| Watch | 14,648 | 479 | 9,339 | 3,658 | - | 6,792 | - | - | 34,916 |
| Special Mention | 200 | - | - | - | - | 2,960 | - | - | 3,160 |
| Substandard | - | - | - | - | 289 | - | - | - | 289 |
| Total Owner occupied RE | 183,931 | 123,133 | 95,206 | 69,957 | 37,007 | 103,667 | - | - | 612,901 |
| Non-owner occupied RE |  |  |  |  |  |  |  |  |  |
| Pass | 281,890 | 169,599 | 113,264 | 59,550 | 79,722 | 106,967 | 604 | 137 | 811,733 |
| Watch | 1,061 | 9,491 | - | 10,683 | 1,408 | 11,660 | - | - | 34,303 |
| Special Mention | - | 202 | - | 6,087 | - | 930 | - | - | 7,219 |
| Substandard | - | 134 | - | 7,992 | 327 | 871 | - | - | 9,324 |
| Total Non-owner occupied RE | 282,951 | 179,426 | 113,264 | 84,312 | 81,457 | 120,428 | 604 | 137 | 862,579 |
| Construction |  |  |  |  |  |  |  |  |  |
| Pass | 48,420 | 55,129 | 4,811 | 247 | - | - | - | - | 108,607 |
| Watch | 1,119 | - | - | - | - | - | - | - | 1,119 |
| Special Mention | - | - | - | - | - | - | - | - | - |
| Substandard | - | - | - | - | - | - | - | - | - |
| Total Construction | 49,539 | 55,129 | 4,811 | 247 | - | - | - | - | 109,726 |
| Business |  |  |  |  |  |  |  |  |  |
| Pass | 136,489 | 57,804 | 29,864 | 21,808 | 35,249 | 28,914 | 136,337 | 709 | 447,174 |
| Watch | 3,186 | 2,058 | 1,318 | 1,282 | 179 | 3,074 | 3,783 | 439 | 15,319 |
| Special Mention | 1,137 | 260 | 386 | 210 | - | 252 | 115 | 642 | 3,002 |
| Substandard | 498 | - | 188 | 233 | 315 | 911 | 472 | - | 2,617 |
| Total Business | 141,310 | 60,122 | 31,756 | 23,533 | 35,743 | 33,151 | 140,707 | 1,790 | 468,112 |
| Total Commercial loans | 657,731 | 417,810 | 245,037 | 178,049 | 154,207 | 257,246 | 141,311 | 1,927 | 2,053,318 |
| Consumer |  |  |  |  |  |  |  |  |  |
| Real estate |  |  |  |  |  |  |  |  |  |
| Pass | 243,589 | 269,565 | 189,075 | 72,499 | 39,042 | 76,172 | - | - | 889,942 |
| Watch | 6,196 | 8,256 | 3,847 | 2,278 | 494 | 3,671 | - | - | 24,742 |
| Special Mention | 3,114 | 1,938 | 2,644 | 2,258 | 955 | 2,639 | - | - | 13,548 |
| Substandard | - | 648 | 227 | 341 | 408 | 1,422 | - | - | 3,046 |
| Total Real estate | 252,899 | 280,407 | 195,793 | 77,376 | 40,899 | 83,904 | - | - | 931,278 |
| Home equity |  |  |  |  |  |  |  |  |  |
| Pass | - | - | - | - | - | - | 165,847 | - | 165,847 |
| Watch | - | - | - | - | - | - | 7,226 | - | 7,226 |
| Special Mention | - | - | - | - | - | - | 4,055 | - | 4,055 |
| Substandard | - | - | - | - | - | - | 2,172 | - | 2,172 |
| Total Home equity | - | - | - | - | - | - | 179,300 | - | 179,300 |
| Construction |  |  |  |  |  |  |  |  |  |
| Pass | 41,138 | 34,039 | 4,923 | - | - | - | - | - | 80,100 |
| Watch | - | - | - | - | - | - | - | - | - |
| Special Mention | - | - | - | 315 | - | - | - | - | 315 |
| Substandard | - | - | - | - | - | - | - | - | - |
| Total Construction | 41,138 | 34,039 | 4,923 | 315 | - | - | - | - | 80,415 |
| Other |  |  |  |  |  |  |  |  |  |
| Pass | 3,894 | 3,038 | 1,702 | 1,534 | 341 | 3,015 | 14,465 | - | 27,989 |
| Watch | 46 | 367 | 15 | 5 | 16 | 175 | 93 | - | 717 |
| Special Mention | 94 | - | - | 44 | 75 | 23 | 97 | - | 332 |
| Substandard | - | - | - | 5 | - | - | 9 | - | 14 |
| Total Other | 4,034 | 3,405 | 1,717 | 1,588 | 432 | 3,213 | 14,663 | - | 29,052 |
| Total Consumer loans | 298,071 | 317,851 | 202,433 | 79,279 | 41,331 | 87,117 | 193,963 | - | 1,220,045 |
| Total loans | $955,802 | 735,661 | 447,470 | 257,328 | 195,538 | 344,363 | 335,274 | 1,927 | 3,273,363 |

The
following tables present loan balances by age and payment status.

_March 31, 2023_

| (dollars in thousands) | Accruing 30-59 days past due | Accruing 60-89 days past due | Accruing 90 days or more past due | Nonaccrual loans | Accruing current | Total |
| --- | --- | --- | --- | --- | --- | --- |
| Commercial |  |  |  |  |  |  |
| Owner occupied RE | - | - | - | - | 615,094 | 615,094 |
| Non-owner occupied RE | 151 | - | - | 1,384 | 926,524 | 928,059 |
| Construction | - | - | - | - | 94,641 | 94,641 |
| Business | 135 | 235 | - | 1,196 | 493,595 | 495,161 |
| Consumer |  |  |  |  |  |  |
| Real estate | 886 | - | - | 1,075 | 991,297 | 993,258 |
| Home equity | 587 | - | - | 1,078 | 179,309 | 180,974 |
| Construction | - | - | - | - | 71,137 | 71,137 |
| Other | 1 | 88 | - | - | 39,532 | 39,621 |
| Total loans | $1,760 | 323 | - | 4,733 | 3,411,129 | 3,417,945 |
| Total loans over 90 days past due | - | - | - | - | - | 192 |

_December 31, 2022_

| (dollars in thousands) | Accruing 30-59 days past due | Accruing 60-89 days past due | Accruing 90 days or more past due | Nonaccrual loans | Accruing current | Total |
| --- | --- | --- | --- | --- | --- | --- |
| Commercial |  |  |  |  |  |  |
| Owner occupied RE | - | - | - | - | 612,901 | 612,901 |
| Non-owner occupied RE | 119 | 757 | - | 247 | 861,456 | 862,579 |
| Construction | - | - | - | - | 109,726 | 109,726 |
| Business | 24 | 1 | - | 182 | 467,905 | 468,112 |
| Consumer |  |  |  |  |  |  |
| Real estate | 330 | - | - | 1,099 | 929,849 | 931,278 |
| Home equity | 50 | - | - | 1,099 | 178,151 | 179,300 |
| Construction | - | - | - | - | 80,415 | 80,415 |
| Other | 88 | - | - | - | 28,964 | 29,052 |
| Total loans | $611 | 758 | - | 2,627 | 3,269,367 | 3,273,363 |
| Total loans over 90 days past due | - | - | - | - | - | 402 |

As
of March 31, 2023 and December 31, 2022, loans 30 days or more past due represented 0.11% of the Company’s total loan portfolio.
Commercial loans 30 days or more past due were 0.03% of the Company’s total loan portfolio as of March 31, 2023 and December 31,
2022. Consumer loans 30 days or more past due were 0.08% of total loans as of March 31, 2023 and December 31, 2022.

The table below summarizes nonaccrual loans by major categories for the periods presented.

| (dollars in thousands) / Commercial / Owner occupied RE | March 31, 2023 / Nonaccrual / loans / with no / allowance / - | March 31, 2023 / Nonaccrual / loans / with an / allowance / - | March 31, 2023 / Total / nonaccrual / loans / - | December 31, 2022 / Nonaccrual / loans / with no / allowance / - | December 31, 2022 / Nonaccrual / loans / with an / allowance / - | December 31, 2022 / Total / nonaccrual / loans / - |
| --- | --- | --- | --- | --- | --- | --- |
| Non-owner occupied RE | $615 | 769 | 1,384 | 114 | 133 | 247 |
| Construction | - | - | - | - | - | - |
| Business | 1,045 | 151 | 1,196 | - | 182 | 182 |
| Total commercial | 1,660 | 920 | 2,580 | 114 | 315 | 429 |
| Consumer |  |  |  |  |  |  |
| Real estate | - | 1,075 | 1,075 | - | 1,099 | 1,099 |
| Home equity | 192 | 886 | 1,078 | 194 | 905 | 1,099 |
| Construction | - | - | - | - | - | - |
| Other | - | - | - | - | - | - |
| Total consumer | 192 | 1,961 | 2,153 | 194 | 2,004 | 2,198 |
| Total nonaccrual loans | 1,852 | 2,881 | 4,733 | 308 | 2,319 | 2,627 |

We
did not recognize interest income on nonaccrual loans for the three months ended March 31, 2023 and March 31, 2022. Accrued interest
of $23,000 was reversed during the three months ended March 31, 2023. Accrued interest of $3,000 was reversed during the three months
ended March 31, 2022.

The
table below summarizes information regarding nonperforming assets.

| (dollars in thousands) | March 31, 2023 | December 31, 2022 |
| --- | --- | --- |
| Nonaccrual loans | $4,733 | 2,627 |
| Other real estate owned | - | - |
| Total nonperforming assets | $4,733 | 2,627 |
| Nonperforming assets as a percentage of: |  |  |
| Total assets | 0.12% | 0.07% |
| Gross loans | 0.14% | 0.08% |
| Total loans over 90 days past due | $192 | 402 |
| Loans over 90 days past due and still accruing | - | - |
| Accruing troubled debt restructurings | - | 4,503 |

**Modifications
to Borrowers Experiencing Financial Difficulty**

The
Company adopted Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt
Restructurings and Vintage Disclosures (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 eliminated
the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing
financial difficulty. There were no loan modifications to borrowers experiencing financial difficulty during the three months ended March
31, 2023.

**Allowance
for Credit Losses**

The
Company maintains an allowance for credit losses to provide for expected credit losses. Losses are charged against the allowance when
management believes that the principal is uncollectable. Subsequent recoveries, if any, are credited to the allowance. Allocations of
the allowance are made for specific loans and for pools of similar types of loans, although the entire allowance is available for any
loan that, in management’s judgment, should be charged against the allowance. A provision for credit losses is taken based on management’s
ongoing evaluation of the appropriate allowance balance.

A
formal evaluation of the adequacy of the credit loss allowance is conducted quarterly. This assessment includes procedures to estimate
the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management’s
evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent
risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay a loan, the estimated value of any underlying
collateral, composition of the loan portfolio, industry and peer bank loan quality indications and other pertinent factors, including
regulatory recommendations. Management believes the level of the allowance for credit losses is adequate to absorb all expected future
losses inherent in the loan portfolio at the balance sheet date. The allowance is increased through provision for credit losses and decreased
by charge-offs, net of recoveries of amounts previously charged-off.

The
Company uses a lifetime probability of default and loss given default modeling approach to estimate the allowance for credit losses on
loans. This method uses historical correlations between default experience and the age of loans to forecast defaults and losses, assuming
that a loan in a pool shares similar risk characteristics such as loan product type, risk rating and loan age, and demonstrates similar
default characteristics as other loans in that pool, as the loan progresses through its lifecycle. The Company calculates lifetime probability
of default and loss given default rates based on historical loss experience, which is used to calculate expected losses based on the
pool’s loss rate and the age of loans in the pool. Management believes that the Company’s historical loss experience provides
the best basis for its assessment of expected credit losses to determine the allowance for credit losses. The Company uses its own internal
data to measure historical credit loss experience within the pools with similar risk characteristics over an economic cycle. The probability
of default and loss given default method also includes assumptions of observed migration over the lifetime of the underlying loan data.
Loans that do not share risk characteristics are evaluated for expected credit losses on an individual basis and excluded from the collective
evaluation.

Management
also considers further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that
differ from the conditions that exist for the period over which historical information is evaluated as well as other changes in qualitative
factors not inherently considered in the quantitative analyses. The Company generally utilizes a four-quarter forecast period in evaluating
the appropriateness of the reasonable and supportable forecast scenarios which are incorporated through qualitative adjustments. There
is immediate reversion to historical loss rates. The qualitative categories and the measurements used to quantify the risks within each
of these categories are subjectively selected by management but measured by objective measurements period over period. The data for each
measurement may be obtained from internal or external sources. The current period measurements are evaluated and assigned a factor commensurate
with the current level of risk relative to past measurements over time. The resulting qualitative adjustments are applied to the relevant
collectively evaluated loan pools. These adjustments are based upon quarterly trend assessments in certain economic factors such as labor,
inflation, consumer sentiment and real disposable income, as well as associate retention and turnover, portfolio concentrations, and
growth characteristics. The qualitative analysis increases or decreases the allowance allocation for each loan pool based on the assessment
of factors described above.

The
following table summarizes the activity related to the allowance for credit losses for the three months ended March 31, 2023 under the
CECL methodology.

_Three months ended March 31, 2023_

| (dollars in thousands) | Commercial / Owner occupied RE | Commercial / Non-owner occupied RE | Commercial / Construction | Commercial / Business | Consumer / Real Estate | Consumer / Home Equity | Consumer / Construction | Consumer / Other | Total |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Balance, beginning of period | $5,867 | 10,376 | 1,292 | 7,861 | 9,487 | 2,551 | 893 | 312 | 38,639 |
| Provision for credit losses | 117 | 1,038 | (182) | 150 | 592 | 53 | (83) | 170 | 1,855 |
| Loan charge-offs | - | (160) | - | (1) | - | - | - | - | (161) |
| Loan recoveries | - | 31 | - | 12 | - | 59 | - | - | 102 |
| Net loan recoveries (charge-offs) | - | (129) | - | 11 | - | 59 | - | - | (59) |
| Balance, end of period | $5,984 | 11,285 | 1,110 | 8,022 | 10,079 | 2,663 | 810 | 482 | 40,435 |
| Net charge-offs to average loans (annualized) |  |  |  |  |  |  |  |  | 0.01% |
| Allowance for credit losses to gross loans |  |  |  |  |  |  |  |  | 1.18% |
| Allowance for credit losses to nonperforming loans |  |  |  |  |  |  |  |  | 854.33% |

_Three months ended March 31, 2022_

| (dollars in thousands) | Commercial / Owner occupied RE | Commercial / Non-owner occupied RE | Commercial / Construction | Commercial / Business | Consumer / Real Estate | Consumer / Home Equity | Consumer / Construction | Consumer / Other | Total |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Balance, beginning of period | $4,700 | 10,518 | 625 | 4,887 | 7,083 | 1,697 | 578 | 320 | 30,408 |
| Adjustment for CECL | (313) | 333 | 154 | 1,057 | (294) | 438 | 130 | (5) | 1,500 |
| Provision for credit losses | 511 | (878) | 150 | 159 | 813 | 165 | 136 | (31) | 1,025 |
| Loan charge-offs | - | - | - | - | - | (169) | - | - | (169) |
| Loan recoveries | - | - | - | 114 | - | 66 | - | - | 180 |
| Net loan recoveries (charge-offs) | - | - | - | 114 | - | (103) | - | - | 11 |
| Balance, end of period | $4,898 | 9,973 | 929 | 6,217 | 7,602 | 2,197 | 844 | 284 | 32,944 |
| Net charge-offs (recoveries) to average loans (annualized) |  |  |  |  |  |  |  |  | 0.00% |
| Allowance for credit losses to gross loans |  |  |  |  |  |  |  |  | 1.24% |
| Allowance for credit losses to nonperforming loans |  |  |  |  |  |  |  |  | 726.88% |

The
$1.9 million provision for credit losses for the three months ended March 31, 2023 was driven by $144.6 million in loan growth for the
quarter. In addition to loan growth, the provision for credit losses was impacted by slightly lower expected loss rates due to continued
low charge-offs during the first quarter of 2023, while minor adjustments to an internal qualitative factor increased the qualitative
component of the allowance and related provision expense.

Collateral
dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral
and the borrower is experiencing financial difficulty. The Company reviews individually evaluated loans for designation as collateral
dependent loans, as well as other loans that management of the Company designates as having higher risk. These loans do not share common
risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses.

The
following tables present an analysis of collateral-dependent loans of the Company.

| (dollars in thousands) / Commercial / Owner occupied RE | Real estate / - | Business assets / - | March 31, 2023 / Other / - | March 31, 2023 / Total / - |
| --- | --- | --- | --- | --- |
| Non-owner occupied RE | 651 | - | - | 651 |
| Construction | - | - | - | - |
| Business | 28 | - | 1,045 | 1,073 |
| Total commercial | 679 | - | 1,045 | 1,724 |
| Consumer |  |  |  |  |
| Real estate | 197 | - | - | 197 |
| Home equity | 192 | - | - | 192 |
| Construction | - | - | - | - |
| Other | - | - | - | - |
| Total consumer | 389 | - | - | 389 |
| Total | $1,068 | - | 1,045 | 2,113 |

| (dollars in thousands) / Commercial / Owner occupied RE | Real / estate / - | Business / assets / - | December 31, 2022 / Other / - | December 31, 2022 / Total / - |
| --- | --- | --- | --- | --- |
| Non-owner occupied RE | 114 | - | - | 114 |
| Construction | - | - | - | - |
| Business | 30 | - | - | 30 |
| Total commercial | 144 | - | - | 144 |
| Consumer |  |  |  |  |
| Real estate | 207 | - | - | 207 |
| Home equity | 194 | - | - | 194 |
| Construction | - | - | - | - |
| Other | - | - | - | - |
| Total consumer | 401 | - | - | 401 |
| Total | $545 | - | - | 545 |

Under
CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based
on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between
the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value
of the collateral exceeds the amortized cost, no allowance is required.

**Allowance
for Credit Losses - Unfunded Loan Commitments**

The
allowance for credit losses for unfunded loan commitments was $2.8 million at March 31, 2023 and is separately classified on the
balance sheet within other liabilities. The following table presents the balance and activity in the allowance for credit losses for
unfunded loan commitments for the three months ended March 31, 2023 and for the twelve months ended December 31, 2022.

| (dollars in thousands) | Three months ended / March 31, 2023 | Twelve months ended / December 31, 2022 |
| --- | --- | --- |
| Balance, beginning of period | $2,780 | - |
| Adjustment for adoption of CECL | - | 2,000 |
| Provision (reversal of) for credit losses | (30) | 780 |
| Balance, end of period | $2,750 | 2,780 |
| Unfunded Loan Commitments | $882,489 | 878,324 |
| Reserve for Unfunded Commitments to Unfunded Loan Commitments | 0.31% | 0.32% |

### **NOTE 5 – Derivative Financial Instruments**

The
Company utilizes derivative financial instruments primarily to hedge its exposure to changes in interest rates. All derivative financial
instruments are recognized as either assets or liabilities and measured at fair value. The Company accounts for all of its derivatives
as free-standing derivatives and does not designate any of these instruments for hedge accounting. Therefore, the gain or loss resulting
from the change in the fair value of the derivative is recognized in the Company’s statement of income during the period of change.

The
Company enters into commitments to originate residential mortgage loans held for sale, at specified interest rates and within a specified
period of time, with clients who have applied for a loan and meet certain credit and underwriting criteria (interest rate lock commitments).
These interest rate lock commitments (“IRLCs”) meet the definition of a derivative financial instrument and are reflected
in the balance sheet at fair value with changes in fair value recognized in current period earnings. Unrealized gains and losses on the
IRLCs are recorded as derivative assets and derivative liabilities, respectively, and are measured based on the value of the underlying
mortgage loan, quoted mortgage-backed securities (“MBS”) prices and an estimate of the probability that the mortgage loan
will fund within the terms of the interest rate lock commitment, net of estimated commission expenses.

The
Company manages the interest rate and price risk associated with its outstanding IRLCs and mortgage loans held for sale by entering into
derivative instruments such as forward sales of MBS. Management expects these derivatives will experience changes in fair value opposite
to changes in fair value of the IRLCs and mortgage loans held for sale, thereby reducing earnings volatility. The Company takes into
account various factors and strategies in determining the portion of the mortgage pipeline (IRLCs and mortgage loans held for sale) it
wants to economically hedge.

The
following table summarizes the Company’s outstanding financial derivative instruments at March 31, 2023 and December 31, 2022.

_March 31, 2023_

| (dollars in thousands) | Notional | Balance Sheet Location | Fair Value / Asset/(Liability) |
| --- | --- | --- | --- |
| Mortgage loan interest rate lock commitments | $13,384 | Other assets | $187 |
| MBS forward sales commitments | 10,000 | Other liabilities | (86) |
| Total derivative financial instruments | $23,384 |  | $101 |

_December 31, 2022_

| (dollars in thousands) | Notional | Balance Sheet Location | Fair Value / Asset/(Liability) |
| --- | --- | --- | --- |
| Mortgage loan interest rate lock commitments | $6,793 | Other assets | $49 |
| MBS forward sales commitments | 5,750 | Other assets | 27 |
| Total derivative financial instruments | $12,543 |  | $76 |

### NOTE 6 – Fair Value Accounting

FASB
ASC 820, “Fair Value Measurement and Disclosures,” defines fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard
describes three levels of inputs that may be used to measure fair value:

**Level  1 – Quoted market price in active markets**

Quoted  prices in active markets for identical assets or liabilities. Level 1 assets and liabilities  include certain debt and equity securities that are traded in an active exchange market.<br>

**Level  2 – Significant other observable inputs**

Observable  inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active;  or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets  or liabilities. Level 2 assets and liabilities include fixed income securities and mortgage-backed securities that are held in the  Company’s available-for-sale portfolio and valued by a third-party pricing service, as well as certain impaired loans.

**Level  3 – Significant unobservable inputs**

Unobservable  inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow  methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management  judgment or estimation. These methodologies may result in a significant portion of the fair value being derived from unobservable  data.

The
methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed
in Note 14 of the Company’s 2022 Annual Report on Form 10-K. The Company’s loan portfolio is initially fair valued using
a segmented approach, using the eight categories of loans as disclosed in Note 4 – Loans and Allowance for Credit Losses. Loans
are considered a Level 3 classification.

Assets
and Liabilities Recorded at Fair Value on a Recurring Basis

The
tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of March 31, 2023 and
December 31, 2022.

_March 31, 2023_

| (dollars in thousands) | Level 1 | Level 2 | Level 3 | Total |
| --- | --- | --- | --- | --- |
| Assets |  |  |  |  |
| Securities available for sale |  |  |  |  |
| Corporate bonds | - | 1,916 | - | 1,916 |
| US treasuries | - | 892 | - | 892 |
| US government agencies | - | 10,984 | - | 10,984 |
| State and political subdivisions | - | 19,649 | - | 19,649 |
| Asset-backed securities | - | 5,819 | - | 5,819 |
| Mortgage-backed securities | - | 54,776 | - | 54,776 |
| Mortgage loans held for sale | - | 6,979 | - | 6,979 |
| Mortgage loan interest rate lock commitments | - | 187 | - | 187 |
| Total assets measured at fair value on a recurring basis | - | 101,202 | - | 101,202 |
| Liabilities |  |  |  |  |
| MBS forward sales commitments | - | 86 | - | 86 |
| Total liabilities measured at fair value on a recurring basis | - | 86 | - | 86 |

_December 31, 2022_

| (dollars in thousands) | Level 1 | Level 2 | Level 3 | Total |
| --- | --- | --- | --- | --- |
| Assets |  |  |  |  |
| Securities available for sale: |  |  |  |  |
| Corporate bonds | - | 1,883 | - | 1,883 |
| US treasuries | - | 871 | - | 871 |
| US government agencies | - | 10,617 | - | 10,617 |
| State and political subdivisions | - | 18,906 | - | 18,906 |
| Asset-backed securities | - | 6,229 | - | 6,229 |
| Mortgage-backed securities | - | 54,841 | - | 54,841 |
| Mortgage loans held for sale | - | 3,917 | - | 3,917 |
| Mortgage loan interest rate lock commitments | - | 49 | - | 49 |
| MBS forward sales commitments | - | 27 | - | 27 |
| Total assets measured at fair value on a recurring basis | - | 97,340 | - | 97,340 |

The
Company had no liabilities recorded for fair value on a recurring basis as of December 31, 2022.

Assets
and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The
tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2023
and December 31, 2022.

_As of March 31, 2023_

| (dollars in thousands) | Level 1 | Level 2 | Level 3 | Total |
| --- | --- | --- | --- | --- |
| Assets |  |  |  |  |
| Individually evaluated | - | 1,972 | 3,695 | 5,667 |
| Total assets measured at fair value on a nonrecurring basis | - | 1,972 | 3,695 | 5,667 |

_As of December 31, 2022_

| (dollars in thousands) | Level 1 | Level 2 | Level 3 | Total |
| --- | --- | --- | --- | --- |
| Assets |  |  |  |  |
| Individually evaluated | - | 429 | 4,071 | 4,500 |
| Total assets measured at fair value on a nonrecurring basis | - | 429 | 4,071 | 4,500 |

The
Company had no liabilities carried at fair value or measured at fair value on a nonrecurring basis.

For
Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of March 31, 2023 and December 31, 2022,
the significant unobservable inputs used in the fair value measurements were as follows:

**Valuation Technique** **Significant Unobservable Inputs** **Range of Inputs**

Individually evaluated loans Appraised Value/ Discounted Cash Flows Discounts to appraisals or cash flows for estimated holding and/or selling costs or age of appraisal 0-25%

Fair
Value of Financial Instruments

Financial
instruments require disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical
to estimate the fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual
obligation which requires the exchange of cash. Certain items are specifically excluded from the disclosure requirements, including the
Company’s common stock, premises and equipment and other assets and liabilities.

The
estimated fair values of the Company’s financial instruments at March 31, 2023 and December 31, 2022 are as follows:

_March 31, 2023_

| (dollars in thousands) | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 |
| --- | --- | --- | --- | --- | --- |
| Financial Assets: |  |  |  |  |  |
| Other investments, at cost | $10,097 | 10,097 | - | - | 10,097 |
| Loans1 | 3,368,332 | 3,176,788 | - | - | 3,176,788 |
| Financial Liabilities: |  |  |  |  |  |
| Deposits | 3,426,774 | 3,065,819 | - | 3,065,819 | - |
| Subordinated debentures | 36,241 | 40,369 | - | 40,369 | - |

_December 31, 2022_

| (dollars in thousands) | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 |
| --- | --- | --- | --- | --- | --- |
| Financial Assets: |  |  |  |  |  |
| Other investments, at cost | $10,833 | 10,833 | - | - | 10,833 |
| Loans1 | 3,227,455 | 3,057,891 | - | - | 3,057,891 |
| Financial Liabilities: |  |  |  |  |  |
| Deposits | 3,133,864 | 2,717,900 | - | 2,717,900 | - |
| Subordinated debentures | 36,214 | 39,885 | - | 39,885 | - |

1 Carrying amount is net of the allowance for credit losses and individually evaluated loans.

### NOTE 7 – Leases

The
Company had operating right-of-use assets, included in property and equipment, of $23.2 million and $23.6 million as of March 31, 2023
and December 31, 2022, respectively. The Company had lease liabilities, included in other liabilities, of $25.5 million and $25.8
million as of March 31, 2023 and December 31, 2022, respectively. We maintain operating leases on land and buildings for various office
spaces. The lease agreements have maturity dates ranging from April 2025 to February 2032, some of which include options for multiple
five-year extensions. The weighted average remaining life of the lease term for these leases was 6.74 years as of March 31, 2023.
The ROU asset and lease liability are recognized at lease commencement by calculating the present value of lease payments over the lease
term.

The
discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with
the remaining lease term at implementation of the accounting standard and as of the lease commencement date for leases subsequently entered
into. The weighted average discount rate for leases was 2.32% as of March 31, 2023.

The
total operating lease costs were $595,000 and $778,000 for the three months ended March 31, 2023 and 2022, respectively.

Maturities
of lease liabilities as of March 31, 2023 were as follows:

| (dollars in thousands) | Operating / Leases |
| --- | --- |
| 2023 | $1,513 |
| 2024 | 2,067 |
| 2025 | 2,124 |
| 2026 | 2,176 |
| 2027 | 2,232 |
| Thereafter | 22,200 |
| Total undiscounted lease payments | 32,312 |
| Discount effect of cash flows | 6,813 |
| Total lease liability | $25,499 |

### NOTE 8 – Earnings Per Common Share

The
following schedule reconciles the numerators and denominators of the basic and diluted earnings per share computations for the three-month
periods ended March 31, 2023 and 2022. Dilutive common shares arise from the potentially dilutive effect of the Company’s stock
options that were outstanding at March 31, 2023. The assumed conversion of stock options can create a difference between basic and dilutive
net income per common share. At March 31, 2023 and 2022, there were 205,689 and 9,000 options, respectively, that were not considered
in computing diluted earnings per common share because they were anti-dilutive.

| (dollars in thousands, except share data) | Three months ended March 31, 2023 | Three months ended March 31, 2022 |
| --- | --- | --- |
| Numerator: |  |  |
| Net income available to common shareholders | $2,703 | 7,970 |
| Denominator: |  |  |
| Weighted-average common shares outstanding – basic | 8,025,876 | 7,931,855 |
| Common stock equivalents | 66,394 | 164,455 |
| Weighted-average common shares outstanding – diluted | 8,092,270 | 8,096,310 |
| Earnings per common share: |  |  |
| Basic | $0.34 | 1.00 |
| Diluted | 0.33 | 0.98 |

**Item
2. MANAGEMENT’S DISCUSSION AND Analysis of Financial Condition and Results of Operations.**

*The
following discussion reviews our results of operations for the three month period ended March 31, 2023 as compared to the three month
period ended March 31, 2022 and assesses our financial condition as of March 31, 2023 as compared to December 31, 2022. You should read
the following discussion and analysis in conjunction with the accompanying consolidated financial statements and the related notes and
the consolidated financial statements and the related notes for the year ended December 31, 2022 included in our Annual Report on Form
10-K for that period. Results for the three month period ended March 31, 2023 are not necessarily indicative of the results for the year
ending December 31, 2023 or any future period.*

*Unless
the context requires otherwise, references to the “Company,” “we,” “us,” “our,” or similar
references mean Southern First Bancshares, Inc. and its consolidated subsidiary. References to the “Bank” refer to Southern
First Bank.*

Cautionary
Warning Regarding forward-looking statements

This
report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements may relate to our
financial condition, results of operations, plans, objectives, or future performance. These statements are based on many assumptions
and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking
statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words
“may,” “would,” “could,” “should,” “will,” “seek to,” “strive,”
“focus,” “expect,” “anticipate,” “predict,” “project,” “potential,”
“believe,” “continue,” “assume,” “intend,” “plan,” and “estimate,”
as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause
our actual results to differ from those anticipated in any forward-looking statements include, but are not limited to:

- Restrictions  or conditions imposed by our regulators on our operations;
- Increases  in competitive pressure in the banking and financial services industries;
- Changes  in access to funding or increased regulatory requirements with regard to funding, which could  impair our liquidity;
- Changes  in deposit flows, which may be negatively affected by a number of factors, including rates  paid by competitors, general interest rate levels, regulatory capital requirements, returns  available to clients on alternative investments and general economic or industry conditions;
- Credit  losses as a result of declining real estate values, increasing interest rates, increasing  unemployment, changes in payment behavior or other factors;
- Credit  losses due to loan concentration;
- Changes  in the amount of our loan portfolio collateralized by real estate and weaknesses in the real  estate market;
- Our  ability to successfully execute our business strategy;
- Our  ability to attract and retain key personnel;
- The  success and costs of our expansion into the Charlotte, North Carolina, Greensboro, North  Carolina and Atlanta, Georgia markets and into potential new markets;
- Risks  with respect to future mergers or acquisitions, including our ability to successfully expand  and integrate the businesses and operations that we acquire and realize the anticipated benefits  of the mergers or acquisitions;
- Changes  in the interest rate environment which could reduce anticipated or actual margins;
- Changes  in political conditions or the legislative or regulatory environment, including new governmental  initiatives affecting the financial services industry;
- Changes  in economic conditions resulting in, among other things, a deterioration in credit quality;
- Changes  occurring in business conditions and inflation;
- Increased  cybersecurity risk, including potential business disruptions or financial losses;
- Changes  in technology;
- The  adequacy of the level of our allowance for credit losses and the amount of loan loss provisions  required in future periods;
- Examinations  by our regulatory authorities, including the possibility that the regulatory authorities  may, among other things, require us to increase our allowance for credit losses or write-down  assets;
- Changes  in U.S. monetary policy, the level and volatility of interest rates, the capital markets  and other market conditions that may affect, among other things, our liquidity and the value  of our assets and liabilities;
- Any  increase in FDIC assessments which will increase our cost of doing business;
- The  rate of delinquencies and amounts of loans charged-off;
- The  rate of loan growth in recent years and the lack of seasoning of a portion of our loan portfolio;
- Our  ability to maintain appropriate levels of capital and to comply with our capital ratio requirements;
- Adverse  changes in asset quality and resulting credit risk-related losses and expenses;
- Changes  in accounting standards, rules and interpretations and the related impact on our financial  statements;
- Risks  associated with actual or potential litigation or investigations by customers, regulatory  agencies or others;
- Adverse  effects of failures by our vendors to provide agreed upon services in the manner and at the  cost agreed;
- The  potential effects of events beyond our control that may have a destabilizing effect on financial  markets and the economy, such as epidemics and pandemics (including COVID-19), war or terrorist  activities, disruptions in our customers’ supply chains, disruptions in transportation,  essential utility outages or trade disputes and related tariffs; and
- Other  risks and uncertainties detailed in Part I, Item 1A, “Risk Factors” of our Annual  Report on Form 10-K for the year ended December 31, 2022, in Part II, Item 1A, “Risk  Factors” of our Quarterly Reports on Form 10-Q, and in our other filings with the SEC.

If
any of these risks or uncertainties materialize, or if any of the assumptions underlying such forward-looking statements proves to be
incorrect, our results could differ materially from those expressed in, implied or projected by, such forward-looking statements. We
urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report
on Form 10-Q. We make these forward-looking statements as of the date of this document and we do not intend, and assume no obligation,
to update the forward-looking statements or to update the reasons why actual results could differ from those expressed in, or implied
or projected by, the forward-looking statements, except as required by law.

**OVERVIEW**

Our
business model continues to be client-focused, utilizing relationship teams to provide our clients with a specific banker contact and
support team responsible for all of their banking needs. The purpose of this structure is to provide a consistent and superior level
of professional service, and we believe it provides us with a distinct competitive advantage. We consider exceptional client service
to be a critical part of our culture, which we refer to as "ClientFIRST."

At
March 31, 2023, we had total assets of $3.94 billion, a 6.7% increase from total assets of $3.69 billion at December 31, 2022. The largest
component of our total assets is loans which were $3.42 billion and $3.27 billion at March 31, 2023 and December 31, 2022, respectively.
Our liabilities and shareholders’ equity at March 31, 2023 totaled $3.64 billion and $299.4 million, respectively, compared to
liabilities of $3.40 billion and shareholders’ equity of $294.5 million at December 31, 2022. The principal component of our liabilities
is deposits which were $3.43 billion and $3.13 billion at March 31, 2023 and December 31, 2022, respectively.

Like
most community banks, we derive the majority of our income from interest received on our loans and investments. Our primary source of
funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our
success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and
investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread
between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities, which is called our
net interest spread. In addition to earning interest on our loans and investments, we earn income through fees and other charges to our
clients.

Our
net income to common shareholders was $2.7 million and $8.0 million for the three months ended March 31, 2023 and 2022, respectively.
Diluted earnings per share (“EPS”) was $0.33 for the first quarter of 2023 as compared to $0.98 for the same period in 2022.
The decrease in net income was primarily driven by a decrease in net interest income resulting from higher costs on our deposit accounts
related to the Federal Reserve’s cumulative 475 basis point interest rate increase during the past 14 months, combined with an
increase in non-interest expenses.

**results
of operations**

Net
Interest Income and Margin

Our
level of net interest income is determined by the level of earning assets and the management of our net interest margin. Our net interest
income was $20.4 million for the first quarter of 2023, an 11.8% decrease over net interest income of $23.2 million for the first quarter
of 2022, driven primarily by the increase in interest expense on our deposit accounts. In addition, our net interest margin, on a tax-equivalent
basis (TE), was 2.36% for the first quarter of 2023 compared to 3.37% for the same period in 2022.

We
have included a number of tables to assist in our description of various measures of our financial performance. For example, the “Average
Balances, Income and Expenses, Yields and Rates” table reflects the average balance of each category of our assets and liabilities
as well as the yield we earned or the rate we paid with respect to each category during the three month periods ended March 31, 2023
and 2022. A review of this table shows that our loans typically provide higher interest yields than do other types of interest-earning
assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio. Similarly, the “Rate/Volume
Analysis” tables demonstrate the effect of changing interest rates and changing volume of assets and liabilities on our financial
condition during the periods shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest
rates, and we have included tables to illustrate our interest rate sensitivity with respect to interest-earning accounts and interest-bearing
accounts.

The
following tables entitled “Average Balances, Income and Expenses, Yield and Rates” set forth information related to our average
balance sheets, average yields on assets, and average costs of liabilities. We derived these yields by dividing income or expense by
the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods
indicated. During the same periods, we had no securities purchased with agreements to resell. All investments owned have an original
maturity of over one year. Nonaccrual loans are included in the following tables. Loan yields have been reduced to reflect the negative
impact on our earnings of loans on nonaccrual status. The net of capitalized loan costs and fees are amortized into interest income on
loans.

**Average
Balances, Income and Expenses, Yields and Rates**

| (dollars in thousands) | For the Three Months Ended March 31, 2023 / Average Balance | For the Three Months Ended March 31, 2023 / Income/ Expense | For the Three Months Ended March 31, 2023 / Yield/ Rate(1) | For the Three Months Ended March 31, 2022 / Average Balance | For the Three Months Ended March 31, 2022 / Income/ Expense | For the Three Months Ended March 31, 2022 / Yield/ Rate(1) |
| --- | --- | --- | --- | --- | --- | --- |
| Interest-earning assets |  |  |  |  |  |  |
| Federal funds sold and interest-bearing deposits with banks | $85,966 | $969 | 4.57% | $89,096 | $59 | 0.27% |
| Investment securities, taxable | 87,521 | 530 | 2.46% | 113,101 | 425 | 1.52% |
| Investment securities, nontaxable(2) | 10,266 | 106 | 4.21% | 11,899 | 64 | 2.17% |
| Loans(3) | 3,334,530 | 36,748 | 4.47% | 2,573,978 | 23,931 | 3.77% |
| Total interest-earning assets | 3,518,283 | 38,353 | 4.42% | 2,788,074 | 24,479 | 3.56% |
| Noninterest-earning assets | 161,310 |  |  | 152,565 |  |  |
| Total assets | $3,679,593 |  |  | $2,940,639 |  |  |
| Interest-bearing liabilities |  |  |  |  |  |  |
| NOW accounts | $303,176 | 440 | 0.59% | $406,054 | 115 | 0.11% |
| Savings & money market | 1,661,878 | 11,992 | 2.93% | 1,242,225 | 618 | 0.20% |
| Time deposits | 543,425 | 4,747 | 3.54% | 158,720 | 175 | 0.45% |
| Total interest-bearing deposits | 2,508,479 | 17,179 | 2.78% | 1,806,999 | 908 | 0.20% |
| FHLB advances and other borrowings | 18,243 | 200 | 4.45% | 16,626 | 12 | 0.29% |
| Subordinated debentures | 36,224 | 527 | 5.90% | 36,116 | 380 | 4.27% |
| Total interest-bearing liabilities | 2,562,946 | 17,906 | 2.83% | 1,859,741 | 1,300 | 0.28% |
| Noninterest-bearing liabilities | 818,123 |  |  | 802,298 |  |  |
| Shareholders’ equity | 298,524 |  |  | 278,600 |  |  |
| Total liabilities and shareholders’ equity | $3,679,593 |  |  | $2,940,639 |  |  |
| Net interest spread |  |  | 1.59% |  |  | 3.28% |
| Net interest income (tax equivalent) / margin |  | $20,447 | 2.36% |  | $23,179 | 3.37% |
| Less: tax-equivalent adjustment(2) |  | 23 |  |  | 15 |  |
| Net interest income |  | $20,424 |  |  | $23,164 |  |

| (1) | Annualized for the three month period. |
| --- | --- |
| (2) | The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis. |
| (3) | Includes mortgage loans held for sale. |

Our
net interest margin (TE) decreased 101 basis points to 2.36% during the first quarter of 2023, compared to the first quarter of 2022,
primarily due to higher costs on our interest-bearing liabilities. Our average interest-bearing liabilities grew by $703.2 million during
the first quarter of 2023, while the rate on these liabilities increased 255 basis points to 2.83%. In contrast, our average interest-earning
assets grew by $730.2 million during the first quarter of 2023 while the average yield on these assets increased by 86 basis points to
4.42% during the same period.

The
increase in average interest-earning assets for the first quarter of 2023 related primarily to an increase of $760.6 million in our average
loan balances. The 86 basis point increase in yield on our interest-earning assets was driven by a 70 basis point increase in loan yield
as our loan portfolio has repriced at rates higher than historical rates for the majority of the past 12 months.

The
increase in our average interest-bearing liabilities during the first quarter of 2023 resulted primarily from a $701.5 million increase
in our interest-bearing deposits, while the 255-basis point increase in rate on our interest-bearing liabilities resulted primarily from
a 258 basis point increase in deposit rates.

Our
net interest spread was 1.59% for the first quarter of 2023 compared to 3.28% for the same period in 2022. The net interest spread is
the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The
255 basis point increase in the rate on our interest-bearing liabilities was partially offset by an 86 basis point increase in yield
on our interest-bearing assets, resulting in a 169 basis point decrease in our net interest spread for the 2023 period. We anticipate
continued pressure on our net interest spread and net interest margin in future periods as a significant portion of our loan portfolio
is at fixed rates which do not move with the Federal Reserve’s interest rate increases, while our deposit accounts reprice much
more quickly.

*Rate/Volume
Analysis*

Net
interest income can be analyzed in terms of the impact of changing interest rates and changing volume. The following tables set forth
the effect which the varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates have had on
changes in net interest income for the periods presented.

| (dollars in thousands) | Three Months Ended / March 31, 2023 vs. 2022 / Increase (Decrease) Due to / Volume | Three Months Ended / March 31, 2023 vs. 2022 / Increase (Decrease) Due to / Rate | Three Months Ended / March 31, 2023 vs. 2022 / Increase (Decrease) Due to / Rate/ Volume | Three Months Ended / March 31, 2023 vs. 2022 / Increase (Decrease) Due to / Total | Three Months Ended / March 31, 2022 vs. 2021 / Increase (Decrease) Due to / Volume | Three Months Ended / March 31, 2022 vs. 2021 / Increase (Decrease) Due to / Rate | Three Months Ended / March 31, 2022 vs. 2021 / Increase (Decrease) Due to / Rate/ Volume | Three Months Ended / March 31, 2022 vs. 2021 / Increase (Decrease) Due to / Total |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Interest income |  |  |  |  |  |  |  |  |
| Loans | $7,189 | 4,328 | 1,300 | 12,817 | $3,571 | (1,816) | (289) | 1,466 |
| Investment securities | (103) | 309 | (67) | 139 | 90 | 64 | 19 | 173 |
| Federal funds sold and interest-bearing deposits with banks | (2) | 945 | (33) | 910 | - | 12 | - | 12 |
| Total interest income | 7,084 | 5,582 | 1,200 | 13,866 | 3,661 | (1,740) | (270) | 1,651 |
| Interest expense |  |  |  |  |  |  |  |  |
| Deposits | 253 | 12,521 | 3,497 | 16,271 | 721 | (596) | (372) | (247) |
| FHLB advances and other borrowings | 1 | 170 | 17 | 188 | 14 | (1) | (4) | 9 |
| Subordinated debentures | 1 | 146 | - | 147 | 1 | (3) | - | (2) |
| Total interest expense | 255 | 12,837 | 3,514 | 16,606 | 736 | (600) | (376) | (240) |
| Net interest income | $6,829 | (7,255) | (2,314) | (2,740) | $2,925 | (1,140) | 106 | 1,891 |

Net
interest income, the largest component of our income, was $20.4 million for the first quarter of 2023 and $23.2 million for the first
quarter of 2022, a $2.7 million, or 11.8%, decrease year over year. The decrease during 2023 was driven by a $16.6 million increase in
interest expense primarily due to higher rates on our interest-bearing deposits. In addition, interest income increased by $13.9 million
primarily due to an increase in volume of loans and the rates on loans.

Provision
for Credit Losses

The
provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the allowance
for credit losses and reserve for unfunded commitments at levels consistent with management’s assessment of expected losses in
the loan portfolio at the balance sheet date. We review the adequacy of the allowance for credit losses on a quarterly basis. Please
see the discussion included in Note 4 – Loans and Allowance for Credit Losses for a description of the factors we consider in determining
the amount of the provision we expense each period to maintain this allowance.

We
recorded a $1.8 million provision for credit losses in the first quarter of 2023, compared to a $1.1 million provision for credit losses
in the first quarter of 2022. The $1.8 million provision in 2023, which included a $1.9 million provision for credit losses and a $30,000
reversal for unfunded commitments, was driven by $144.6 million in loan growth during the first quarter.

Noninterest
Income

The
following table sets forth information related to our noninterest income.

| (dollars in thousands) | Three months ended March 31, 2023 | Three months ended March 31, 2022 |
| --- | --- | --- |
| Mortgage banking income | $622 | 1,494 |
| Service fees on deposit accounts | 325 | 303 |
| ATM and debit card income | 555 | 514 |
| Income from bank owned life insurance | 332 | 315 |
| Other income | 210 | 301 |
| Total noninterest income | $2,044 | 2,927 |

Noninterest
income decreased $883,000, or 30.2%, for the first quarter of 2023 as compared to the same period in 2022. The decrease in total noninterest
income resulted primarily from the following:

- Mortgage  banking income has typically been the largest component of our noninterest income; however,  lower mortgage origination volume during the past 12 months, combined with our strategy to  keep a larger percentage of these loans in our portfolio, has impacted our profitability.  Consequently, mortgage banking income decreased by $872,000, or 58.4%, from the first quarter  of 2022.
- Other  income decreased $91,000, or 30.2% primarily due to a decrease in loan fee income.

Noninterest
expenses

The
following table sets forth information related to our noninterest expenses.

| (dollars in thousands) | Three months ended March 31, 2023 | Three months ended March 31, 2022 |
| --- | --- | --- |
| Compensation and benefits | $10,356 | 9,455 |
| Occupancy | 2,457 | 1,779 |
| Outside service and data processing costs | 1,629 | 1,534 |
| Insurance | 689 | 261 |
| Professional fees | 660 | 599 |
| Marketing | 366 | 266 |
| Other | 947 | 791 |
| Total noninterest expense | $17,104 | 14,685 |

Noninterest
expense was $17.1 million for the first quarter of 2023, a $2.4 million, or 16.5%, increase from noninterest expense of $14.7 million
for the first quarter of 2022. The increase in noninterest expense was driven primarily by the following:

- Compensation  and benefits expense increased $901,000, or 9.5%, relating primarily to annual salary increases,  hiring of new team members, and higher benefits expense.
- Occupancy  costs increased $678,000, or 38.1%, driven by costs associated with higher depreciation,  property taxes and maintenance costs of our new headquarters.
- Insurance  costs increased $428,000, or 164.0%, driven by higher FDIC insurance premiums.

Our
efficiency ratio was 76.1% for the first quarter of 2023, compared to 56.3% for the first quarter of 2022. The efficiency ratio represents
the percentage of one dollar of expense required to be incurred to earn a full dollar of revenue and is computed by dividing noninterest
expense by the sum of net interest income and noninterest income. The higher ratio during the first quarter of 2023, compared to the
first quarter of 2022, relates primarily to the decrease in net interest income and mortgage banking income, combined with higher noninterest
expenses.

We
incurred income tax expense of $836,000 and $2.3 million for the three months ended March 31, 2023 and 2022, respectively. Our effective
tax rate was 23.6% and 22.6% for the three months ended March 31, 2023 and 2022, respectively. The higher tax rate during the first three
months of 2023 relates to the lesser impact of equity compensation transactions during the period.

**Balance
Sheet Review**

Investment
Securities

At
March 31, 2023, the $104.1 million in our investment securities portfolio represented approximately 2.6% of our total assets. Our available
for sale investment portfolio included corporate bonds, US treasuries, US government agency securities, state and political subdivisions,
asset-backed securities and mortgage-backed securities with a fair value of $94.0 million and an amortized cost of $108.9 million, resulting
in an unrealized loss of $14.9 million. At December 31, 2022, the $104.2 million in our investment securities portfolio represented approximately
2.8% of our total assets, including investment securities with a fair value of $93.3 million and an amortized cost of $110.3 million
for an unrealized loss of $17.0 million.

Loans

Since
loans typically provide higher interest yields than other types of interest earning assets, a substantial percentage of our earning assets
are invested in our loan portfolio. Average loans, excluding mortgage loans held for sale, for the three months ended March 31, 2023
and 2022 were $3.33 billion and $2.56 billion, respectively. Before the allowance for credit losses, total loans outstanding at March
31, 2023 and December 31, 2022 were $3.42 billion and $3.27 billion, respectively.

The
principal component of our loan portfolio is loans secured by real estate mortgages. As of March 31, 2023, our loan portfolio included
$2.88 billion, or 84.4%, of real estate loans, compared to $2.78 billion, or 84.8%, at December 31, 2022. Most of our real estate loans
are secured by residential or commercial property. We obtain a security interest in real estate, in addition to any other available collateral,
in order to increase the likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans to coincide
with the appropriate regulatory guidelines. We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent
in concentration in certain types of collateral and business types. Home equity lines of credit totaled $181.0 million as of March 31,
2023, of which approximately 49% were in a first lien position, while the remaining balance was second liens. At December 31, 2022, our
home equity lines of credit totaled $179.3 million, of which approximately 48% were in first lien positions, while the remaining balance
was in second liens. The average home equity loan had a balance of approximately $83,000 and a loan to value of 74% as of March 31, 2023,
compared to an average loan balance of $84,000 and a loan to value of approximately 73% as of December 31, 2022. Further, 0.7% and 0.6%
of our total home equity lines of credit were over 30 days past due as of March 31, 2023 and December 31, 2022, respectively.

Following
is a summary of our loan composition at March 31, 2023 and December 31, 2022. During the first three months of 2023, our loan portfolio
increased by $144.6 million, or 4.4%, with a 3.9% increase in commercial loans while consumer loans increased by 5.3% during the period.
The majority of the increase was in loans secured by real estate. Our consumer real estate portfolio grew by $62.0 million and includes
high quality 1-4 family consumer real estate loans. Our average consumer real estate loan currently has a principal balance of $470,000,
a term of 22 years, and an average rate of 3.84% as of March 31, 2023, compared to a principal balance of $468,000, a term of 22 years,
and an average rate of 3.71% as of December 31, 2022.

| (dollars in thousands) | March 31, 2023 / Amount | March 31, 2023 / % of Total | December 31, 2022 / Amount | December 31, 2022 / % of Total |
| --- | --- | --- | --- | --- |
| Commercial |  |  |  |  |
| Owner occupied RE | $615,094 | 18.0% | $612,901 | 18.7% |
| Non-owner occupied RE | 928,059 | 27.2% | 862,579 | 26.3% |
| Construction | 94,641 | 2.8% | 109,726 | 3.4% |
| Business | 495,161 | 14.5% | 468,112 | 14.3% |
| Total commercial loans | 2,132,955 | 62.5% | 2,053,318 | 62.7% |
| Consumer |  |  |  |  |
| Real estate | 993,258 | 29.1% | 931,278 | 28.4% |
| Home equity | 180,974 | 5.3% | 179,300 | 5.5% |
| Construction | 71,137 | 2.1% | 80,415 | 2.5% |
| Other | 39,621 | 1.0% | 29,052 | 0.9% |
| Total consumer loans | 1,284,990 | 37.5% | 1,220,045 | 37.3% |
| Total gross loans, net of deferred fees | 3,417,945 | 100.0% | 3,273,363 | 100.0% |
| Less—allowance for credit losses | (40,435) |  | (38,639) |  |
| Total loans, net | $3,377,510 |  | $3,234,724 |  |

*Nonperforming
assets*

Nonperforming
assets include real estate acquired through foreclosure or deed taken in lieu of foreclosure and loans on nonaccrual status. Generally,
a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering
economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the
contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized
as a reduction in principal when received. Our policy with respect to nonperforming loans requires the borrower to make a minimum of
six consecutive payments in accordance with the loan terms and to show capacity to continue performing into the future before that loan
can be placed back on accrual status. As of March 31, 2023 and December 31, 2022, we had no loans 90 days past due and still accruing.

Following
is a summary of our nonperforming assets.

| (dollars in thousands) | March 31, 2023 | December 31, 2022 |
| --- | --- | --- |
| Commercial | $2,580 | 429 |
| Consumer | 2,153 | 2,198 |
| Total nonaccrual loans | 4,733 | 2,627 |
| Other real estate owned | - | - |
| Total nonperforming assets | $4,733 | 2,627 |

At
March 31, 2023, nonperforming assets were $4.7 million, or 0.12% of total assets and 0.14% of gross loans. Comparatively, nonperforming
assets were $2.6 million, or 0.07% of total assets and 0.08% of gross loans at December 31, 2022. Nonaccrual loans increased $2.1 million
during the first three months of 2023 due primarily to three commercial relationships totaling $2.4 million that were added to nonaccrual
status, all of which are secured by real estate or liquid assets.

The
amount of foregone interest income on nonaccrual loans in the first three months of 2023 and 2022 was not material. At March 31, 2023
and December 31, 2022, the allowance for credit losses represented 854.3% and 1470.7% of the total amount of nonperforming loans, respectively.
The majority of the nonperforming loans at March 31, 2023 were secured by real estate, while one nonperforming loan was secured by a
brokerage account. We have evaluated the underlying collateral on these loans and believe that the collateral on these loans is sufficient
to minimize future losses.

As
a general practice, most of our commercial loans and a portion of our consumer loans are originated with relatively short maturities
of less than ten years. As a result, when a loan reaches its maturity we frequently renew the loan and thus extend its maturity using
similar credit standards as those used when the loan was first originated. Due to these loan practices, we may, at times, renew loans
which are classified as nonaccrual after evaluating the loan’s collateral value and financial strength of its guarantors. Nonaccrual
loans are renewed at terms generally consistent with the ultimate source of repayment and rarely at reduced rates. In these cases, we
will generally seek additional credit enhancements, such as additional collateral or additional guarantees to further protect the loan.
When a loan is no longer performing in accordance with its stated terms, we will typically seek performance under the guarantee.

In
addition, at March 31, 2023, 84.4% of our loans were collateralized by real estate and 83.1% of our individually evaluated loans were
secured by real estate. We utilize third party appraisers to determine the fair value of collateral dependent loans. Our current loan
and appraisal policies require us to obtain updated appraisals on an annual basis, either through a new external appraisal or an appraisal
evaluation. Individually evaluated loans are reviewed on a quarterly basis to determine the level of impairment. As of March 31, 2023,
we did not have any individually evaluated real estate loans carried at a value in excess of the appraised value. We typically charge-off
a portion or create a specific reserve for impaired loans when we do not expect repayment to occur as agreed upon under the original
terms of the loan agreement.

At
March 31, 2023, individually evaluated loans totaled $6.6 million, for which $5.5 million of these loans had a reserve of approximately
$959,000 allocated in the allowance for credit losses. During the first three months of 2023, the average recorded investment in individually
evaluated loans was approximately $7.5 million. Comparatively, individually evaluated loans totaled $7.1 million at December 31, 2022
for which $6.8 million of these loans had a reserve of approximately $1.3 million allocated in the allowance for credit losses. During
2022, the average recorded investment in individually evaluated loans was approximately $7.6 million.

*Allowance
for Credit Losses*

The
allowance for credit losses was $40.4 million, representing 1.18% of outstanding loans and providing coverage of 854.33%, of nonperforming
loans at March 31, 2023 compared to $38.6 million, or 1.18% of outstanding loans and 1470.84% of nonperforming loans at December 31,
2022. At March 31, 2022, the allowance for credit losses was $32.9 million, or 1.24% of outstanding loans and 726.88% of nonperforming
loans.

*Deposits
and Other Interest-Bearing Liabilities*

Our
primary source of funds for loans and investments is our deposits and advances from the FHLB. In the past, we have chosen to obtain a
portion of our certificates of deposits from areas outside of our market in order to obtain longer term deposits than are readily available
in our local market. Our internal guidelines regarding the use of brokered CDs limit our brokered CDs to 20% of total deposits, which
allows us to take advantage of the attractive terms that wholesale funding can offer while mitigating the related inherent risk.

Our
retail deposits represented $3.08 billion, or 89.9% of total deposits, while our wholesale deposits represented $347.7 million, or 10.1%,
of total deposits at March 31, 2023. At December 31, 2022, retail deposits represented $2.90 billion, or 92.5%, of our total deposits.
Wholesale deposits were $236.2 million, representing 7.5% of our total deposits, at December 31, 2022. Our loan-to-deposit ratio was
100% at March 31, 2023 and 104% at December 31, 2022.

The
following is a detail of our deposit accounts:

| (dollars in thousands) | March 31, 2023 | December 31, 2022 |
| --- | --- | --- |
| Non-interest bearing | $740,534 | 804,115 |
| Interest bearing: |  |  |
| NOW accounts | 303,743 | 318,030 |
| Money market accounts | 1,748,562 | 1,506,418 |
| Savings | 39,706 | 40,673 |
| Time, less than $250,000 | 106,679 | 89,876 |
| Time and out-of-market deposits, $250,000 and over | 487,550 | 374,752 |
| Total deposits | $3,426,774 | 3,133,864 |

During
the past 12 months, we continued our focus on increasing core deposits, which exclude out-of-market deposits and time deposits of
$250,000 or more, in order to provide a relatively stable funding source for our loan portfolio and other earning assets. Our core
deposits were $2.95 billion and $2.76 billion at March 31, 2023, and December 31, 2022, respectively. In addition, at March 31, 2023
and December 31, 2022, we estimate that we have approximately $1.1 billion, or 32.1% and 36.6% of total
deposits, respectively, in uninsured deposits including related interest accrued and unpaid. Since it is not reasonably practicable
to provide a precise measure of uninsured deposits, the amounts above are estimates and are based on the same methodologies and
assumptions used by the FDIC for the Bank’s regulatory reporting requirements.

The
following table shows the average balance amounts and the average rates paid on deposits.

| (dollars in thousands) | Three months ended March 31, 2023 / Amount | Three months ended March 31, 2023 / Rate | Three months ended March 31, 2022 / Amount | Three months ended March 31, 2022 / Rate |
| --- | --- | --- | --- | --- |
| Noninterest-bearing demand deposits | $766,916 | 0.00% | $753,546 | 0.00% |
| Interest-bearing demand deposits | 303,176 | 0.59% | 406,054 | 0.12% |
| Money market accounts | 1,621,885 | 3.00% | 1,201,816 | 0.21% |
| Savings accounts | 39,993 | 0.06% | 40,409 | 0.05% |
| Time deposits less than $250,000 | 59,469 | 4.55% | 56,648 | 0.32% |
| Time deposits greater than $250,000 | 483,956 | 0.94% | 102,073 | 0.50% |
| Total deposits | $3,275,395 | 1.76% | $2,560,546 | 0.14% |

During
the first three months of 2023, our average transaction account balances increased by $330.1 million, or 13.7%, from the prior year,
while our average time deposit balances increased by $385,000, or 242.4%. We have experienced record growth in new account openings throughout
our footprint during the first quarter of 2023. In addition, we have added $245.9 million in wholesale time deposits.

All
of our time deposits are certificates of deposits. The maturity distribution of our time deposits $250,000 or more at March 31, 2023
was as follows:

| (dollars in thousands) | March 31, 2023 |
| --- | --- |
| Three months or less | $180,209 |
| Over three through six months | 155,187 |
| Over six through twelve months | 137,563 |
| Over twelve months | 14,591 |
| Total | $487,550 |

Time
deposits that meet or exceed the FDIC insurance limit of $250,000 at March 31, 2023 and December 31, 2022 were $487.6 million and $374.8
million, respectively.

**Liquidity
and Capital Resources**

Liquidity
is our ability to fund operations, to meet depositor withdrawals, to provide for customers’ credit needs, and to meet maturing
obligations and existing commitments. Our liquidity principally depends on our cash flows from operating activities, investment in and
maturity of assets, changes in balances of deposits and borrowings, and our ability to borrow funds. The bank failures in March 2023
exemplify the potential serious results of the unexpected inability of insured depository institutions to obtain needed liquidity to
satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in
an institutions ability to satisfy its obligations to depositors. We seek to ensure our funding needs are met by maintaining a level
of liquidity through asset and liability management. Liquidity management involves monitoring our sources and uses of funds in order
to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different
balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment
portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit
inflows and outflows are far less predictable and are not subject to the same degree of control.

At
March 31, 2023 and December 31, 2022 our cash and cash equivalents totaled $272.2 million and $170.9 million, respectively, or 6.9% and
4.6% of total assets, respectively. Our investment securities at March 31, 2023 and December 31, 2022 amounted to $104.1 million and
$104.2 million, respectively, or 2.6% and 2.8% of total assets, respectively. Investment securities traditionally provide a secondary
source of liquidity since they can be converted into cash in a timely manner.

Our
ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity. We plan to meet
our future cash needs through the liquidation of temporary investments, the generation of deposits, loan payoffs, and from additional
borrowings. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. We maintain
five federal funds purchased lines of credit with correspondent banks totaling $118.5 million for which there were no borrowings against
the lines of credit at March 31, 2023.

We
are also a member of the FHLB, from which applications for borrowings can be made. The FHLB requires that securities, qualifying mortgage
loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. The unused borrowing capacity currently
available from the FHLB at March 31, 2023 was $609.9 million, based primarily on the Bank’s qualifying mortgages available to secure
any future borrowings. However, we are able to pledge additional securities to the FHLB in order to increase our available borrowing
capacity. In addition, at March 31, 2023 and December 31, 2022 we had $373.3 million and $341.5 million, respectively, of letters of
credit outstanding with the FHLB to secure client deposits.

We
also have a line of credit with another financial institution for $15.0 million, which was unused at March 31, 2023. The line of credit
was renewed on December 21, 2021 at an interest rate of One Month CME Term SOFR plus 3.5% and a maturity date of December 20, 2023.

We
believe that our existing stable base of core deposits, federal funds purchased lines of credit with correspondent banks, and borrowings
from the FHLB will enable us to successfully meet our long-term liquidity needs. However, as short-term liquidity needs arise, we have
the ability to sell a portion of our investment securities portfolio to meet those needs.

Total
shareholders’ equity was $299.4 million at March 31, 2023 and $294.5 million at December 31, 2022. The $4.9 million increase from
December 31, 2022 is primarily related to net income of $2.7 million during the first three months of 2023 and a decrease in the unrealized
loss on securities available for sale of $1.6 million.

The
following table shows the return on average assets (net income divided by average total assets), return on average equity (net income
divided by average equity), equity to assets ratio (average equity divided by average assets), and tangible common equity ratio (total
equity less preferred stock divided by total assets) annualized for the three months ended March 31, 2023 and the year ended December
31, 2022. Since our inception, we have not paid cash dividends.

| Line item | March 31, 2023 | December 31, 2022 |
| --- | --- | --- |
| Return on average assets | 0.30% | 0.90% |
| Return on average equity | 3.67% | 10.20% |
| Return on average common equity | 3.67% | 10.20% |
| Average equity to average assets ratio | 8.11% | 8.85% |
| Tangible common equity to assets ratio | 7.60% | 7.98% |

Under
the capital adequacy guidelines, regulatory capital is classified into two tiers. These guidelines require an institution to maintain
a certain level of Tier 1 and Tier 2 capital to risk-weighted assets. Tier 1 capital consists of common shareholders’ equity, excluding
the unrealized gain or loss on securities available for sale, minus certain intangible assets. In determining the amount of risk-weighted
assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks
believed to be inherent in the type of asset. Tier 2 capital consists of Tier 1 capital plus the general reserve for credit losses, subject
to certain limitations. We are also required to maintain capital at a minimum level based on total average assets, which is known as
the Tier 1 leverage ratio.

Regulatory
capital rules, which we refer to 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 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. In order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization
must maintain a “capital conservation buffer” on top of our minimum risk-based capital requirements. This buffer must consist
solely of common equity Tier 1, but the buffer applies to all three measurements (common equity Tier 1, Tier 1 capital and total capital).
The capital conservation buffer consists of an additional amount of CET1 equal to 2.5% of risk-weighted assets.

To
be considered “well-capitalized” for purposes of certain rules and prompt corrective action requirements, the Bank must maintain
a minimum total risked-based capital ratio of at least 10%, a total Tier 1 capital ratio of at least 8%, a common equity Tier 1 capital
ratio of at least 6.5%, and a leverage ratio of at least 5%. As of March 31, 2023, our capital ratios exceed these ratios and we remain
“well capitalized.”

The
following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements.

| (dollars in thousands) | Actual / Amount | Actual / Ratio | March 31, 2023 / For capital adequacy purposes minimum plus the capital conservation buffer / Amount | March 31, 2023 / For capital adequacy purposes minimum plus the capital conservation buffer / Ratio | March 31, 2023 / To be well capitalized under prompt corrective action provisions minimum / Amount | March 31, 2023 / To be well capitalized under prompt corrective action provisions minimum / Ratio |
| --- | --- | --- | --- | --- | --- | --- |
| Total Capital (to risk weighted assets) | $376,311 | 12.38% | $243,212 | 8.00% | $304,016 | 10.00% |
| Tier 1 Capital (to risk weighted assets) | 338,279 | 11.13% | 182,409 | 6.00% | 243,212 | 8.00% |
| Common Equity Tier 1 Capital (to risk weighted assets) | 338,279 | 11.13% | 136,807 | 4.50% | 197,610 | 6.50% |
| Tier 1 Capital (to average assets) | 338,279 | 9.16% | 147,775 | 4.00% | 184,719 | 5.00% |

| (dollars in thousands) | Actual / Amount | Actual / Ratio | December 31, 2022 / For capital adequacy purposes minimum plus the capital conservation buffer / Amount | December 31, 2022 / For capital adequacy purposes minimum plus the capital conservation buffer / Ratio | December 31, 2022 / To be well capitalized under prompt corrective action provisions minimum / Amount | December 31, 2022 / To be well capitalized under prompt corrective action provisions minimum / Ratio |
| --- | --- | --- | --- | --- | --- | --- |
| Total Capital (to risk weighted assets) | $366,988 | 12.45% | $235,892 | 8.00% | $294,865 | 10.00% |
| Tier 1 Capital (to risk weighted assets) | 330,108 | 11.20% | 176,919 | 6.00% | 235,892 | 8.00% |
| Common Equity Tier 1 Capital (to risk weighted assets) | 330,108 | 11.20% | 132,689 | 4.50% | 191,662 | 6.50% |
| Tier 1 Capital (to average assets) | 330,108 | 9.43% | 140,040 | 4.00% | 175,050 | 5.00% |

The
following table summarizes the capital amounts and ratios of the Company and the minimum regulatory requirements.

| (dollars in thousands) | Actual / Amount | Actual / Ratio | March 31, 2023 / For capital adequacy purposes minimum plus the capital conservation buffer (1) / Amount | March 31, 2023 / For capital adequacy purposes minimum plus the capital conservation buffer (1) / Ratio | March 31, 2023 / To be well capitalized under prompt corrective action provisions minimum / Amount | March 31, 2023 / To be well capitalized under prompt corrective action provisions minimum / Ratio |
| --- | --- | --- | --- | --- | --- | --- |
| Total Capital (to risk weighted assets) | $385,157 | 12.67% | $243,211 | 8.00% | N/A | N/A |
| Tier 1 Capital (to risk weighted assets) | 324,125 | 10.66% | 182,409 | 6.00% | N/A | N/A |
| Common Equity Tier 1 Capital (to risk weighted assets) | 311,125 | 10.23% | 136,806 | 4.50% | N/A | N/A |
| Tier 1 Capital (to average assets) | 324,125 | 8.80% | 147,285 | 4.00% | N/A | N/A |

| (dollars in thousands) | Actual / Amount | Actual / Ratio | December 31, 2022 / For capital adequacy purposes minimum plus the capital conservation buffer (1) / Amount | December 31, 2022 / For capital adequacy purposes minimum plus the capital conservation buffer (1) / Ratio | December 31, 2022 / To be well capitalized under prompt corrective action provisions minimum / Amount | December 31, 2022 / To be well capitalized under prompt corrective action provisions minimum / Ratio |
| --- | --- | --- | --- | --- | --- | --- |
| Total Capital (to risk weighted assets) | $380,802 | 12.91% | $235,892 | 8.00% | N/A | N/A |
| Tier 1 Capital (to risk weighted assets) | 320,922 | 10.88% | 176,919 | 6.00% | N/A | N/A |
| Common Equity Tier 1 Capital (to risk weighted assets) | 307,922 | 10.44% | 132,689 | 4.50% | N/A | N/A |
| Tier 1 Capital (to average assets) | 320,922 | 9.17% | 140,057 | 4.00% | N/A | N/A |

*(1)* *Under  the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is not  subject to the minimum capital adequacy and capital conservation buffer capital requirements  at the holding company level, unless otherwise advised by the Federal Reserve (such capital  requirements are applicable only at the Bank level). Although the minimum regulatory capital  requirements are not applicable to the Company, we calculate these ratios for our own planning  and monitoring purposes.*

The
ability of the Company to pay cash dividends to shareholders is dependent upon receiving cash in the form of dividends from the Bank.
The dividends that may be paid by the Bank to the Company are subject to legal limitations and regulatory capital requirements. Since
our inception, we have not paid cash dividends to shareholders.

**Effect
of Inflation and Changing Prices**

The
effect of relative purchasing power over time due to inflation has not been taken into account in our consolidated financial statements.
Rather, our financial statements have been prepared on an historical cost basis in accordance with generally accepted accounting principles.

Unlike
most industrial companies, our assets and liabilities are primarily monetary in nature. Therefore, the effect of changes in interest
rates will have a more significant impact on our performance than will the effect of changing prices and inflation in general. In addition,
interest rates may generally increase as the rate of inflation increases, although not necessarily in the same magnitude. As discussed
previously, we seek to manage the relationships between interest sensitive assets and liabilities in order to protect against wide rate
fluctuations, including those resulting from inflation.

**Off-Balance
Sheet Risk**

Commitments
to extend credit are agreements to lend money to a client as long as the client has not violated any material condition established in
the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At
March 31, 2023 unfunded commitments to extend credit were $882.5 million, of which $286.3 million were at fixed rates and $596.2 million
were at variable rates. At December 31, 2022, unfunded commitments to extend credit were $878.3 million, of which approximately $318.9
million were at fixed rates and $559.4 million were at variable rates. A significant portion of the unfunded commitments related to commercial
business loans and consumer home equity lines of credit. We evaluate each client’s credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower.
The type of collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential
real estate. As of March 31, 2023, the reserve for unfunded commitments was $2.8 million or 0.31% of total unfunded commitments. As of
December 31, 2022, the reserve for unfunded commitments was $2.8 million or 0.32% of total unfunded commitments.

At
March 31, 2023 and December 31, 2022, there were commitments under letters of credit for $15.6 million and $14.3 million, respectively.
The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities
to customers. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent
future cash requirements.

Except
as disclosed in this report, we are not involved in off-balance sheet contractual relationships, unconsolidated related entities that
have off-balance sheet arrangements or transactions that could result in liquidity needs or other commitments that significantly impact
earnings.

**Critical
Accounting Estimates**

We
have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States
and with general practices within the banking industry in the preparation of our financial statements.

Certain
accounting policies inherently involve a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater
possibility of producing results that could be materially different than originally reported, which could have a material impact on the
carrying values of our assets and liabilities and our results of operations. Of the significant accounting policies used in the preparation
of our consolidated financial statements, we have identified certain items as critical accounting policies based on the associated estimates,
assumptions, judgments and complexity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical
Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2022, for a description our significant
accounting policies that use critical accounting estimates.

**Accounting,
Reporting, and Regulatory Matters**

See
Note 1 – Summary of Significant Accounting Policies in the accompanying notes to consolidated financial statements included elsewhere
in this report for details of recently issued accounting pronouncements and their expected impact on our consolidated financial statements.

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

Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Market
risk is the risk of loss from adverse changes in market prices and rates, which principally arises from interest rate risk inherent in
our lending, investing, deposit gathering, and borrowing activities. Other types of market risks, such as foreign currency exchange rate
risk and commodity price risk, do not generally arise in the normal course of our business.

We
actively monitor and manage our interest rate risk exposure in order to control the mix and maturities of our assets and liabilities
utilizing a process we call asset/liability management. The essential purposes of asset/liability management are to seek to ensure adequate
liquidity and to maintain an appropriate balance between interest sensitive assets and liabilities in order to minimize potentially adverse
impacts on earnings from changes in market interest rates. Our asset/liability management committee (“ALCO”) monitors and
considers methods of managing exposure to interest rate risk. We have both an internal ALCO consisting of senior management that meets
at various times during each month and a board ALCO that meets monthly. The ALCOs are responsible for maintaining the level of interest
rate sensitivity of our interest sensitive assets and liabilities within board-approved limits.

As
of March 31, 2023, the following table summarizes the forecasted impact on net interest income using a base case scenario given upward
and downward movements in interest rates of 100, 200, and 300 basis points based on forecasted assumptions of prepayment speeds, nominal
interest rates and loan and deposit repricing rates. Estimates are based on current economic conditions, historical interest rate cycles
and other factors deemed to be relevant. However, underlying assumptions may be impacted in future periods which were not known to management
at the time of the issuance of the Consolidated Financial Statements. Therefore, management’s assumptions may or may not prove
valid. No assurance can be given that changing economic conditions and other relevant factors impacting our net interest income will
not cause actual occurrences to differ from underlying assumptions. In addition, this analysis does not consider any strategic changes
to our balance sheet which management may consider as a result of changes in market conditions.

| Interest rate scenario | Change in net interest income from base |
| --- | --- |
| Up 300 basis points | (16.34 |
| Up 200 basis points | (10.86 |
| Up 100 basis points | (5.43 |
| Base | — |
| Down 100 basis points | 10.80% |
| Down 200 basis points | 21.01% |
| Down 300 basis points | 30.48% |

**Item
4. CONTROLS AND PROCEDURES.**

*Evaluation
of Disclosure Controls and Procedures*

Management,
including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure
that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized
and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and
the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

*Changes
in Internal Control over Financial Reporting*

There
has been no change in the Company’s internal control over financial reporting during the three months ended March 31, 2023, that
has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART
II. OTHER INFORMATION

Item
1. LEGAL PROCEEDINGS.

We
are a party to claims and lawsuits arising in the course of normal business activities. Management is not aware of any material pending
legal proceedings against the Company which, if determined adversely, would have a material adverse impact on the company’s financial
position, results of operations or cash flows.

Item
1A. RISK FACTORS.

Investing
in shares of our common stock involves certain risks, including those identified and described in Item 1A. of our Annual Report on Form 10-K
for the fiscal year ended December 31, 2022, as well as cautionary statements contained in this Quarterly Report on Form 10-Q,
including those under the caption “Cautionary Warning Regarding Forward-Looking Statements” set forth in Part I, Item 2 of
this Form 10-Q, risks and matters described elsewhere in this Form 10-Q, and in our other filings with the SEC.

We
are providing these additional risk factors to supplement the risk factors contained in Item 1A. of our Annual Report on Form 10-K for
the year ended December 31, 2022.

***Our
deposit insurance premiums could be higher in the future, which could have an adverse effect on our future earnings.***

The
FDIC insures deposits at FDIC-insured depository institutions, such as Southern First Bank, up to the maximum federal deposit insurance
level per account. Our regular assessments are based on its average consolidated total assets minus average tangible equity as well as
by risk classification, which includes regulatory capital levels and the level of supervisory concern. In addition to ordinary assessments
described above, the FDIC has the ability to impose special assessments in certain instances.

We
are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or
financial institution failures, we may be required to pay even higher FDIC premiums. For example, in response to March 2023 bank closures
and in an effort to strengthen public confidence in the banking system and protect depositors, regulators announced that any losses to
the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law, which
could increase the cost of our FDIC insurance assessments and affect our profitability. If our financial condition deteriorates or if
the bank regulators otherwise have supervisory concerns about us, then our assessments could rise. Any future additional assessments,
increases or required prepayments in FDIC insurance premiums could reduce our profitability, may limit our ability to pursue certain
business opportunities, or otherwise negatively impact our operations.

***The
Federal Reserve has implemented significant economic strategies that have affected interest rates, inflation, asset values, and the shape
of the yield curve.***

In
2020, in response to economic disruption associated with the COVID-19 pandemic, the Federal Reserve quickly reduced short-term rates
to extremely low levels and acted to influence the markets to reduce long-term rates as well. During 2021, the Federal Reserve significantly
reduced such “easing” actions that held down long-term rates. During 2022, the Federal Reserve switched to a tightening policy.
It raised short term rates significantly and rapidly throughout the year. Those actions triggered a significant decline in the values
of most categories of U.S. stocks and bonds; significantly raised recessionary expectations for the U.S.; and inverted the yield curve
in the U.S. for much of the last two quarters of 2022.

Effects
on the yield curve often are most pronounced at the short end of the curve, which is of particular importance to us and other banks.
Among other things, easing strategies are intended to lower interest rates, expand the money supply, and stimulate economic activity,
while tightening strategies are intended to increase interest rates, discourage borrowing, tighten the money supply, and restrain economic
activity. However, in 2022, short term rates rose faster than long term rates to the point that the yield curve inverted for much of
the final two quarters of 2022. This sort of phenomenon—where short term rates rise more strongly and rapidly than long-term rates
can follow—is relatively uncommon.

It
is unclear when long term rates are likely to catch up. Many external factors may interfere with the effects of these plans or cause
them to be changed, sometimes quickly. Such factors include significant economic trends or events as well as significant international
monetary policies and events. For 2023, the Federal Reserve has not yet indicated when it will stop, or at least pause, raising short
term rates, although the rate of increases has slowed.

These
economic strategies have had, and will continue to have, a significant impact on our business and on many of our clients. As exemplified
by the March 2023 bank failures in the U.S., such strategies also can affect the U.S. and world-wide financial systems in ways that may
be difficult to predict.

***Adverse
developments affecting the financial services industry, such as recent bank failures or concerns involving liquidity, may have a material
adverse effect on the Company’s operations.***

The
recent high-profile bank failures involving Silicon Valley Bank and Signature Bank have caused general uncertainty and concern regarding
the liquidity adequacy of the banking sector. Although we were not directly affected by these bank failures, the resulting speed and
ease in which news, including social media commentary, led depositors to withdraw or attempt to withdraw their funds from these and other
financial institutions caused the stock prices of many financial institutions to become volatile. Additional bank failures could have
an adverse effect on our financial condition and results of operations, either directly or through an adverse impact on certain of our
customers.

In
response to these bank failures and the resulting market reaction, the Secretary of the Treasury approved actions enabling the FDIC to
complete its resolutions of the failed banks in a manner that fully protects depositors by utilizing the Deposit Insurance Fund, including
the use of Bridge Banks to assume all of the deposit obligations of the failed banks, while leaving unsecured lenders and equity holders
of such institutions exposed to losses. In addition, the Federal Reserve announced it would make available additional funding to eligible
depository institutions under a Bank Term Funding Program to help assure banks have the ability to meet the needs of all their depositors.
In an effort to strengthen public confidence in the banking system and protect depositors, regulators announced that any losses to the
Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law, which
will increase our FDIC insurance assessment and will increase our costs of doing business. However, it is uncertain whether these steps
by the government will be sufficient to calm the financial markets, reduce the risk of significant depositor withdrawals at other institutions
and thereby reduce the risk of additional bank failures. As a result of this uncertainty, we face the potential for reputational risk,
deposit outflows, increased costs and competition for liquidity, and increased credit risk which, individually or in the aggregate, could
have a material adverse effect on our business, financial condition and results of operations.

Item
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

(a) Not  applicable.

(b) Not  applicable.

(c) Not  applicable.

Item
3. DEFAULTS UPON SENIOR SECURITIES.

None.

Item
4. MINE SAFETY DISCLOSURES.

Not
applicable.

Item
5. OTHER INFORMATION.

None.

Item
6. EXHIBITS.

The
exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Index to Exhibits attached hereto and are
incorporated herein by reference.

**INDEX
TO EXHIBITS**

| Exhibit Number | Description |
| --- | --- |
| 10.1 | Employment Agreement by and between Southern First Bank and William M. Aiken, III, dated December 1, 2021. |
| 10.2 | Employment Agreement by and between Southern First Bank and D. Andrew Borrmann, dated March 29, 2023 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed April 3, 2023).* |
| 31.1 | Rule 13a-14(a) Certification of the Principal Executive Officer. |
| 31.2 | Rule 13a-14(a) Certification of the Principal Financial Officer. |
| 32 | Section 1350 Certifications. |
| 101 | The following materials from the Quarterly Report on Form 10-Q of Southern First Bancshares, Inc. for the quarter ended March 31, 2023, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statement of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Unaudited Consolidated Financial Statements. |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
| ______ | ________________________________________________ |
| * | Management contract or compensatory plan or arrangement. |

SIGNATURES

Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.

**SOUTHERN  FIRST BANCSHARES, INC.**

Registrant

Date: May 2, 2023 /s/ R. Arthur Seaver,  Jr.

R. Arthur Seaver, Jr.

Chief Executive Officer (Principal Executive Officer)

Date: May 2, 2023 /s/ D. Andrew  Borrmann

D. Andrew Borrmann

Chief Financial Officer (Principal Financial and Accounting  Officer)

41

---

## EMPLOYMENT AGREEMENT

SEC source: [e419475ex10-1_southernfirst.htm](https://www.sec.gov/Archives/edgar/data/1090009/000120677423000655/e419475ex10-1_southernfirst.htm)

**Exhibit 10.1**

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT
(this “Agreement”) is made as of and effective on the 1st day of December, 2021 (the “Effective Date”) by and
between Southern First Bank (the “Employer”), having its principal office at 100 Verdae Boulevard, Suite 100, Greenville,
South Carolina 29607 and **William Marion Aiken, III** (hereinafter called “Employee”), a resident of the State of South
Carolina. References herein to the “Company” refer to Southern First Bancshares, Inc., the parent company of the Employer.

Employer desires to continue
to employ Employee, now as a Senior Executive Vice President, Chief Risk Officer. Employer desires to provide for the continued employment
of Employee and to provide an employment arrangement which Employer has determined will encourage the continued dedication of Employee
to Employer. Employee is willing to continue to serve Employer on the terms and conditions herein provided. Unless otherwise specified
hereafter, any services performed by the Employee shall be for the benefit of the Employer and, therefore, any payments or benefits paid
to the Employee pursuant to this Agreement shall be the sole responsibility of the Employer; provided, however, the Employer’s
obligation to make any payments owed to the Employee under this Agreement shall be discharged to the extent compensation payments are
made by the Company.

In consideration of the mutual
covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:

1. Employment.
Employer shall continue to employ Employee, and Employee shall continue to serve Employer, effective as of the Effective Date a Senior
Executive Vice President, Chief Risk Officer and in such capacity shall perform such duties as are consistent with that position, and
as Employer from time to time may direct. Employee shall have such authority and responsibilities consistent with Employee’s position
as are set forth in Employer’s Bylaws or assigned by Employer’s Board of Directors (the “Board”), Employer’s
Chief Executive Officer, or Employer’s President from time to time. Employee shall devote Employee’s full business time, attention,
skill and efforts to the performance of Employee’s duties hereunder, except during periods of illness or periods of vacation and
leaves of absence consistent with Employer’s policy. Such duties shall be performed at Employer’s principal corporate offices
or subsidiary offices as agreed upon by Employer and Employee. Employer reserves the right from time to time to extend, curtail or change
the title and duties of Employee. Employee may devote reasonable periods to service as a director or advisor to other organizations, to
charitable and community activities, and to managing Employee’s personal investments; provided that such activities do not
materially interfere with the performance of Employee’s duties hereunder and are not in conflict or competitive with, or adverse
to, the interests of Employer.

2. Term.
Unless earlier terminated as provided in section 13 below, Employee’s employment under this Agreement shall commence on the Effective
Date and be for a term ending January 31, 2023 (the “Term”). On January 31, 2022 and on the last day of January each year
thereafter, the Term shall automatically be extended for an additional one (1) year so that the remaining Term shall continue to be two
(2) years; provided that Employer or Employee may at any time, by written notice, fix the Term to a finite term of two (2) years
commencing with the date of the written notice.

3. Base
Salary. For all services rendered by Employee under this Agreement, Employer shall pay Employee a rate of base salary of $250,000
per year (the “Base Salary”). The Base Salary shall be reviewed annually by the Board, and may be increased by the Board or
a duly appointed committee thereof, in its sole discretion. The Base Salary shall be paid in accordance with Employer’s standard
payroll procedures, but in any case, no less frequently than monthly.

4. Benefits.

(a) Employee
shall be entitled, to the extent that Employee’s position, title, tenure, salary, age, health and other qualifications make Employee
eligible, to participate in such pension, profit sharing, bonus, life insurance, hospitalization, major medical, and other employee benefit
plans or programs of Employer currently in existence on the date hereof or later established that generally are provided to executive
employees of Employer. Employee’s participation in any such plan or program shall be subject to the provisions, rules and regulations
applicable thereto. Any Company stock options or similar awards shall be issued to Employee at an exercise price per share of not less
than the fair market value per share of the corresponding shares as of the date of grant and the number of shares subject to such grant
shall be fixed on such date. In addition, within 45 days of the Effective Date, Company shall grant to Employee 1,000 restricted shares
of the Company’s common stock. Any and all bonus payments made to Employee shall be paid by the earlier of: (i) seventy (70) days
after the end of the year in which the bonus was earned by Employee or (ii) with the first payroll cycle following the Company’s
press release announcing its previous year’s financial performance.

(b) Employer
shall provide Employee with a monthly automobile allowance, paid in accordance with Employer’s standard payroll procedures, but
in any case, no less frequently than monthly.

5. Working
Facilities. Employee shall be furnished with an office and such other facilities and services as may be necessary or suitable to Employee’s
position and adequate for the performance of Employee’s duties.

6. Expenses.
Employee is authorized to incur reasonable expenses for promoting the business of Employer, including expenses for entertainment, travel
and similar items, but only to the extent that such expenses are allowable deductions to Employer on its Federal income tax return. Expenses
for which there is a fifty percent (50%) tax deduction limitation for entertainment, travel and similar items shall be considered reimbursable
expenses. Employer shall reimburse Employee for all such expenses within sixty (60) days of Employee’s written notice to Employer
of such expenses. Employee shall repay to Employer the amounts of any expenses claimed which, for lack of proper documentation or otherwise,
are not allowed to Employer as deductions for Federal income tax purposes.

7. Paid
Time Off. Employee shall be entitled each fiscal year to twenty (27) days of paid time off for illness, vacation and personal time,
which shall be granted on a noncumulative basis from year-to-year, as granted by Employer to employees of similar tenure and compensation
rank, pursuant to Employer’s paid days off policy. Employer reserves the right to modify this and any other personnel policy from
time to time. Any payments made by the Employer to the Employee as compensation for paid vacation leave shall be paid in accordance with
the Employer’s standard payroll procedures.

2

8. Ownership
of Work Product.

(a) Employee
shall diligently disclose to Employer as soon as it is created or conceived by Employee, and Employer shall own, all Work Product (as
defined below). To the extent permitted by law, all Work Product shall be considered work made for hire by Employee and owned by Employer.

(b) If
any of the Work Product may not, by operation of law, be considered work made for hire by Employee for Employer (or if ownership of all
right, title and interest of the intellectual property rights therein shall not otherwise vest exclusively in Employer), Employee agrees
to assign, and upon creation thereof automatically assigns, without further consideration, the ownership of all Work Product to Employer,
its successors and assigns.

(c) Employer,
its successors and assigns, shall have the right to obtain and hold in its or their own name copyrights, registrations, and any other
protection available in the foregoing.

(d) Employee
agrees to perform upon the reasonable request of Employer, during or after Employee’s employment, such further acts as may be necessary
or desirable to transfer, perfect and defend Employer’s ownership of the Work Product. When requested, Employee will:

(i) Execute,
acknowledge and deliver any requested affidavits and documents of assignment and conveyance;

(ii) Obtain
and aid in the enforcement of copyrights (and, if applicable, patents) with respect to the Work Product in any countries;

(iii) Provide
testimony in connection with any proceeding affecting the right, title or interest of Employer in any Work Product; and

(iv) Perform
any other acts deemed necessary or desirable to carry out the purposes of this Agreement.

(e) Employer
shall reimburse all reasonable out-of-pocket expenses incurred by Employee at Employer’s request in connection with subsection 8(d)
within sixty (60) days of Employee’s written notice to Employer of such expenses.

(f) For
purposes hereof, “Work Product” shall mean all intellectual property rights, including all Trade Secrets (as defined below),
U.S. and international copyrights, patentable inventions, discoveries and improvements, and other intellectual property rights, in any
programming, documentation, technology or other work product that relates to the business and interests of Employer or any Affiliates
and that Employee conceives, develops, or delivers to Employer at any time during the Term of Employee’s employment. “Work
Product” shall also include all intellectual property rights in any programming, documentation, technology or other work product
that is now contained in any of the products or systems (including development and support systems) of Employer to the extent Employee
conceived, developed or delivered such Work Product to Employer prior to the date of this Agreement while Employee was engaged as an independent
contractor or employee of Employer. Employee hereby irrevocably relinquishes for the benefit of Employer and its assigns any moral rights
in the Work Product recognized by applicable law.

3

9. Protection
of Trade Secrets and Confidential Information.

(a) Through
exercise of Employee’s rights and performance of Employee’s obligations under this Agreement, Employee will be exposed to
“Trade Secrets” and “Confidential Information” (as those terms are defined below). “Trade Secrets”
shall mean information or data of or about Employer or any Affiliates (as defined in subsection 26(a)), including, but not limited to,
technical or non-technical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial
data, financial plans, product plans, or lists of actual or potential customers, clients, distributors, or licensees, that: (i) derive
economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other
persons who can obtain economic value from their disclosure or use; and (ii) are the subject of efforts that are reasonable under the
circumstances to maintain their secrecy. To the extent that the foregoing definition is inconsistent with the definition of “trade
secret” mandated under applicable law, the latter definition shall govern for purposes of interpreting Employee’s obligations
under this Agreement. Except as required to perform Employee’s obligations under this Agreement, or except with Employer’s
prior written permission, Employee shall not use, redistribute, market, publish, disclose or divulge to any other person or entity any
Trade Secrets of Employer. Employee’s obligations under this provision shall remain in force (during and after the Term) for so
long as such information or data shall continue to constitute a Trade Secret under applicable law. Employee agrees to cooperate with any
and all confidentiality requirements of Employer, and Employee shall immediately notify Employer of any unauthorized disclosure or use
of any Trade Secrets of which Employee becomes aware.

(b) Employee
agrees to maintain in strict confidence and, except as necessary to perform Employee’s duties for Employer, not to use or disclose
any Confidential Information at any time, either during the Term of Employee’s employment or for a period of one (1) year after
Employee’s last date of employment, so long as the pertinent data or information remains Confidential Information. “Confidential
Information” shall mean any non-public information of a competitively sensitive or personal nature, other than Trade Secrets, acquired
by Employee during Employee’s employment, relating to Employer or any Affiliate or Employer’s or any Affiliate’s business,
operations, customers, suppliers, products, employees, financial affairs or industrial practices. Notwithstanding anything herein to the
contrary, no obligation or liability shall accrue hereunder with respect to any information that is or becomes publicly available without
the fault of Employee.

(c) Employee
will abide by Employer’s policies and regulations, as established from time to time, for the protection of its Confidential Information.
Employee acknowledges that all records, files, data, documents, and the like relating to suppliers, customers, costs, prices, systems,
methods, personnel, technology and other materials relating to Employer or its Affiliated entities shall be and remain the sole property
of Employer and/or such Affiliated entity. Employee agrees, upon the request of Employer, and in any event upon termination of Employee’s
employment, to turn over all copies of all media, records, documentation, etc., pertaining to Employer (together with a written statement
certifying as to Employee’s compliance with the foregoing).

10. Non-Solicitation of Customers. During the Employee’s employment
with the Employer and for a period of one (1) year following termination or expiration of this Agreement, Employee shall not (except on
behalf of or with the prior written consent of the Employer) directly or indirectly solicit any individual or entity which was a customer
or client of Employer or any of its Affiliates for the purpose of providing a service or product to such customer or client which is the
same type of service or product offered or provided by Employer or any of its Affiliates; provided, however, that this restriction
shall apply only to those customers or clients with whom Employee had contact in connection with services or products provided by Employer
or any of its Affiliates within two (2) years prior to the date of termination of such employment.

4

11. Non-Solicitation of Employees. During the Employee’s employment
with the Employer and for a period of one (1) year following termination or expiration of this Agreement, Employee shall not, directly
or indirectly, on the Employee’s own behalf or in the service of or on behalf of others, induce or solicit, or attempt to induce
or solicit, for employment purposes or for any type of consulting purposes any employee of or consultant to the Employer or any of its
Affiliates for the purpose of providing services that are the same or similar to the types of services offered or engaged in by any employee
of or consultant to the Employer or any of its Affiliates at the time of termination of Employee’s employment with Employer.

12. Non-Competition Agreement. During Employee’s employment with the
Employer and for a period of one (1) year following termination or expiration of this Agreement, Employee shall not (without the prior
written consent of Employer) compete with Employer or any of its Affiliates, directly or indirectly, engage in forming, serving as an
organizer, director, officer of, employee or agent, or consultant to, or acquiring or maintaining more than a one percent (1%) passive
investment in, a depository financial institution or holding company thereof if such depository institution or holding company has, or
upon formation will have, one or more offices or branches located within thirty (30) miles of any office or branch of Employer or any
of its Affiliates in existence at the time Employee’s employment with Employer is terminated (the “Territory”). Notwithstanding
the foregoing, Employee may serve as an officer of or consultant to a depository institution or holding company thereof even though such
institution operates one or more offices or branches in the Territory, if Employee’s employment does not directly involve, in whole
or in part, the depository financial institution’s or holding company’s operations in the Territory.

13. Termination and Severance Payments.

(a) Employee’s
employment under this Agreement may be terminated prior to the end of the Term only as follows:

(i) upon
the death of Employee;

(ii) by
Employer upon the Disability (as defined in subsection 26(d)) of Employee for a period of one hundred and eighty (180) days;

(iii) by
Employer for Cause (as defined in subsection 26(b)) upon delivery of a Notice of Termination (as defined in subsection 26(g)) to Employee;

(iv) by
Employer without Cause upon delivery of a Notice of Termination to Employee;

(v) by
Employee for Good Reason (as defined in subsection 26(e)) upon delivery of a Notice of Termination to the Employer within a ninety (90)
day period beginning on the thirtieth (30th) day after the occurrence of a Change in Control (as defined in subsection 26(c))
or within a ninety (90) day period beginning on the one (1) year anniversary of the occurrence of a Change in Control; or

(vi) by
Employee upon delivery of a Notice of Termination to Employer.

(b) If
Employee’s employment is terminated because of the Employee’s death, Employer shall pay Employee’s estate:

(i) any
sums due Employee as Base Salary and/or reimbursement of expenses through the end of the month during which death occurred, paid in accordance
with Employer’s standard payroll procedures, but in any case, no less frequently than monthly; and

(ii) any
bonus earned or accrued through the date of death. Any bonus for previous years which was not yet paid will be paid pursuant to the terms
as set forth in section 4(a). Any bonus that is earned in the year of death will be paid on the earlier of: (i) seventy (70) days after
the end of the year in which the Employee died or (ii) with the first payroll cycle following the Company’s press release announcing
its financial performance for the year in which the Employee died. To the extent that the bonus is performance-based, the amount of the
bonus will be calculated by taking into account the performance of the Employer for the entire year and prorating this through the date
of Employee’s death.

5

(c) During
the period of any Disability leading up to the termination of Employee’s employment as a result of the Disability, Employer shall:

(i) continue
to pay the Employee’s full Base Salary at the rate then in effect and all perquisites and other benefits (other than any bonus)
in accordance with Employer’s standard payroll procedures, but in any case, no less frequently than monthly, until Employee becomes
eligible for benefits under any long-term disability plan or insurance program maintained by Employer; provided that the amount
of any such payments to Employee shall be reduced by the sum of the amounts, if any, payable to Employee for the same period under any
disability benefit or pension plan covering the Employee; and

(ii) pay
Employee any bonus earned or accrued through the date of Disability. Any bonus for previous years which was not yet paid will be paid
pursuant to the terms as set forth in section 4(a). Any bonus that is earned in the year of Disability will be paid on the earlier of:
(i) seventy (70) days after the end of the year in which Employee became Disabled or (ii) with the first payroll cycle following the Company’s
press release announcing its financial performance for the year in which the Employee became Disabled.

(d) If
Employee’s employment is terminated for Cause, Employee shall receive only any sums due Employee as Base Salary and/or reimbursement
of expenses through the date of termination, paid in accordance with Employer’s standard payroll procedures, but in any case, no
less frequently than monthly.

(e) If
Employee’s employment is terminated by Employer without Cause, conditioned upon the effectiveness of the release described in Section
13(i) below and subject to the possibility of a six-month delay described below in Section 29(a), beginning on the first day of the month
following the date of the Employee’s termination, and continuing on the first day of the month for the next eleven (11) months,
the Employer shall pay to the Employee monthly severance compensation in cash in an amount equal to one-twelfth (1/12th) of the Employee’s
annual rate of Base Salary at the date of termination. Employer shall also pay Employee any bonus earned or accrued through the date of
termination. Any bonus for previous years, which was not yet paid, will be paid as stated in Section 4(a) of this Agreement. The restrictive
covenants contained in sections 10, 11 and 12 shall not apply to Employee.

(f) If
Employee’s employment is terminated by Employee for Good Reason, in addition to other rights and remedies available in law or equity,
Employee shall be entitled to the following:

(i) Subject
to the possibility of a six-month delay described below in Section 29(a), beginning on the date following the date of the Employee’s
termination, the Employer shall provide Employee with the same severance compensation and accrued bonus set forth in Section 13(e);

(ii) Employee
may continue participation, in accordance with the terms of the applicable benefits plans, in the Company’s group health plan pursuant
to plan continuation rules under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”). In accordance with COBRA, assuming
Employee is covered under the Company’s group health plan as of his date of termination, Employee will be entitled to elect COBRA
continuation coverage for the legally required COBRA period (the “Continuation Period”). If Employee elects COBRA coverage
for group health coverage, he will be obligated to pay the portion of the full COBRA cost of the coverage equal to an active employee’s
share of premiums for coverage for the respective plan year and the Company’s share of such premiums shall be treated as taxable
income to Employee. Notwithstanding the above, the Employer’s obligations hereunder with respect to the foregoing benefits provided
in this subsection (ii) shall be limited to the extent that if Employee obtains any coverage pursuant to a subsequent employer’s
benefit plans which duplicates the Employer’s coverage, the duplicative coverage may be terminated by Employer. This subsection
(ii) shall not be interpreted so as to limit any benefits to which Employee or his dependents or beneficiaries may be entitled under any
of Employer’s employee benefit plans, programs, or practices following the Employee’s Termination of Employment, including,
without limitation, retiree medical and life insurance benefits; and

(iii) the
restrictive covenants contained in sections 10, 11 and 12 shall not apply to Employee.

6

(g) If
Employee’s employment is terminated by Employee without Good Reason, Employee shall receive only any sums due Employee as Base Salary
and/or reimbursement of expenses through the date of termination, paid in accordance with Employer’s standard payroll procedures,
but in any case, no less frequently than monthly.

(h) With
the exceptions of the provisions of this section 13, and the express terms of any benefit plan under which Employee is a participant,
it is agreed that, upon termination of Employee’s employment, Employer shall have no obligation to Employee for, and Employee waives
and relinquishes, any further compensation or benefits (exclusive of COBRA benefits). Unless otherwise stated in this section 13, the
effect of termination on any outstanding incentive awards, stock options, stock appreciation rights, performance units, or other incentives
shall be governed by the terms of the applicable benefit or incentive plan and/or the agreements governing such incentives. Within sixty
(60) days of termination of Employee’s employment, and as a condition to the Employer’s obligation to pay any severance hereunder,
the Employee shall execute, and not timely revoke during any revocation period provided pursuant to such release, a mutually satisfactory
form of release acknowledging such remaining obligations and discharging both parties, as well as Employer’s officers, directors
and employees with respect to their actions for or on behalf of Employer, from any other claims or obligations arising out of or in connection
with Employee’s employment by Employer, including the circumstances of such termination. In most instances, payment will be made,
or in the case of installment payments, will begin as soon as practicable after such release is effective. However, if the 60-day period
spans two calendar years, such severance payment will be made as soon as possible in the subsequent taxable year.

(i) The
parties intend that the severance payments and other compensation provided for herein are reasonable compensation for Employee’s
services to Employer and shall not constitute “excess parachute payments” within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended (the “Code”), and any regulations thereunder. If the Employer’s independent accountants
acting as auditors for the Employer determine that any or the aggregate value (as determined pursuant to Section 280G of the Code) of
all payments, distributions, accelerations of vesting, awards and provisions of benefits by the Employer to or for the benefit of Employee
(whether paid or payable, distributed or distributable, accelerated, awarded or provided pursuant to the terms of this Agreement or otherwise),
(a “Payment”) would constitute an excess parachute payment and be subject to the excise tax imposed by Section 4999 of the
Code (the “Excise Tax”), such Payment shall be reduced to the least extent necessary so that no portion of the Payment shall
be subject to the Excise Tax, but only if, by reason of such reduction, the net after-tax benefit received by the Employee as a result
of such reduction will exceed the net after-tax benefit that would have been received by the Employee if no such reduction were made.
The Payment shall be reduced, if applicable, by the Employer in the following order of priority: (A) reduction of any cash payments otherwise
payable to the Employee pursuant to a supplemental executive retirement plan including, without limitation, any salary continuation agreement
between the Employee and the Employer; (B) reduction of any cash severance payments otherwise payable to the Employee that are exempt
from Section 409A of the Code; (C) reduction of any other cash payments or benefits otherwise payable to the Employee that are exempt
from Section 409A of the Code, but excluding any payments attributable to any acceleration of vesting or payments with respect to any
equity award that are exempt from Section 409A of the Code; (D) reduction of any payments attributable to any acceleration of vesting
or payments with respect to any equity award that are exempt from Section 409A of the Code, in each case beginning with payments that
would otherwise be made last in time; and (E) reduction of any other payments or benefits otherwise payable to the Employee on a pro-rata
basis or such other manner that complies with Section 409A of the Code, but excluding any payments attributable to any acceleration of
vesting and payments with respect to any equity award that are exempt from Section 409A of the Code. If, however, such Payment is not
reduced as described above, then such Payment shall be paid in full to the Employee and the Employee shall be responsible for payment
of any Excise Taxes relating to the Payment.

14. Oral Modification Not Binding. This Agreement supersedes all prior agreements
and understandings between the parties and may not be changed or terminated orally, and no change or attempted waiver of the provisions
hereof shall be binding unless in writing and signed by the party against whom the same is sought to be enforced; provided, however,
that Employee’s compensation may be increased at any time by Employer without in any way affecting any of the other terms and conditions
of this Agreement, which in all other respects shall remain in full force and effect.

7

15. Governing Law. This Agreement and all rights hereunder shall be governed
by the laws of the State of South Carolina, except to the extent governed by the laws of the United States of America in which case federal
laws shall govern. Any action brought by any party to this Agreement shall be brought and maintained in a court of competent jurisdiction
in the State of South Carolina.

16. Remedies for Breach; Non-Waiver. Employee recognizes and agrees that a
breach by Employee of any covenant contained in this Agreement would cause immeasurable and irreparable harm to Employer. In the event
of a breach or threatened breach of any covenant contained herein, Employer shall be entitled to temporary and permanent injunctive relief,
restraining Employee from violating or threatening to violate any covenant contained herein, as well as all costs and fees incurred by
Employer, including attorneys’ fees, as a result of Employee’s breach or threatened breach of the covenant. Employer and Employee
agree that the relief described herein is in addition to such other and further relief as may be available to Employer at equity or by
law. Nothing herein shall be construed as prohibiting Employer from pursuing any other remedies available to it for such breach of threatened
breach, including the recovery of damages from Employee. Failure of the Employer to enforce any of the provisions of this Agreement or
any rights with respect thereto shall in no way be considered a waiver of such provisions or rights or in any way otherwise affect the
validity of this Agreement.

17. Consideration. Employee acknowledges and agrees that valid consideration
has been given to Employee by Employer in return for the promises of Employee set forth herein.

18. Covenants are Independent. The covenants on the part of Employee contained
herein shall each be construed as agreements independent of each other and of any other provisions in this Agreement and the unenforceability
of one shall not affect the enforceability of the remaining covenants.

19. Severability and Substitution of Valid Provisions. To the extent that
any provision or language of this Agreement is deemed unenforceable, by virtue of the scope of the business activity prohibited or the
length of time the activity is prohibited, Employer and Employee agree that this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies of the State of South Carolina.

20. Extension of Periods. Each of the time periods described in Sections 9-12
of this Agreement shall be automatically extended by any length of time during which Employee is in breach of the corresponding covenant
contained herein. Such provisions of this Agreement shall continue in full force and effect throughout the duration of the extended periods.

21. Reasonable Restraint. It is agreed by the parties that the foregoing covenants
in this Agreement are necessary for the legitimate business interests of Employer and impose a reasonable restraint on Employee in light
of the activities and business of Employer on the date of the execution of this Agreement.

22. Withholding of Taxes. Employer may withhold from any amounts payable to
Employee under this Agreement all federal, state, city or other taxes and withholdings as shall be required pursuant to any applicable
law, rule or regulation.

23. Notices. Any notice required or permitted to be given under this Agreement
shall be sufficient if given in writing and either personally delivered or sent by registered or certified mail to Employee’s residence
in the case of Employee or to its principal office in the case of Employer.

8

24. Assignment. The rights and obligations of the parties to this Agreement
shall inure to the benefit of and shall be binding upon the successors and assigns of Employer. This Agreement shall not be terminated
by any merger or consolidation whether or not the Employer or the Company is the consolidated or surviving corporation or by transfer
of all or substantially all of the assets of the Employer or the Company to another corporation if there is a surviving or resulting corporation
in such transfer.

25. Severability. It is not the intent of any party hereto to violate any
public policy of any jurisdiction in which this Agreement may be enforced. If any provision of this Agreement or the application of any
provision hereof to any person or circumstances is held invalid, unenforceable or otherwise unlawful, the remainder of this Agreement
and the application of such provision to any other person or circumstances shall not be affected. In addition, the applicable provision
shall be reformed to the extent (and only to the extent) necessary to make it valid, enforceable and legal.

26. Certain Definitions.

(a) “Affiliate”
shall mean the Company and any business entity controlled by the Employer or the Company, controlling or under common control with the
Employer or the Company.

(b) “Cause”
shall consist of any of:

(i) the
commission by Employee of a willful act (including, without limitation, a dishonest or fraudulent act) or a grossly negligent act, or
the willful or grossly negligent omission to act by Employee, which is intended to cause, causes or is reasonably likely to cause material
harm to Employer or any Affiliate (including harm to its business reputation);

(ii) the
indictment of Employee for the commission or perpetration by Employee of any felony or any crime involving dishonesty, moral turpitude
or fraud;

(iii) the
material breach by Employee of this Agreement that, if susceptible of cure, remains uncured thirty (30) days following written notice
to Employee of such breach;

(iv) the
receipt of any form of notice, written or otherwise, that any regulatory agency having jurisdiction over Employer intends to institute
any form of formal or informal (e.g., a memorandum of understanding which relates to Employee’s performance) regulatory action
against Employee, Employer or any Affiliate (provided that the Board determines in good faith, with Employee abstaining from participating
in the consideration of and vote on the matter, that the subject matter of such action involves acts or omissions by or under the supervision
of Employee or that termination of Employee would materially advance Employer’s or Affiliate’s compliance with the purpose
of the action or would materially assist Employer or Affiliate in avoiding or reducing the restrictions or adverse effects to Employer
or Affiliate related to the regulatory action);

(v) the
exhibition by Employee of a standard of behavior within the scope of Employee’s employment that is materially disruptive to the
orderly conduct of Employer’s or Affiliate’s business operations (including, without limitation, substance abuse or sexual
misconduct) to a level which, in the Board’s good faith and reasonable judgment, with Employee abstaining from participating in
the consideration of and vote on the matter, is materially detrimental to Employer’s or Affiliate’s best interest, that, if
susceptible of cure remains uncured ten (10) days following written notice to Employee of such specific inappropriate behavior; or

(vi) the
failure of Employee to devote Employee’s full business time and attention to Employee’s employment as provided under this
Agreement that, if susceptible of cure, remains uncured thirty (30) days following written notice to Employee of such failure.

9

(c) “Change
in Control” shall mean the occurrence during the Term of any of the following events, unless such event is a result of a Non-Control
Transaction:

(i)
the individuals who, as of the date of this Agreement, are members of the Board of Directors of the Company (the “Incumbent Board”)
cease for any reason to constitute at least fifty percent (50%) of the Board of Directors of the Company; provided, however,
that if the election, or nomination for election by the Company’s shareholders, of any new director was approved in advance by a
vote of at least fifty percent (50%) of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as
a member of the Incumbent Board; provided, further, that no individual shall be considered a member of the Incumbent Board
if such individual initially assumed office as a result of either an actual or threatened election contest, or other actual or threatened
solicitation of proxies or consents by or on behalf of any person other than the Board of Directors of the Company, including by reason
of any agreement intended to avoid or settle any election contest or proxy contest;

(ii) an
acquisition (other than directly from the Company) of any voting securities of the Company (the “Voting Securities”) by any
“Person” (as the term “person” is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of
1934 (the “Exchange Act”)) immediately after which such Person has “Beneficial Ownership” (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of twenty percent (20%) or more of the combined voting power of the Company’s
then outstanding Voting Securities; provided, however, that in determining whether a Change in Control has occurred, Voting
Securities which are acquired in a Non-Control Transaction shall not constitute an acquisition which would cause a Change in Control;

(iii) consummation
of: (a) a merger, consolidation, or reorganization involving the Company; (b) a complete liquidation or dissolution of the Company; or
(c) the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a subsidiary);
or

(iv) a
notice of an application is filed with the South Carolina Board of Financial Institutions, the Office of Comptroller of the Currency (the
“OCC”) or the Federal Reserve Board or any other bank or thrift regulatory approval (or notice of no disapproval) is granted
by the Federal Reserve, South Carolina Board of Financial Institutions, the OCC, the Federal Deposit Insurance Corporation, or any other
regulatory authority for permission to acquire control of the Company or any of its banking subsidiaries; provided, however,
that if the application is filed in connection with a transaction which has been approved by the Board of Directors of the Company, then
the Change in Control shall not be deemed to occur until consummation of the transaction.

(d) “Disability”
or “Disabled” shall mean as defined by Treasury Regulation § 1.409A-3(i)(4).

(e)
“Good Reason” shall mean the occurrence after a Change in Control of any of the events or conditions described in subsections
(i) through (vii) hereof:

(i) a
change in the Employee’s status, title, position or responsibilities (including reporting responsibilities) which, in the Employee’s
reasonable judgment, represents an adverse change from Employee’s status, title, position or responsibilities as in effect at any
time within ninety (90) days preceding the date of a Change in Control or at any time thereafter; the assignment to the Employee of any
duties or responsibilities which, in the Employee’s reasonable judgment, are inconsistent with Employee’s status, title, position
or responsibilities as in effect at any time within ninety (90) days preceding the date of a Change in Control or at any time thereafter;
any removal of the Employee from or failure to reappoint or reelect Employee to any of such offices or positions, except in connection
with the termination of Employee’s employment for Disability or Cause, as a result of Employee’s death, or by the Employee
other than for Good Reason, or any other change in condition or circumstances that in the Employee’s reasonable judgment makes it
materially more difficult for the Employee to carry out the duties and responsibilities of the Employee’s office than existed at
any time within ninety (90) days preceding the date of Change in Control or at any time thereafter;

(ii) a
reduction in the Employee’s Base Salary or any failure to pay the Employee any compensation or benefits to which Employee is entitled
within five (5) days of the date due;

10

(iii)
the Employer’s requiring the Employee to be based at any place outside a thirty (30) - mile radius from the executive offices occupied
by the Employee immediately prior to the Change in Control, except for reasonably required travel on the Employer’s business which
is not materially greater than such travel requirements prior to the Change in Control;

(iv)
the failure by the Employer to (A) continue in effect (without reduction in benefit level and/or reward opportunities) any material compensation
or employee benefit plan in which the Employee was participating at any time within ninety (90) days preceding the date of a Change in
Control or at any time thereafter, unless such plan is replaced with a plan that provides substantially equivalent compensation or benefits
to the Employee, or (B) provide the Employee with compensation and benefits, in the aggregate, at least equal (in terms of benefit levels
and/or reward opportunities) to those provided for under each other employee benefit plan, program and practice in which the Employee
was participating at any time within ninety (90) days preceding the date of a Change in Control or at any time thereafter;

(v)
any material breach by the Employer of any material provision of this Agreement; or

(vi) any
purported termination of the Employee’s employment for Cause by the Employer which does not comply with the terms of this Agreement.

Employee’s
right to terminate Employee’s employment for Good Reason shall not be affected by Employee’s incapacity due to physical or
mental illness.

(f) “Non-Control
Transaction” shall mean a transaction described below:

(i) the shareholders
of the Company, immediately before such merger, consolidation or reorganization own, directly or indirectly, immediately following such
merger, consolidation or reorganization, at least fifty percent (50%) of the combined voting power of the outstanding voting securities
of the corporation resulting from such merger, consolidation or reorganization (the “Surviving Corporation”) in substantially
the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization; and

(ii) immediately
following such merger, consolidation or reorganization, the number of directors on the board of directors of the Surviving Corporation
who were members of the Incumbent Board shall at least equal the number of directors who were affiliated with or appointed by the other
party to the merger, consolidation or reorganization.

(g) “Notice
of Termination” shall mean a written notice of termination from one party to the other which specifies an effective date of
termination, indicates the specific termination provision in this Agreement relied upon, and, in the case of (i) a termination for Cause,
sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee’s employment
under the provision so indicated, or (ii) in the case of a termination for Good Reason, sets forth the Good Reason event which occurred
no more than ninety (90) days prior to the date of the notice and provides the Employer not less than thirty (30) days to remedy this
condition.

11

(h) “Terminate”,
”terminated”, “termination”, or “Termination of Employment” shall mean separation
from service as defined by Treasury Regulation § 1.409A-1(h).

27. Compliance
with Regulatory Restrictions. Notwithstanding anything to the contrary herein, and in addition to any restrictions stated in Section
13 hereof, any compensation or other benefits paid to the Employee shall be limited to the extent required by any federal or state regulatory
agency having authority over the Company or the Employer. The Employee agrees that compliance by the Company or the Employer with such
regulatory restrictions, even to the extent that compensation or other benefits paid to the Employee are limited, shall not be a breach
of this Agreement by the Company or the Employer.

28. Compliance
with Dodd–Frank Wall Street Reform and Consumer Protection Act. Notwithstanding anything to the contrary herein, any incentive
payments to the Employee shall be limited to the extent required under the Dodd–Frank Wall Street Reform and Consumer Protection
Act (the “Act”), including, but not limited to, clawbacks for such incentive payments as required by the Act. The Employee
agrees to such amendments, agreements, or waivers that are required by the Act or requested by the Company to comply with the terms of
the Act.

29. Compliance
with Internal Revenue Code Section 409A. All payments that may be made and benefits that may be provided pursuant to this Agreement
are intended to qualify for an exclusion from Section 409A of the Code and any related regulations or other pronouncements thereunder
and, to the extent not excluded, to meet the requirements of Section 409A of the Code. Any payments made under Section 13 of this Agreement
which are paid on or before the last day of the applicable period for the short-term deferral exclusion under Treasury Regulation §
1.409A-1(b)(4) are intended to be excluded under such short-term deferral exclusion. Any remaining payments under Section 13 are intended
to qualify for the exclusion for separation pay plans under Treasury Regulation § 1.409A-1(b)(9). Each payment made under Section
13 shall be treated as a “separate payment”, as defined in Treasury Regulation § 1.409A-2(b)(2), for purposes of Code
Section 409A. Further, notwithstanding anything to the contrary, all severance payments payable under the provisions of Section 13 shall
be paid to the Employee no later than the last day of the second calendar year following the calendar year in which occurs the date of
Employee’s termination of employment. None of the payments under this Agreement are intended to result in the inclusion in Employee’s
federal gross income on account of a failure under Section 409A(a)(1) of the Code. The parties intend to administer and interpret this
Agreement to carry out such intentions. However, Company does not represent, warrant or guarantee that any payments that may be made pursuant
to this Agreement will not result in inclusion in Employee’s gross income, or any penalty, pursuant to Section 409A(a)(1) of the
Code or any similar state statute or regulation. Notwithstanding any other provision of this Agreement, to the extent that the right to
any payment (including the provision of benefits) hereunder provides for the “deferral of compensation” within the meaning
of Section 409A(d)(1) of the Code, the payment shall be paid (or provided) in accordance with the following:

(a) If
the Employee is a “Specified Employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code on the date of the Employee’s
termination (the “Separation Date”), and if an exemption from the six month delay requirement of Code Section 409A(a)(2)(B)(i)
is not available, then no such payment shall be made or commence during the period beginning on the Separation Date and ending on the
date that is six months following the Separation Date or, if earlier, on the date of the Employee’s death. The amount of any payment
that would otherwise be paid to the Employee during this period shall instead be paid to the Employee on the first day of the first calendar
month following the end of the period.

(b) Payments with respect
to reimbursements of expenses or benefits or provision of fringe or other in-kind benefits shall be made on or before the last day of
the calendar year following the calendar year in which the relevant expense or benefit is incurred. The amount of expenses or benefits
eligible for reimbursement, payment or provision during a calendar year shall not affect the expenses or benefits eligible for reimbursement,
payment or provision in any other calendar year.

30. Entire
Agreement. This Agreement supersedes any other agreements, oral or written, between the parties with respect to the subject matter
hereof, and contains all of the agreements and understandings between the parties with respect to the employment of Employee by Employer.
Any waiver or modification of any term of this Agreement shall be effective only if it is set forth in writing signed by all parties hereto.

31. Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of which together will constitute one and the same agreement. Transmission by
facsimile, email, or other form of electronic transmission of an executed counterpart of this Agreement shall be deemed to constitute
due and sufficient delivery of such counterpart.

*[Signatures appear on the following page.]*

12

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date.

EMPLOYER:

SOUTHERN FIRST BANK

[CORPORATE SEAL] By: /s/ Silvia King

Name: Silvia King

Attest: Title: CHRO

/s/ Julie Fairchild

Secretary

EMPLOYEE:

/s/  William Marion Aiken, III

William Marion Aiken, III

13

---

## RULE 13A-14(A) CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER

SEC source: [e419475ex31-1_southernfirst.htm](https://www.sec.gov/Archives/edgar/data/1090009/000120677423000655/e419475ex31-1_southernfirst.htm)

**Exhibit 31.1**

Rule 13a-14(a) Certification
of the Principal Executive Officer.

---

**Exhibit 31.1**

| Rule 13a-14(a) Certification of the Principal Executive Officer. / I, R. Arthur Seaver, Jr., certify that: |  |  |
| --- | --- | --- |
| 1. | I have reviewed this quarterly report on Form 10-Q of Southern First Bancshares, Inc.; |  |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |  |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |  |
| 4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |  |
|  | a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|  | b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|  | c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and |
|  | d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
| 5. | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |  |
|  | a) | All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
|  | b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |

- Date: May 2, 2023 By: /s/ R. Arthur Seaver, Jr.
- R. Arthur Seaver, Jr.
- Chief Executive Officer

---

## RULE 13A-14(A) CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER

SEC source: [e419475ex31-2_southernfirst.htm](https://www.sec.gov/Archives/edgar/data/1090009/000120677423000655/e419475ex31-2_southernfirst.htm)

**Exhibit 31.2**

Rule 13a-14(a) Certification
of the Principal Financial Officer.

---

**Exhibit 31.2**

| Rule 13a-14(a) Certification of the Principal Financial Officer. / I, D. Andrew Borrmann, certify that: |  |  |
| --- | --- | --- |
| 1. | I have reviewed this quarterly report on Form 10-Q of Southern First Bancshares, Inc.; |  |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |  |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |  |
| 4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |  |
|  | a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|  | b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|  | c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and |
|  | d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
| 5. | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |  |
|  | a) | All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
|  | b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |

- Date: May 2, 2023 By: /s/D. Andrew Borrmann
- D. Andrew Borrmann
- Chief Financial Officer

---

## SECTION 1350 CERTIFICATIONS

SEC source: [e419475ex32_southernfirst.htm](https://www.sec.gov/Archives/edgar/data/1090009/000120677423000655/e419475ex32_southernfirst.htm)

**Exhibit 32**

Section 1350 Certifications.

---

**Exhibit 32**

**CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350,  
AS ADOPTED PURSUANT TO  
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002**

- The undersigned, the Chief Executive Officer and the Chief Financial Officer of Southern First Bancshares, Inc. (the "Company"), each certify that, to his knowledge on the date of this certification:
- 1. The quarterly report of the Company for the period ended March 31, 2023 as filed with the Securities and Exchange Commission on this date (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
- 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ R. Arthur Seaver, Jr.

R. Arthur Seaver, Jr.

Chief Executive Officer

Date: May 2, 2023

/s/ D. Andrew Borrmann

D. Andrew Borrmann

Chief Financial Officer

Date: May 2, 2023