# Southern First Bancshares (SFST) 10-Q SEC filing - Q3 FY2024

- Filed: Nov 1, 2024
- Fiscal quarter: Q3 FY2024
- Calendar quarter: Q3 2024
- Accession: 0001206774-24-000990
- OpenCapital page: https://www.opencapital.sh/filings/0001206774-24-000990
- Markdown URL: https://www.opencapital.sh/filings/0001206774-24-000990.md
- Official SEC filing index: https://www.sec.gov/Archives/edgar/data/1090009/0001206774-24-000990-index.htm

## Filing documents

- [10-Q (sfst4399411-10q.htm)](https://www.sec.gov/Archives/edgar/data/1090009/000120677424000990/sfst4399411-10q.htm)
- [CERTIFICATION (sfst4399411-ex311.htm)](https://www.sec.gov/Archives/edgar/data/1090009/000120677424000990/sfst4399411-ex311.htm)
- [CERTIFICATION (sfst4399411-ex312.htm)](https://www.sec.gov/Archives/edgar/data/1090009/000120677424000990/sfst4399411-ex312.htm)
- [CERTIFICATION (sfst4399411-ex32.htm)](https://www.sec.gov/Archives/edgar/data/1090009/000120677424000990/sfst4399411-ex32.htm)

---

## 10-Q

SEC source: [sfst4399411-10q.htm](https://www.sec.gov/Archives/edgar/data/1090009/000120677424000990/sfst4399411-10q.htm)

**UNITED STATES  
SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

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

**For the Quarterly Period Ended September 30, 2024  
OR**

**o****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 x No o

Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x No o

Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, 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 o Accelerated filer x

Non-accelerated filer o Smaller Reporting Company o

Emerging growth company o

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. o

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

Indicate the number of shares
outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 8,159,847 shares of common stock,
par value $0.01 per share, were issued and outstanding as of October 29, 2024.

*SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY*  
September 30, 2024 Form 10-Q

INDEX

**Page**

[**PART I – CONSOLIDATED FINANCIAL INFORMATION**](#v_001)

[Item 1.](#v_002) [Consolidated Financial Statements](#v_002)

[Consolidated Balance Sheets](#v_003) [3](#v_003)

[Consolidated Statements of Income](#v_004) [4](#v_004)

[Consolidated Statements of Comprehensive Income](#v_005) [5](#v_005)

[Consolidated Statements of Shareholders’ Equity](#v_006) [6](#v_006)

[Consolidated Statements of Cash Flows](#v_007) [7](#v_007)

[Notes to Unaudited Consolidated Financial Statements](#v_008) [8](#v_008)

[Item 2.](#v_009) [Management’s Discussion and Analysis of Financial Condition and Results of Operations](#v_009) [27](#v_009)

[Item 3.](#v_010) [Quantitative and Qualitative Disclosures about Market Risk](#v_010) [44](#v_010)

[Item 4.](#v_011) [Controls and Procedures](#v_011) [44](#v_011)

[**PART II – OTHER INFORMATION**](#v_012)

[Item 1.](#v_013) [Legal Proceedings](#v_013) [45](#v_013)

[Item 1A.](#v_014) [Risk Factors](#v_014) [45](#v_014)

[Item 2.](#v_015) [Unregistered Sales of Equity Securities and Use of Proceeds](#v_015) [45](#v_015)

[Item 3.](#v_017) [Defaults upon Senior Securities](#v_017) [45](#v_017)

[Item 4.](#v_018) [Mine Safety Disclosures](#v_018) [45](#v_018)

[Item 5.](#v_019) [Other Information](#v_019) [45](#v_019)

[Item 6.](#v_020) [Exhibits](#v_020) [45](#v_020)

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) | September 30, 2024 | December 31, 2023 |
| --- | --- | --- |
| ASSETS |  |  |
| Cash and cash equivalents: |  |  |
| Cash and due from banks | $25,289 | 28,020 |
| Federal funds sold | 226,110 | 119,349 |
| Interest-bearing deposits with banks | 9,176 | 8,801 |
| Total cash and cash equivalents | 260,575 | 156,170 |
| Investment securities: |  |  |
| Investment securities available for sale | 134,597 | 134,702 |
| Other investments | 19,640 | 19,939 |
| Total investment securities | 154,237 | 154,641 |
| Mortgage loans held for sale | 8,602 | 7,194 |
| Loans | 3,619,556 | 3,602,627 |
| Less allowance for credit losses | (40,166) | (40,682) |
| Loans, net | 3,579,390 | 3,561,945 |
| Bank owned life insurance | 53,663 | 52,501 |
| Property and equipment, net | 90,158 | 94,301 |
| Deferred income taxes, net | 11,595 | 12,200 |
| Other assets | 16,411 | 16,837 |
| Total assets | $4,174,631 | 4,055,789 |
| LIABILITIES |  |  |
| Deposits | $3,518,825 | 3,379,564 |
| FHLB advances and related debt | 240,000 | 275,000 |
| Subordinated debentures | 24,903 | 36,322 |
| Other liabilities | 64,365 | 52,436 |
| Total liabilities | 3,848,093 | 3,743,322 |
| SHAREHOLDERS’ EQUITY |  |  |
| Preferred stock, par value $.01 per share, 10,000,000 shares authorized | - | - |
| Common stock, par value $.01 per share, 20,000,000 shares authorized, 8,156,097 shares issued and outstanding at September 30, 2024; 10,000,000 shares authorized, 8,088,186 shares issued and outstanding at December 31, 2023. | 82 | 81 |
| Nonvested restricted stock | (4,219) | (3,596) |
| Additional paid-in capital | 124,288 | 121,777 |
| Accumulated other comprehensive loss | (9,063) | (11,342) |
| Retained earnings | 215,450 | 205,547 |
| Total shareholders’ equity | 326,538 | 312,467 |
| Total liabilities and shareholders’ equity | $4,174,631 | 4,055,789 |

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 September 30, 2024 | For the three months / ended September 30, 2023 | For the nine months / ended September 30, 2024 | For the nine months / ended September 30, 2023 |
| --- | --- | --- | --- | --- |
| Interest income |  |  |  |  |
| Loans | $47,550 | 43,542 | 139,700 | 121,380 |
| Investment securities | 1,412 | 1,470 | 4,308 | 2,788 |
| Federal funds sold and interest-bearing deposits with banks | 2,209 | 2,435 | 6,072 | 4,295 |
| Total interest income | 51,171 | 47,447 | 150,080 | 128,463 |
| Interest expense |  |  |  |  |
| Deposits | 27,725 | 25,130 | 82,873 | 64,245 |
| Borrowings | 2,855 | 2,972 | 8,443 | 5,623 |
| Total interest expense | 30,580 | 28,102 | 91,316 | 69,868 |
| Net interest income | 20,591 | 19,345 | 58,764 | 58,595 |
| Provision for (reversal of) credit losses | - | (500) | 325 | 2,235 |
| Net interest income after provision for (reversal of) credit losses | 20,591 | 19,845 | 58,439 | 56,360 |
| Noninterest income |  |  |  |  |
| Mortgage banking income | 1,449 | 1,208 | 4,536 | 3,167 |
| Service fees on deposit accounts | 455 | 356 | 1,265 | 1,011 |
| ATM and debit card income | 599 | 588 | 1,730 | 1,680 |
| Income from bank owned life insurance | 401 | 349 | 1,162 | 1,018 |
| Other income | 271 | 249 | 669 | 653 |
| Total noninterest income | 3,175 | 2,750 | 9,362 | 7,529 |
| Noninterest expenses |  |  |  |  |
| Compensation and benefits | 10,789 | 10,231 | 32,936 | 30,874 |
| Occupancy | 2,595 | 2,562 | 7,704 | 7,537 |
| Outside service and data processing costs | 1,930 | 1,744 | 5,738 | 5,078 |
| Insurance | 1,025 | 1,243 | 2,945 | 2,829 |
| Professional fees | 548 | 504 | 1,748 | 1,914 |
| Marketing | 319 | 293 | 1,077 | 994 |
| Other | 833 | 725 | 2,634 | 2,573 |
| Total noninterest expenses | 18,039 | 17,302 | 54,782 | 51,799 |
| Income before income tax expense | 5,727 | 5,293 | 13,019 | 12,090 |
| Income tax expense | 1,345 | 1,195 | 3,116 | 2,831 |
| Net income | $4,382 | 4,098 | 9,903 | 9,259 |
| Earnings per common share |  |  |  |  |
| Basic | $0.54 | 0.51 | 1.22 | 1.15 |
| Diluted | 0.54 | 0.51 | 1.22 | 1.15 |
| Weighted average common shares outstanding |  |  |  |  |
| Basic | 8,064,283 | 8,052,926 | 8,100,003 | 8,043,410 |
| Diluted | 8,089,176 | 8,072,408 | 8,123,846 | 8,077,830 |

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 September 30, 2024 | For the three months ended September 30, 2023 | For the nine months ended September 30, 2024 | For the nine months ended September 30, 2023 |
| --- | --- | --- | --- | --- |
| Net income | $4,382 | 4,098 | 9,903 | 9,259 |
| Other comprehensive income (loss): |  |  |  |  |
| Unrealized gain (loss) on securities available for sale: |  |  |  |  |
| Unrealized holding gain (loss) arising during the period, pretax | 3,548 | (3,221) | 2,884 | (2,333) |
| Tax benefit (expense) | (745) | 676 | (605) | 488 |
| Other comprehensive income (loss) | 2,803 | (2,545) | 2,279 | (1,845) |
| Comprehensive income | $7,185 | 1,553 | 12,182 | 7,414 |

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 September 30, / Common stock / Shares | For the three months ended September 30, / Common stock / Amount | For the three months ended September 30, / Preferred stock / Shares | For the three months ended September 30, / Preferred stock / Amount | For the three months ended September 30, / Nonvested restricted / stock | For the three months ended September 30, / Additional paid-in / capital | For the three months ended September 30, / Accumulated other comprehensive / income (loss) | For the three months ended September 30, / Retained / earnings | For the three months ended September 30, / Total |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| June 30, 2023 | 8,058,438 | $81 | - | - | $(4,051) | $120,912 | $(12,710) | $197,282 | $301,514 |
| Net income Preferred stock | - | - | - | - | - | - | - | 4,098 | 4,098 |
| Proceeds from exercise of stock options | 14,250 | - | - | - | - | 312 | - | - | 312 |
| Issuance of restricted stock, net of forfeitures Retained earnings | 15,950 | - | - | - | (388) | 388 | - | - | - |
| Compensation expense related to restricted stock, net of tax | - | - | - | - | 374 | - | - | - | 374 |
| Compensation expense related to stock options, net of tax Common stock | - | - | - | - | - | 145 | - | - | 145 |
| Other comprehensive loss | - | - | - | - | - | - | (2,545) | - | (2,545) |
| Additional paid-in capital |  |  |  |  |  |  |  |  |  |
| September 30, 2023 | 8,088,638 | $81 | - | - | $(4,065) | $121,757 | $(15,255) | $201,380 | $303,898 |
| June 30, 2024 | 8,155,097 | $82 | - | - | $(4,710) | $124,174 | $(11,866) | $211,068 | $318,748 |
| Net income | - | - | - | - | - | - | - | 4,382 | 4,382 |
| Proceeds from exercise of stock options | 1,000 | - | - | - | - | 23 | - | - | 23 |
| Issuance of restricted stock, net of forfeitures | - | - | - | - | - | - | - | - | - |
| Compensation expense related to restricted stock, net of tax | - | - | - | - | 491 | - | - | - | 491 |
| Compensation expense related to stock options, net of tax | - | - | - | - | - | 91 | - | - | 91 |
| Other comprehensive income | - | - | - | - | - | - | 2,803 | - | 2,803 |
| September 30, 2024 | 8,156,097 | $82 | - | - | $(4,219) | $124,288 | $(9,063) | $215,450 | $326,538 |
|  | For the nine months ended September 30, |  |  |  |  |  |  |  |  |
|  | Common stock |  | Preferred stock |  | Nonvested restricted | Additional paid-in | Accumulated other comprehensive | Retained |  |
| (dollars in thousands, except share data) | Shares | Amount | Shares | Amount | stock | capital | income (loss) | earnings | Total |
| December 31, 2022 | 8,011,045 | $80 | - | - | $(3,306) | $119,027 | $(13,410) | $192,121 | $294,512 |
| Net income | - | - | - | - | - | - | - | 9,259 | 9,259 |
| Proceeds from exercise of stock options | 25,250 | - | - | - | - | 497 | - | - | 497 |
| Issuance of restricted stock, net of forfeitures | 52,343 | 1 | - | - | (1,824) | 1,823 | - | - | - |
| Compensation expense related to restricted stock, net of tax | - | - | - | - | 1,065 | - | - | - | 1,065 |
| Compensation expense related to stock options, net of tax | - | - | - | - | - | 410 | - | - | 410 |
| Other comprehensive loss | - | - | - | - | - | - | (1,845) | - | (1,845) |
| Accumulated other comprehensive income (loss) |  |  |  |  |  |  |  |  |  |
| September 30, 2023 | 8,088,638 | $81 | - | - | $(4,065) | $121,757 | $(15,255) | $201,380 | $303,898 |
| December 31, 2023 | 8,088,186 | $81 | - | - | $(3,596) | $121,777 | $(11,342) | $205,547 | $312,467 |
| Net income | - | - | - | - | - | - | - | 9,903 | 9,903 |
| Proceeds from exercise of stock options | 12,000 | - | - | - | - | 190 | - | - | 190 |
| Issuance of restricted stock, net of forfeitures | 55,911 | 1 | - | - | (2,035) | 2,034 | - | - | - |
| Compensation expense related to restricted stock, net of tax | - | - | - | - | 1,412 | - | - | - | 1,412 |
| Compensation expense related to stock options, net of tax | - | - | - | - | - | 287 | - | - | 287 |
| Other comprehensive income | - | - | - | - | - | - | 2,279 | - | 2,279 |
| September 30, 2024 | 8,156,097 | $82 | - | - | $(4,219) | $124,288 | $(9,063) | $215,450 | $326,538 |

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 nine months ended September 30, 2024 | For the nine months ended September 30, 2023 |
| --- | --- | --- |
| Operating activities |  |  |
| Net income | $9,903 | 9,259 |
| Adjustments to reconcile net income to cash provided by operating activities: |  |  |
| Provision for credit losses | 325 | 2,235 |
| Depreciation and other amortization | 3,623 | 3,611 |
| Accretion and amortization of securities discounts and premium, net | 437 | 142 |
| Net change in operating leases | 114 | 188 |
| Compensation expense related to stock options and restricted stock grants | 1,699 | 1,475 |
| Gain on sale of loans held for sale | (4,354) | (2,793) |
| Loans originated and held for sale | (148,745) | (112,930) |
| Proceeds from sale of loans held for sale | 151,691 | 112,523 |
| Increase in cash surrender value of bank owned life insurance | (1,162) | (1,018) |
| Increase in deferred tax asset | - | (66) |
| Decrease (increase) in other assets | 426 | (7,892) |
| Increase in other liabilities | 13,408 | 6,059 |
| Net cash provided by operating activities | 27,365 | 10,793 |
| Investing activities |  |  |
| Increase (decrease) in cash realized from: |  |  |
| Increase in loans, net | (18,195) | (280,627) |
| Purchase of property and equipment | (567) | (1,120) |
| Purchase of investment securities: |  |  |
| Available for sale | (20,513) | (58,204) |
| Other investments | (4,301) | (49,949) |
| Payments and maturities, calls and repayments of investment securities: |  |  |
| Available for sale | 23,065 | 5,039 |
| Other investments | 4,600 | 41,182 |
| Net cash used for investing activities | (15,911) | (343,679) |
| Financing activities |  |  |
| Increase (decrease) in cash realized from: |  |  |
| Increase in deposits, net | 139,261 | 213,907 |
| Increase (decrease) in Federal Home Loan Bank advances and other borrowings, net | (35,000) | 100,000 |
| Decrease in subordinated debentures | (11,500) | - |
| Proceeds from the exercise of stock options | 190 | 497 |
| Net cash provided by financing activities | 92,951 | 314,404 |
| Net increase (decrease) in cash and cash equivalents | 104,405 | (18,482) |
| Cash and cash equivalents at beginning of the period | 156,170 | 170,874 |
| Cash and cash equivalents at end of the period | $260,575 | 152,392 |
| Supplemental information |  |  |
| Cash paid for |  |  |
| Interest | $87,129 | 64,390 |
| Income taxes | 2,235 | 586 |
| Schedule of non-cash transactions |  |  |
| Unrealized gain (loss) on securities, net of income taxes | 2,279 | (1,845) |
| Right-of-use assets obtained in exchange for lease obligations: |  |  |
| Operating Leases | - | 147 |

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 and nine-month periods ended September 30, 2024 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2024. 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, 2023 as filed with the U.S. Securities
and Exchange Commission (“SEC”) on March 5, 2024. 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 and 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

In the normal course of its
business, the Company encounters two significant types of risks: economic and regulatory. There are three main components of economic
risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different speeds, or on different bases, than its interest-earning assets. Credit risk is the risk of
default within the Company’s loan portfolio that results from borrowers’ inability or unwillingness to make contractually
required payments. Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of real estate
held by the Company. There were three significant bank failures in the first five months of 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 recent bank failures 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
has and could continue to increase the cost of our FDIC insurance assessments. The ultimate impact of these bank failures on the economy,
financial institutions and their depositors, as well as any governmental regulatory responses or actions resulting from the same, remains
difficult to predict at this time.

The Company is subject to the regulations of various
governmental agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations
by the regulatory agencies, which may subject the Company to changes with respect to the valuation of assets, the amount of required credit
loss allowance and operating restrictions resulting from the regulators’ judgments based on information available to them at the
time of their examinations.

The Bank makes loans to individuals and businesses
in the Upstate, Midlands, and Lowcountry regions of South Carolina as well as the Triangle, Triad and Charlotte regions of North Carolina
and Atlanta, Georgia for various personal and commercial purposes. The Bank’s loan portfolio has a concentration of real estate
loans. As of September 30, 2024 and 2023, real estate loans represented 84.4% and 84.5%, respectively, of total loans. However, borrowers’
ability to repay their loans is not dependent upon any specific economic sector.

As of September 30, 2024, the Company’s and the
Bank’s capital ratios were in excess of all regulatory requirements. While management believes that we have sufficient capital to
withstand an extended economic recession, our reported and regulatory capital ratios could be adversely impacted by future credit losses.

The Company maintains access to multiple sources of
liquidity, including a $15.0 million holding company line of credit with another bank which could be used to support capital ratios at
the subsidiary bank. As of September 30, 2024, the $15.0 million line was unused.

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.

*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.

In December 2023,
the FASB amended the Income Taxes topic in the Accounting Standards Codification to improve the transparency of income tax disclosures.
The amendments are effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements
that have not yet been issued or made available for 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:

_September 30, 2024_

| Schedule of amortized costs and fair value of investment securities / (dollars in thousands) Corporate bonds [Member] | Amortized / Cost | Gross Unrealized / Gains | Gross Unrealized / Losses | Fair / Value |
| --- | --- | --- | --- | --- |
| Available for sale Asset-backed securities [Member] |  |  |  |  |
| Corporate bonds US treasuries [Member] | $2,128 | - | 181 | 1,947 |
| US treasuries | 999 | - | 75 | 924 |
| US government agencies US government agencies [Member] | 18,113 | 4 | 1,431 | 16,686 |
| State and political subdivisions State and political subdivisions [Member] | 22,450 | - | 2,427 | 20,023 |
| Asset-backed securities Mortgage-backed securities [Member] | 34,271 | 70 | 76 | 34,265 |
| Mortgage-backed securities | 68,108 | 35 | 7,391 | 60,752 |
| Total investment securities available for sale | $146,069 | 109 | 11,581 | 134,597 |
|  | December 31, 2023 |  |  |  |
|  | Amortized | Gross Unrealized |  | Fair |
|  | Cost | Gains | Losses | Value |
| Available for sale |  |  |  |  |
| Corporate bonds | $2,147 | - | 237 | 1,910 |
| US treasuries | 9,495 | 1 | 102 | 9,394 |
| US government agencies | 20,594 | - | 1,938 | 18,656 |
| State and political subdivisions | 22,642 | 11 | 2,912 | 19,741 |
| Asset-backed securities | 33,450 | 2 | 216 | 33,236 |
| Mortgage-backed securities | 60,730 | - | 8,965 | 51,765 |
| Total investment securities available for sale | $149,058 | 14 | 14,370 | 134,702 |

Contractual maturities and yields on the Company’s
investment securities at September 30, 2024 and December 31, 2023 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.

_September 30, 2024_

| Schedule of contractual maturities and yields on the company's investment securities / (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 Corporate bonds [Member] | - | - | - | - | $1,947 | 2.02% | - | - | $1,947 | 2.02% |
| US treasuries | - | - | 924 | 1.27% | - | - | - | - | 924 | 1.27% |
| US government agencies US government agencies [Member] | - | - | 4,239 | 1.08% | 12,447 | 4.56% | - | - | 16,686 | 3.67% |
| State and political subdivisions State and political subdivisions [Member] | - | - | 1,331 | 1.96% | 6,101 | 1.98% | 12,591 | 2.13% | 20,023 | 2.07% |
| Asset-backed securities Asset-backed securities [Member] | - | - | 49 | (0.12%) | - | - | 34,216 | 6.70% | 34,265 | 6.69% |
| Mortgage-backed securities Mortgage-backed securities [Member] | - | - | 6,689 | 1.28% | 7,865 | 3.01% | 46,198 | 2.37% | 60,752 | 2.33% |
| Total investment securities Total investment securities [Member] | - | - | $13,232 | 1.28% | $28,360 | 3.40% | $93,005 | 3.93% | $134,597 | 3.56% |
|  |  |  |  |  |  |  | December 31, 2023 |  |  |  |
|  | Less than one year |  | One to five years |  | Five to ten years |  | Over ten years |  | Total |  |
| (dollars in thousands) | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield |
| Available for sale |  |  |  |  |  |  |  |  |  |  |
| Corporate bonds | - | - | - | - | $1,910 | 2.01% | - | - | $1,910 | 2.01% |
| US treasuries | 8,497 | 5.42% | 897 | 1.27% | - | - | - | - | 9,394 | 5.02% |
| US government agencies | 970 | 0.45% | 2,385 | 1.00% | 15,301 | 4.41% | - | - | 18,656 | 3.77% |
| State and political subdivisions | - | - | 906 | 1.94% | 5,769 | 1.89% | 13,066 | 2.15% | 19,741 | 2.06% |
| Asset-backed securities | - | - | 296 | (6.13%) | - | - | 32,940 | 6.63% | 33,236 | 6.57% |
| Mortgage-backed securities | - | - | 4,795 | 1.15% | 5,400 | 1.59% | 41,570 | 2.00% | 51,765 | 1.87% |
| Total investment securities | $9,467 | 4.91% | $9,279 | 0.98% | $28,380 | 3.20% | $87,576 | 3.76% | $134,702 | 3.55% |

The tables below summarize gross unrealized losses
on investment securities and the fair market value of the related securities at September 30, 2024 and December 31, 2023, aggregated
by investment category and length of time that individual securities have been in a continuous unrealized loss position.

| Schedule of gross unrealized losses on investment securities and fair market value of related securities |  |  |  |  |  |  |  |  |  |  |  |  | September 30, 2024 | September 30, 2024 | September 30, 2024 | September 30, 2024 | September 30, 2024 | September 30, 2024 |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | 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 | $ | $1,947 | $ | $181 |  | 1 | $ | $1,947 | $ | $181 |
| US treasuries |  | - |  | - |  | - |  | 1 |  | 924 |  | 75 |  | 1 |  | 924 |  | 75 |
| US government agencies |  | - |  | - |  | - |  | 9 |  | 10,582 |  | 1,431 |  | 9 |  | 10,582 |  | 1,431 |
| State and political subdivisions |  | 2 |  | 757 |  | 2 |  | 30 |  | 19,266 |  | 2,425 |  | 32 |  | 20,023 |  | 2,427 |
| Asset-backed |  | 4 |  | 9,575 |  | 44 |  | 8 |  | 7,124 |  | 32 |  | 12 |  | 16,699 |  | 76 |
| Mortgage-backed securities |  | 5 |  | 7,303 |  | 23 |  | 61 |  | 47,929 |  | 7,368 |  | 66 |  | 55,232 |  | 7,391 |
| Total investment securities |  | 11 | $ | $17,635 | $ | $69 |  | 110 | $ | $87,772 | $ | $11,512 |  | 121 | $ | $105,407 | $ | $11,581 |
|  |  |  |  |  |  |  |  |  |  |  |  |  | December 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 | $ | $1,910 | $ | $237 |  | 1 | $ | $1,910 | $ | $237 |
| US treasuries |  | - |  | - |  | - |  | 1 |  | 897 |  | 102 |  | 1 |  | 897 |  | 102 |
| US government agencies |  | 2 |  | 7,533 |  | 50 |  | 10 |  | 11,123 |  | 1,888 |  | 12 |  | 18,656 |  | 1,938 |
| State and political subdivisions |  | - |  | - |  | - |  | 30 |  | 18,964 |  | 2,912 |  | 30 |  | 18,964 |  | 2,912 |
| Asset-backed |  | 8 |  | 26,746 |  | 145 |  | 7 |  | 4,866 |  | 71 |  | 15 |  | 31,612 |  | 216 |
| Mortgage-backed securities |  | 2 |  | 2,869 |  | 36 |  | 62 |  | 48,896 |  | 8,929 |  | 64 |  | 51,765 |  | 8,965 |
| Total investment securities |  | 12 | $ | $37,148 | $ | $231 |  | 111 | $ | $86,656 | $ | $14,139 |  | 123 | $ | $123,804 | $ | $14,370 |

At September 30, 2024, the Company had 121 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 September 30, 2024.

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

| Schedule of investments / (dollars in thousands) | September 30, 2024 | December 31, 2023 |
| --- | --- | --- |
| Federal Home Loan Bank stock | $14,516 | 16,063 |
| Other nonmarketable investments | 4,721 | 3,473 |
| Investment in Trust Preferred subsidiaries | 403 | 403 |
| Total other investments | $19,640 | 19,939 |

The Company has evaluated other investments for impairment
and determined that the other investments are not impaired as of September 30, 2024 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.

At September 30, 2024, there were no securities pledged
as collateral for repurchase agreements from brokers.

### **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 September 30, 2024, mortgage loans held for sale totaled
$8.6 million compared to $7.2 million at December 31, 2023.

### 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 $6.6 million
as of September 30, 2024 and $7.0 million as of December 31, 2023.

| Schedule of composition of our loan portfolio / (dollars in thousands)Commercial [Member] | September 30, 2024 / Amount | September 30, 2024 / % of Total | December 31, 2023 / Amount | December 31, 2023 / % of Total |
| --- | --- | --- | --- | --- |
| Commercial |  |  |  |  |
| Owner occupied REOwner occupied RE [Member] | $642,608 | 17.8% | $631,657 | 17.5% |
| Non-owner occupied RE | 917,642 | 25.3% | 942,529 | 26.2% |
| ConstructionConstruction [Member] | 144,665 | 4.0% | 150,680 | 4.2% |
| BusinessBusiness [Member] | 521,535 | 14.4% | 500,161 | 13.9% |
| Total commercial loansConsumer [Member] | 2,226,450 | 61.5% | 2,225,027 | 61.8% |
| Consumer |  |  |  |  |
| Real estateReal estate [Member] | 1,132,371 | 31.3% | 1,082,429 | 30.0% |
| Home equityHome equity [Member] | 195,383 | 5.4% | 183,004 | 5.1% |
| ConstructionNon-owner occupied RE [Member] | 21,582 | 0.6% | 63,348 | 1.7% |
| OtherOther [Member] | 43,770 | 1.2% | 48,819 | 1.4% |
| Total consumer loans | 1,393,106 | 38.5% | 1,377,600 | 38.2% |
| Total gross loans, net of deferred fees | 3,619,556 | 100.0% | 3,602,627 | 100.0% |
| Less—allowance for credit losses | (40,166) |  | (40,682) |  |
| Total loans, net | $3,579,390 |  | $3,561,945 |  |

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.

_September 30, 2024_

| Schedule of loan maturity distribution by type and related interest rate / (dollars in thousands) | One year or less | After one but within five years | After five butwithin fifteen years | After fifteen years | Total |
| --- | --- | --- | --- | --- | --- |
| Commercial |  |  |  |  |  |
| Owner occupied RE | $15,557 | 205,224 | 380,526 | 41,301 | 642,608 |
| Non-owner occupied RE | 103,329 | 512,610 | 281,197 | 20,506 | 917,642 |
| Construction | 30,589 | 64,016 | 50,060 | - | 144,665 |
| Business | 122,565 | 244,825 | 149,858 | 4,287 | 521,535 |
| Total commercial loans | 272,040 | 1,026,675 | 861,641 | 66,094 | 2,226,450 |
| Consumer |  |  |  |  |  |
| Real estate | 19,871 | 71,492 | 295,998 | 745,010 | 1,132,371 |
| Home equity | 2,810 | 33,445 | 154,758 | 4,370 | 195,383 |
| Construction | 4,514 | 2,500 | 11,601 | 2,967 | 21,582 |
| Other | 7,207 | 32,731 | 3,023 | 809 | 43,770 |
| Total consumer loans | 34,402 | 140,168 | 465,380 | 753,156 | 1,393,106 |
| Total gross loans, net of deferred fees | $306,442 | 1,166,843 | 1,327,021 | 819,250 | 3,619,556 |
|  |  |  | December 31, 2023 |  |  |
| (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 | $17,358 | 177,203 | 395,130 | 41,966 | 631,657 |
| Non-owner occupied RE | 68,601 | 517,622 | 331,727 | 24,579 | 942,529 |
| Construction | 26,762 | 64,432 | 59,486 | - | 150,680 |
| Business | 114,432 | 194,416 | 186,927 | 4,386 | 500,161 |
| Total commercial loans | 227,153 | 953,673 | 973,270 | 70,931 | 2,225,027 |
| Consumer |  |  |  |  |  |
| Real estate | 10,593 | 51,956 | 301,095 | 718,785 | 1,082,429 |
| Home equity | 2,716 | 27,578 | 147,855 | 4,855 | 183,004 |
| Construction | - | 252 | 39,459 | 23,637 | 63,348 |
| Other | 11,157 | 33,592 | 3,265 | 805 | 48,819 |
| Total consumer loans | 24,466 | 113,378 | 491,674 | 748,082 | 1,377,600 |
| Total gross loans, net of deferred fees | $251,619 | 1,067,051 | 1,464,944 | 819,013 | 3,602,627 |

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

| Schedule of loans due after one year by category / (dollars in thousands) | September 30, 2024 / Interest Rate / Fixed | September 30, 2024 / Interest Rate / Floating or Adjustable | December 31, 2023 / Interest Rate / Fixed | December 31, 2023 / Interest Rate / Floating or Adjustable |
| --- | --- | --- | --- | --- |
| Commercial |  |  |  |  |
| Owner occupied RE | $601,086 | 25,965 | 605,199 | 9,100 |
| Non-owner occupied RE | 710,377 | 103,936 | 768,048 | 105,880 |
| Construction | 81,430 | 32,646 | 81,326 | 42,592 |
| Business | 272,599 | 126,371 | 293,920 | 91,809 |
| Total commercial loans | 1,665,492 | 288,918 | 1,748,493 | 249,381 |
| Consumer |  |  |  |  |
| Real estate | 1,112,500 | - | 1,071,836 | - |
| Home equity | 10,616 | 181,957 | 11,441 | 168,847 |
| Construction | 17,068 | - | 63,348 | - |
| Other | 8,564 | 27,999 | 11,525 | 26,137 |
| Total consumer loans | 1,148,748 | 209,956 | 1,158,150 | 194,984 |
| Total gross loans, net of deferred fees | $2,814,240 | 498,874 | 2,906,643 | 444,365 |

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, which 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 September 30, 2024.

| Schedule of classified by credit quality indicators by year of origination / (dollars in thousands) | 2024 | 2023 | 2022 | 2021 | 2020 | Prior | September 30, 2024 / Revolving | September 30, 2024 / Revolving Converted to Term | September 30, 2024 / Total |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Commercial |  |  |  |  |  |  |  |  |  |
| Owner occupied RE |  |  |  |  |  |  |  |  |  |
| Pass | $44,238 | 44,567 | 180,574 | 125,436 | 68,270 | 150,019 | 85 | 239 | 613,428 |
| Watch | 488 | - | 3,377 | 1,464 | 8,898 | 11,121 | - | - | 25,348 |
| Special Mention | - | - | 167 | - | - | 2,857 | - | - | 3,024 |
| Substandard | - | - | - | - | - | 808 | - | - | 808 |
| Total Owner occupied RE | 44,726 | 44,567 | 184,118 | 126,900 | 77,168 | 164,805 | 85 | 239 | 642,608 |
| Non-owner occupied RE |  |  |  |  |  |  |  |  |  |
| Pass | 32,690 | 74,224 | 312,722 | 157,108 | 100,908 | 195,151 | 344 | - | 873,147 |
| Watch | - | 959 | 4,568 | 438 | 1,645 | 11,444 | - | - | 19,054 |
| Special Mention | - | - | - | 7,630 | - | 8,938 | - | - | 16,568 |
| Substandard | - | - | 969 | 300 | - | 7,604 | - | - | 8,873 |
| Total Non-owner occupied RE | 32,690 | 75,183 | 318,259 | 165,476 | 102,553 | 223,137 | 344 | - | 917,642 |
| Current period gross write-offs | - | - | - | - | - | (1,029) | - | - | (1,029) |
| Construction |  |  |  |  |  |  |  |  |  |
| Pass | 18,696 | 30,478 | 76,088 | 19,403 | - | - | - | - | 144,665 |
| Total Construction | 18,696 | 30,478 | 76,088 | 19,403 | - | - | - | - | 144,665 |
| Business |  |  |  |  |  |  |  |  |  |
| Pass | 33,201 | 43,582 | 119,984 | 40,840 | 16,377 | 54,153 | 173,489 | 313 | 481,939 |
| Watch | - | 142 | 16,665 | 2,020 | 1,442 | 5,434 | 9,398 | 131 | 35,232 |
| Special Mention | 663 | 96 | 817 | - | 67 | 1,101 | - | 209 | 2,953 |
| Substandard | - | - | - | 143 | 362 | 309 | 597 | - | 1,411 |
| Total Business | 33,864 | 43,820 | 137,466 | 43,003 | 18,248 | 60,997 | 183,484 | 653 | 521,535 |
| Current period gross write-offs | - | - | - | - | (347) | (18) | (72) | - | (437) |
| Total Commercial loans | 129,976 | 194,048 | 715,931 | 354,782 | 197,969 | 448,939 | 183,913 | 892 | 2,226,450 |
| Consumer |  |  |  |  |  |  |  |  |  |
| Real estate |  |  |  |  |  |  |  |  |  |
| Pass | 61,766 | 150,755 | 287,584 | 270,022 | 163,332 | 159,210 | - | - | 1,092,669 |
| Watch | - | 760 | 5,573 | 7,472 | 5,488 | 5,525 | - | - | 24,818 |
| Special Mention | - | 141 | 2,702 | 1,504 | 988 | 4,816 | - | - | 10,151 |
| Substandard | 213 | 275 | 334 | 1,215 | 976 | 1,720 | - | - | 4,733 |
| Total Real estate | 61,979 | 151,931 | 296,193 | 280,213 | 170,784 | 171,271 | - | - | 1,132,371 |
| Home equity |  |  |  |  |  |  |  |  |  |
| Pass | - | - | - | - | - | - | 181,922 | - | 181,922 |
| Watch | - | - | - | - | - | - | 8,628 | - | 8,628 |
| Special Mention | - | - | - | - | - | - | 3,402 | - | 3,402 |
| Substandard | - | - | - | - | - | - | 1,431 | - | 1,431 |
| Total Home equity | - | - | - | - | - | - | 195,383 | - | 195,383 |
| Current period gross write-offs | - | - | - | - | - | - | (45) |  | (45) |
| Construction |  |  |  |  |  |  |  |  |  |
| Pass | 5,305 | 4,678 | 9,890 | 1,709 | - | - | - | - | 21,582 |
| Total Construction | 5,305 | 4,678 | 9,890 | 1,709 | - | - | - | - | 21,582 |
| Other |  |  |  |  |  |  |  |  |  |
| Pass | 2,978 | 954 | 1,662 | 1,812 | 1,274 | 2,815 | 31,016 | - | 42,511 |
| Watch | 161 | 7 | 16 | 338 | - | 144 | 57 | - | 723 |
| Special Mention | 19 | 29 | 326 | 65 | - | 62 | 30 | - | 531 |
| Substandard | - | - | - | - | - | - | 5 | - | 5 |
| Total Other | 3,158 | 990 | 2,004 | 2,215 | 1,274 | 3,021 | 31,108 | - | 43,770 |
| Current period gross write-offs | - | - | - | - | - | (38) | (42) | - | (80) |
| Total Consumer loans | 70,442 | 157,599 | 308,087 | 284,137 | 172,058 | 174,292 | 226,491 | - | 1,393,106 |
| Total loans | $200,418 | 351,647 | 1,024,018 | 638,919 | 370,027 | 623,231 | 410,404 | 892 | 3,619,556 |
| Total Current period gross write-offs | - | - | - | - | (347) | (1,085) | (159) | - | (1,591) |

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

_December 31, 2023_

| (dollars in thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving | Revolving Converted to Term | Total |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Commercial |  |  |  |  |  |  |  |  |  |
| Owner occupied RE |  |  |  |  |  |  |  |  |  |
| Pass | $42,846 | 180,654 | 138,549 | 64,818 | 59,880 | 110,502 | 85 | 166 | 597,500 |
| Watch | - | 3,460 | 460 | 15,997 | 3,525 | 6,616 | - | - | 30,058 |
| Special Mention | - | 181 | - | - | - | 3,057 | - | - | 3,238 |
| Substandard | - | - | - | - | - | 861 | - | - | 861 |
| Total Owner occupied RE | 42,846 | 184,295 | 139,009 | 80,815 | 63,405 | 121,036 | 85 | 166 | 631,657 |
| Non-owner occupied RE |  |  |  |  |  |  |  |  |  |
| Pass | 84,617 | 298,063 | 162,697 | 107,364 | 59,260 | 163,990 | 9,249 | - | 885,240 |
| Watch | 1,007 | 3,260 | 9,914 | 533 | 5,545 | 10,630 | - | - | 30,889 |
| Special Mention | - | - | 7,759 | - | 8,252 | 879 | - | - | 16,890 |
| Substandard | - | - | 313 | - | 8,088 | 1,109 | - | - | 9,510 |
| Total Non-owner occupied RE | 85,624 | 301,323 | 180,683 | 107,897 | 81,145 | 176,608 | 9,249 | - | 942,529 |
| Current period gross write-offs | - | (200) | - | - | - | (42) | - | - | (242) |
| Construction |  |  |  |  |  |  |  |  |  |
| Pass | 27,262 | 86,161 | 24,399 | 11,459 | - | - | - | - | 149,281 |
| Watch | - | 1,399 | - | - | - | - | - | - | 1,399 |
| Total Construction | 27,262 | 87,560 | 24,399 | 11,459 | - | - | - | - | 150,680 |
| Business |  |  |  |  |  |  |  |  |  |
| Pass | 48,705 | 134,999 | 48,557 | 18,868 | 17,292 | 47,708 | 146,745 | 1,431 | 464,305 |
| Watch | 127 | 15,867 | 1,833 | 1,010 | 842 | 3,584 | 7,570 | 506 | 31,339 |
| Special Mention | 241 | 961 | 98 | 857 | 184 | 447 | 150 | 97 | 3,035 |
| Substandard | - | - | 155 | - | 132 | 1,195 | - | - | 1,482 |
| Total Business | 49,073 | 151,827 | 50,643 | 20,735 | 18,450 | 52,934 | 154,465 | 2,034 | 500,161 |
| Current period gross write-offs | - | - | - | (28) | - | - | (15) | (22) | (65) |
| Total Commercial loans | 204,805 | 725,005 | 394,734 | 220,906 | 163,000 | 350,578 | 163,799 | 2,200 | 2,225,027 |
| Consumer |  |  |  |  |  |  |  |  |  |
| Real estate |  |  |  |  |  |  |  |  |  |
| Pass | 144,179 | 273,585 | 278,138 | 176,395 | 66,087 | 105,383 | - | - | 1,043,767 |
| Watch | 490 | 5,658 | 8,230 | 3,917 | 2,051 | 3,890 | - | - | 24,236 |
| Special Mention | 143 | 2,499 | 1,657 | 1,291 | 2,220 | 3,360 | - | - | 11,170 |
| Substandard | - | - | 635 | 817 | 318 | 1,486 | - | - | 3,256 |
| Total Real estate | 144,812 | 281,742 | 288,660 | 182,420 | 70,676 | 114,119 | - | - | 1,082,429 |
| Home equity |  |  |  |  |  |  |  |  |  |
| Pass | - | - | - | - | - | - | 171,003 | - | 171,003 |
| Watch | - | - | - | - | - | - | 6,393 | - | 6,393 |
| Special Mention | - | - | - | - | - | - | 4,283 | - | 4,283 |
| Substandard | - | - | - | - | - | - | 1,325 | - | 1,325 |
| Total Home equity | - | - | - | - | - | - | 183,004 | - | 183,004 |
| Current period gross write-offs | - | - | - | - | - | - | (438) | - | (438) |
| Construction |  |  |  |  |  |  |  |  |  |
| Pass | 14,339 | 39,893 | 9,116 | - | - | - | - | - | 63,348 |
| Total Construction | 14,339 | 39,893 | 9,116 | - | - | - | - | - | 63,348 |
| Other |  |  |  |  |  |  |  |  |  |
| Pass | 1,278 | 2,551 | 2,361 | 1,457 | 803 | 2,604 | 36,549 | - | 47,603 |
| Watch | 9 | 29 | 348 | - | 15 | 163 | 58 | - | 622 |
| Special Mention | 33 | 333 | - | - | 23 | 82 | 41 | - | 512 |
| Substandard | - | - | 75 | - | - | - | 7 | - | 82 |
| Total Other | 1,320 | 2,913 | 2,784 | 1,457 | 841 | 2,849 | 36,655 | - | 48,819 |
| Current period gross write-offs | - | - | - | - | - | - | (16) | - | (16) |
| Total Consumer loans | 160,471 | 324,548 | 300,560 | 183,877 | 71,517 | 116,968 | 219,659 | - | 1,377,600 |
| Total loans | $365,276 | 1,049,553 | 695,294 | 404,783 | 234,517 | 467,546 | 383,458 | 2,200 | 3,602,627 |
| Total Current period gross write-offs | - | (200) | - | (28) | - | (42) | (469) | (22) | (761) |

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

_September 30, 2024_

| Schedule of loan balances by payment status / (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 | $163 | - | - | - | 642,445 | 642,608 |
| Non-owner occupied RE | - | - | - | 7,904 | 909,738 | 917,642 |
| Construction | - | - | - | - | 144,665 | 144,665 |
| Business | 1,454 | 556 | - | 838 | 518,687 | 521,535 |
| Consumer |  |  |  |  |  |  |
| Real estate | 754 | 239 | - | 2,448 | 1,128,930 | 1,132,371 |
| Home equity | 101 | - | - | 393 | 194,889 | 195,383 |
| Construction | - | - | - | - | 21,582 | 21,582 |
| Other | 4 | - | - | - | 43,766 | 43,770 |
| Total loans | $2,476 | 795 | - | 11,583 | 3,604,702 | 3,619,556 |
| Total loans over 90 days past due | - | - | - | - | - | 2,073 |
|  | December 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 | $74 | - | - | - | 631,583 | 631,657 |
| Non-owner occupied RE | 8,102 | - | - | 1,423 | 933,004 | 942,529 |
| Construction | - | - | - | - | 150,680 | 150,680 |
| Business | 567 | - | - | 319 | 499,275 | 500,161 |
| Consumer |  |  |  |  |  |  |
| Real estate | 1,750 | - | - | 985 | 1,079,694 | 1,082,429 |
| Home equity | 601 | 30 | - | 1,236 | 181,137 | 183,004 |
| Construction | - | - | - | - | 63,348 | 63,348 |
| Other | 25 | 25 | - | - | 48,769 | 48,819 |
| Total loans | $11,119 | 55 | - | 3,963 | 3,587,490 | 3,602,627 |
| Total loans over 90 days past due | - | - | - | - | - | 1,300 |

As of September
30, 2024 and December 31, 2023, loans 30 days or more past due represented 0.16% and 0.37% of the Company’s total loan portfolio,
respectively. Commercial loans 30 days or more past due were 0.08% and 0.27% of the Company’s total loan portfolio as of September
30, 2024 and December 31, 2023, respectively. Consumer loans 30 days or more past due were 0.08% and 0.09% of total loans as of September
30, 2024 and December 31, 2023, respectively.

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

| Schedule of nonaccrual loans by major categories / (dollars in thousands) | September 30, 2024 / Nonaccrual / loans / with no / allowance | September 30, 2024 / Nonaccrual / loans / with an / allowance | September 30, 2024 / Total / nonaccrual / loans | Nonaccrual / loans / with no / allowance | December 31, 2023 / Nonaccrual / loans / with an / allowance | December 31, 2023 / Total / nonaccrual / loans |
| --- | --- | --- | --- | --- | --- | --- |
| Commercial |  |  |  |  |  |  |
| Non-owner occupied RE | $5,432 | 2,472 | 7,904 | $653 | 770 | 1,423 |
| Business | - | 838 | 838 | 164 | 155 | 319 |
| Total commercial | 5,432 | 3,310 | 8,742 | 817 | 925 | 1,742 |
| Consumer |  |  |  |  |  |  |
| Real estate | 1,735 | 713 | 2,448 | - | 985 | 985 |
| Home equity | 318 | 75 | 393 | 343 | 893 | 1,236 |
| Total consumer | 2,053 | 788 | 2,841 | 343 | 1,878 | 2,221 |
| Total nonaccrual loans | $7,485 | 4,098 | 11,583 | $1,160 | 2,803 | 3,963 |

The Company did not recognize interest income on
nonaccrual loans for the three months ended September 30, 2024 and September 30, 2023. The accrued interest reversed during the three
months ended September 30, 2024 and September 30, 2023 was not material. Foregone interest income on the nonaccrual loans for the three-month
period ended September 30, 2024 and September 30, 2023 was not material.

We did not recognize interest income on nonaccrual
loans for the nine months ended September 30, 2024 and September 30, 2023. Accrued interest of $94,000 was reversed during the nine months
ended September 30, 2024 and $35,000 was reversed during the nine months ended September 30, 2023.

The table below summarizes information regarding nonperforming assets.

| Schedule of nonperforming assets / (dollars in thousands) | September 30, 2024 | December 31, 2023 |
| --- | --- | --- |
| Nonaccrual loans | $11,583 | 3,963 |
| Other real estate owned | - | - |
| Total nonperforming assets | $11,583 | 3,963 |
| Nonperforming assets as a percentage of: |  |  |
| Total assets | 0.28% | 0.10% |
| Gross loans | 0.32% | 0.11% |
| Total loans over 90 days past due | $2,073 | 1,300 |
| Loans over 90 days past due and still accruing | - | - |

**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.

The allowance for credit losses incorporates an estimate
of lifetime expected credit losses and is recorded on each asset upon origination or acquisition. The starting point for the estimate
of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers
experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit
losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

Because the effect of most modifications made to borrowers
experiencing financial difficulty is already included in the allowance for credit losses due to the measurement methodologies used to
estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Loan modifications to
borrowers experiencing financial difficulty were not material for the three and nine months ended September 30, 2024 and September 30,
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 tables summarize the activity related
to the allowance for credit losses for the three and nine months ended September 30, 2024 and September 30, 2023 under the CECL methodology.

| Schedule of activity related to the allowance for credit losses / (dollars in thousands) | Commercial / Owner occupied RE | Commercial / Non- owner occupied RE | Commercial / Construction | Three months ended September 30, 2024 / Commercial / Business | Three months ended September 30, 2024 / Real Estate | Three months ended September 30, 2024 / Home Equity | Three months ended September 30, 2024 / Construction | Three months ended September 30, 2024 / Other | Three months ended September 30, 2024 / Consumer / Total |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Balance, beginning of period | $5,467 | 10,562 | 1,331 | 7,236 | 12,397 | 2,479 | 278 | 407 | 40,157 |
| Provision for credit losses for loans | - | - | - | - | - | - | - | - | - |
| Loan charge-offs | - | - | - | (72) | - | (45) | - | (1) | (118) |
| Loan recoveries | - | - | - | 73 | - | 4 | - | 50 | 127 |
| Net loan recoveries (charge-offs) | - | - | - | 1 | - | (41) | - | 49 | 9 |
| Balance, end of period | $5,467 | 10,562 | 1,331 | 7,237 | 12,397 | 2,438 | 278 | 456 | 40,166 |
| Net recoveries to average loans (annualized) |  |  |  |  |  |  |  |  | 0.00% |
| Allowance for credit losses to gross loans |  |  |  |  |  |  |  |  | 1.11% |
| Allowance for credit losses to nonperforming loans |  |  |  |  |  |  |  |  | 346.78% |

| (dollars in thousands) | Commercial / Owner occupied RE | Commercial / Non-owner occupied RE | Commercial / Construction | Three months ended September 30, 2023 / Commercial / Business | Three months ended September 30, 2023 / Real Estate | Three months ended September 30, 2023 / Home Equity | Three months ended September 30, 2023 / Construction | Three months ended September 30, 2023 / Other | Three months ended September 30, 2023 / Consumer / Total |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Balance, beginning of period | $5,896 | 11,584 | 1,331 | 8,152 | 10,395 | 2,521 | 684 | 542 | 41,105 |
| Provision for credit losses for loans | 300 | (247) | (34) | (148) | 191 | (20) | (102) | (40) | (100) |
| Loan charge-offs | - | (1) | - | (42) | - | - | - | - | (43) |
| Loan recoveries | - | 154 | - | 13 | - | 2 | - | - | 169 |
| Net loan recoveries (charge-offs) | - | 153 | - | (29) | - | 2 | - | - | 126 |
| Balance, end of period | $6,196 | 11,490 | 1,297 | 7,975 | 10,586 | 2,503 | 582 | 502 | 41,131 |
| Net recoveries to average loans (annualized) |  |  |  |  |  |  |  |  | (0.01 |
| Allowance for credit losses to gross loans |  |  |  |  |  |  |  |  | 1.16% |
| Allowance for credit losses to nonperforming loans |  |  |  |  |  |  |  |  | 953.25% |

| (dollars in thousands) | Commercial / Owner occupied RE | Commercial / Non-owner occupied RE | Commercial / Construction | Nine months ended September 30, 2024 / Commercial / Business | Nine months ended September 30, 2024 / Consumer / Real Estate | Nine months ended September 30, 2024 / Consumer / Home Equity | Nine months ended September 30, 2024 / Consumer / Construction | Nine months ended September 30, 2024 / Consumer / Other | Nine months ended September 30, 2024 / Consumer / Total |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Balance, beginning of period | $6,118 | 11,167 | 1,594 | 7,385 | 10,647 | 2,600 | 677 | 494 | 40,682 |
| Provision for credit losses for loans | (651) | 424 | (263) | 190 | 1,750 | (244) | (399) | (57) | 750 |
| Loan charge-offs | - | (1,029) | - | (437) | - | (45) | - | (80) | (1,591) |
| Loan recoveries | - | - | - | 99 | - | 127 | - | 99 | 325 |
| Net loan recoveries (charge-offs) | - | (1,029) | - | (338) | - | 82 | - | 19 | (1,266) |
| Balance, end of period | $5,467 | 10,562 | 1,331 | 7,237 | 12,397 | 2,438 | 278 | 456 | 40,166 |
| Net charge-offs to average loans (annualized) |  |  |  |  |  |  |  |  | 0.05% |
| Allowance for credit losses to gross loans |  |  |  |  |  |  |  |  | 1.11% |
| Allowance for credit losses to nonperforming loans |  |  |  |  |  |  |  |  | 346.78% |

| (dollars in thousands) | Commercial / Owner occupied RE | Commercial / Non- owner occupied RE | Commercial / Construction | Nine months ended September 30, 2023 / Commercial / Business | Nine months ended September 30, 2023 / Real Estate | Nine months ended September 30, 2023 / Home Equity | Nine months ended September 30, 2023 / Construction | Nine months ended September 30, 2023 / Other | Nine months ended September 30, 2023 / Consumer / 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 for loans | 329 | 1,138 | 5 | 120 | 1,099 | 278 | (311) | 192 | 2,850 |
| Loan charge-offs | - | (209) | - | (43) | - | (389) | - | (2) | (643) |
| Loan recoveries | - | 185 | - | 37 | - | 63 | - | - | 285 |
| Net loan recoveries (charge-offs) | - | (24) | - | (6) | - | (326) | - | (2) | (358) |
| Balance, end of period | $6,196 | 11,490 | 1,297 | 7,975 | 10,586 | 2,503 | 582 | 502 | 41,131 |
| Net charge-offs to average loans (annualized) |  |  |  |  |  |  |  |  | 0.01% |
| Allowance for credit losses to gross loans |  |  |  |  |  |  |  |  | 1.16% |
| Allowance for credit losses to nonperforming loans |  |  |  |  |  |  |  |  | 953.25% |

There was no provision for credit losses for the three
months ended September 30, 2024. For the three months ended September 30, 2023, there was a $100,000 reversal of the provision for credit
losses related to loans. In addition, the provision for credit losses was $750,000 and $2.9 million for the nine months ended September
30, 2024 and September 30, 2023, respectively.

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.

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.

The following tables present an analysis of collateral-dependent
loans of the Company as of September 30, 2024 and December 31, 2023.

| Schedule of analysis of collateral-dependent loans / (dollars in thousands) | Real / estate | Business / assets | September 30, 2024 / Other | September 30, 2024 / Total |
| --- | --- | --- | --- | --- |
| Commercial |  |  |  |  |
| Non-owner occupied RE | $7,240 | - | - | 7,240 |
| Business | 461 | 234 | - | 695 |
| Total commercial | 7,701 | 234 | - | 7,935 |
| Consumer |  |  |  |  |
| Real estate | 1,891 | - | - | 1,891 |
| Home equity | 393 | - | - | 393 |
| Total consumer | 2,284 | - | - | 2,284 |
| Total | $9,985 | 234 | - | 10,219 |

| (dollars in thousands) | Real / estate | December 31, 2023 / Business / assets | December 31, 2023 / Other | December 31, 2023 / Total |
| --- | --- | --- | --- | --- |
| Commercial |  |  |  |  |
| Non-owner occupied RE | $720 | - | - | 720 |
| Business | 164 | - | - | 164 |
| Total commercial | 884 | - | - | 884 |
| Consumer |  |  |  |  |
| Real estate | 166 | - | - | 166 |
| Home equity | 343 | - | - | 343 |
| Total consumer | 509 | - | - | 509 |
| Total | $1,393 | - | - | 1,393 |

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

The allowance for credit losses for unfunded loan commitments
was $1.4 million and $1.8 million at September 30, 2024 and December 31, 2023, respectively, 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 and nine months ended September 30, 2024 and September 30, 2023.

| Schedule of allowance for credit losses for unfunded loan commitments / (dollars in thousands) | Three months ended September 30, 2024 | Three months ended September 30, 2023 |
| --- | --- | --- |
| Balance, beginning of period | $1,406 | 2,565 |
| Provision for (reversal of) credit losses | - | (400) |
| Balance, end of period | $1,406 | 2,165 |
| Unfunded Loan Commitments | $699,888 | 780,581 |
| Reserve for Unfunded Commitments to Unfunded Loan Commitments | 0.20% | 0.28% |

| (dollars in thousands) | Nine months ended September 30, 2024 | Nine months ended September 30, 2023 |
| --- | --- | --- |
| Balance, beginning of period | $1,831 | 2,780 |
| Provision for (reversal of) credit losses | (425) | (615) |
| Balance, end of period | $1,406 | 2,165 |
| Unfunded Loan Commitments | $699,888 | 780,581 |
| Reserve for Unfunded Commitments to Unfunded Loan Commitments | 0.20% | 0.28% |

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

The Company utilizes
derivative financial instruments primarily to manage 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 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. These derivatives are free- standing derivatives and are not designated as instruments for hedge accounting. 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 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 entered into a pay-fixed portfolio layer
method fair value swap, designated as a hedging instrument, with a total notional amount of $200.0 million in the second quarter of 2023.
The hedging instrument matures on May 25, 2028. The Company entered into a second pay-fixed portfolio layer method fair value swap, designated
as a hedging instrument, with a total notional amount of $100.0 million in the third quarter of 2024. The hedging instrument matures onAugust 27, 2027. The Company is designating the fair value swaps under the portfolio layer method (“PLM”). Under this method,
the hedged item is designated as a hedged layer of a closed portfolio of financial loans that is anticipated to remain outstanding for
the designated hedged period. Adjustments are made to record the swap at fair value on the consolidated balance sheets, with changes in
fair value recognized in interest income. The carrying value of the fair value swap on the consolidated balance sheets will also be adjusted
through interest income, based on changes in fair value attributable to changes in the hedged risk.

The following table represents the carrying value of
the portfolio layer method hedged asset and liability and the cumulative fair value hedging adjustment included in the carrying value
of the hedged asset as of September 30, 2024 and December 31, 2023.

| Schedule of carrying value of hedged asset and liability and cumulative fair value hedging adjustment / (dollars in thousands) | September 30, 2024 / Carrying Amount | September 30, 2024 / Hedged Liability | December 31, 2023 / Carrying Amount | December 31, 2023 / Hedged Liability |
| --- | --- | --- | --- | --- |
| Fixed Rate Asset/Liability1 | $296,937 | $3,063 | $199,518 | $482 |

1 These amounts included the amortized cost basis of closed portfolios of fixed rate loans used to designate hedging relationships in which the hedged item is the stated amount of the assets in the closed portfolio anticipated to be outstanding for the designated hedged period. As of September 30, 2024, the amortized cost basis of the closed portfolio used in this hedging relationship was $679.8 million, the cumulative basis adjustment associated with this hedging relationship was $3.2 million, and the amount of the designated hedged item was $300.0 million.

The following table summarizes the Company’s
outstanding financial derivative instruments at September 30, 2024 and December 31, 2023.

| Schedule of outstanding financial derivative instruments / (dollars in thousands) | Notional | September 30, 2024 / Balance Sheet Location | September 30, 2024 / Fair Value / Asset/(Liability) |
| --- | --- | --- | --- |
| Derivatives designated as hedging instruments: |  |  |  |
| Fair value swap Fair value swap [Member] | $300,000 | Other liabilities | $(3,063) |
| Derivatives not designated as hedging instruments: |  |  |  |
| Mortgage loan interest rate lock commitments Mortgage loan interest rate lock commitments [Member] | 28,937 | Other assets | 354 |
| MBS forward sales commitments MBS forward sales commitments [Member] | 19,000 | Other liabilities | (48) |
| Total derivative financial instruments Total derivative financial instruments [Member] | $347,937 |  | $(2,757) |

| (dollars in thousands) | Notional | December 31, 2023 / Balance Sheet Location | December 31, 2023 / Fair Value / Asset/(Liability) |
| --- | --- | --- | --- |
| Derivatives designated as hedging instruments: |  |  |  |
| Fair value swap | $200,000 | Other liabilities | $(482) |
| Derivatives not designated as hedging instruments: |  |  |  |
| Mortgage loan interest rate lock commitments | 12,973 | Other assets | 159 |
| MBS forward sales commitments | 10,000 | Other liabilities | (68) |
| Total derivative financial instruments | $222,973 |  | $(391) |

Accrued interest
receivable related to the interest rate swap as of September 30, 2024 totaled $402,000 and is excluded from the fair value presented in
the table above.

The Company assesses
the effectiveness of the fair value swap hedge with a regression analysis that compares the changes in forward curves to determine the
value. The effective portion of changes in fair value of derivatives designated as fair value hedges is recorded through interest income.
The Company does not offset derivative assets and derivative liabilities for financial statement presentation purposes.

The following table summarizes the effect of the fair value hedging relationship
recognized in the consolidated statements of income for the three and nine months ended September 30, 2024 and September 30, 2023.

| Schedule of summarize the effect of fair value hedging relationship recognized in the consolidated statement of income / (dollars in thousands) | Three months ended September 30, 2024 | Three months ended September 30, 2023 | Nine months ended September 30, 2024 | Nine months ended September 30, 2023 |
| --- | --- | --- | --- | --- |
| Gain (loss) on fair value hedging relationship: |  |  |  |  |
| Hedged asset/liability | $3,063 | 6,250 | $3,063 | 6,250 |
| Fair value derivative designated as hedging instrument | (2,962) | (6,251) | (2,973) | (6,285) |
| Total gain (loss) recognized in interest income on loans | $101 | (1) | $90 | (35) |

### 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.

**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 individually evaluated 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 12 of the Company’s 2023 Annual Report
on Form 10-K. See Note 5 for how the derivative asset fair value is determined. 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 September 30, 2024 and December 31, 2023.

| Schedule of assets and liabilities measured at fair value on a recurring basis / (dollars in thousands) | Level 1 | September 30, 2024 / Level 2 | September 30, 2024 / Level 3 | September 30, 2024 / Total |
| --- | --- | --- | --- | --- |
| Assets |  |  |  |  |
| Securities available for sale |  |  |  |  |
| Corporate bonds | - | 1,947 | - | 1,947 |
| US treasuries | - | 924 | - | 924 |
| US government agencies | - | 16,686 | - | 16,686 |
| State and political subdivisions | - | 20,023 | - | 20,023 |
| Asset-backed securities | - | 34,265 | - | 34,265 |
| Mortgage-backed securities | - | 60,752 | - | 60,752 |
| Mortgage loans held for sale | - | 8,602 | - | 8,602 |
| Mortgage loan interest rate lock commitments | - | 354 | - | 354 |
| Total assets measured at fair value on a recurring basis | - | 143,553 | - | 143,553 |
| Liabilities |  |  |  |  |
| Derivative liability | - | 3,063 | - | 3,063 |
| MBS forward sales commitments | - | 48 | - | 48 |
| Total liabilities measured at fair value on a recurring basis | - | 3,111 | - | 3,111 |

_December 31, 2023_

| (dollars in thousands) | Level 1 | Level 2 | Level 3 | Total |
| --- | --- | --- | --- | --- |
| Assets |  |  |  |  |
| Securities available for sale: |  |  |  |  |
| Corporate bonds | - | 1,910 | - | 1,910 |
| US treasuries | - | 9,394 | - | 9,394 |
| US government agencies | - | 18,656 | - | 18,656 |
| State and political subdivisions | - | 19,741 | - | 19,741 |
| Asset-backed securities | - | 33,236 | - | 33,236 |
| Mortgage-backed securities | - | 51,765 | - | 51,765 |
| Mortgage loans held for sale | - | 7,194 | - | 7,194 |
| Mortgage loan interest rate lock commitments | - | 159 | - | 159 |
| Total assets measured at fair value on a recurring basis | - | 142,055 | - | 142,055 |
| Liabilities |  |  |  |  |
| Derivative liability | - | 482 | - | 482 |
| MBS forward sales commitments | - | 68 | - | 68 |
| Total liabilities measured at fair value on a recurring basis | - | 550 | - | 550 |

*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 September 30, 2024 and December 31, 2023.

_As of September 30, 2024_

| Schedule of assets and liabilities measured at fair value on a nonrecurring basis / (dollars in thousands) Level 1 [Member] | Level 1 | Level 2 | Level 3 | Total |
| --- | --- | --- | --- | --- |
| Assets |  |  |  |  |
| Individually evaluated loans Level 2 [Member] | - | 8,954 | 1,812 | 10,766 |
| Total assets measured at fair value on a nonrecurring basis | - | 8,954 | 1,812 | 10,766 |

_As of December 31, 2023_

| (dollars in thousands) | Level 1 | Level 2 | Level 3 | Total |
| --- | --- | --- | --- | --- |
| Assets |  |  |  |  |
| Individually evaluated loans Level 3 [Member] | - | 1,160 | 2,976 | 4,136 |
| Total assets measured at fair value on a nonrecurring basis | - | 1,160 | 2,976 | 4,136 |

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 September 30, 2024 and December 31, 2023, the significant unobservable inputs used in
the fair value measurements were as follows:

Schedule of unobservable inputs used in the fair value measurements

**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 September 30, 2024 and December 31, 2023 are as follows:

| Schedule of estimated fair values of the company's financial instruments / (dollars in thousands) | Carrying Amount | Fair Value | September 30, 2024 / Level 1 | September 30, 2024 / Level 2 | September 30, 2024 / Level 3 |
| --- | --- | --- | --- | --- | --- |
| Financial Assets: |  |  |  |  |  |
| Other investments, at cost | $19,640 | 19,640 | - | - | 19,640 |
| Loans1 | 3,567,000 | 3,302,316 | - | - | 3,302,316 |
| Financial Liabilities: |  |  |  |  |  |
| Deposits | 3,518,825 | 3,348,532 | - | 3,348,532 | - |
| Subordinated debentures | 24,903 | 28,200 | - | 28,200 | - |

| (dollars in thousands) | Carrying Amount | Fair Value | December 31, 2023 / Level 1 | December 31, 2023 / Level 2 | December 31, 2023 / Level 3 |
| --- | --- | --- | --- | --- | --- |
| Financial Assets: |  |  |  |  |  |
| Other investments, at cost | $19,939 | 19,939 | - | - | 19,939 |
| Loans1 | 3,557,120 | 3,337,768 | - | - | 3,337,768 |
| Financial Liabilities: |  |  |  |  |  |
| Deposits | 3,379,564 | 2,961,182 | - | 2,961,182 | - |
| Subordinated debentures | 36,322 | 40,712 | - | 40,712 | - |

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 (“ROU”)
assets, included in property and equipment, of $21.0 million and $22.2 million as of September 30, 2024 and December 31, 2023, respectively.
 The Company had lease liabilities, included in other liabilities, of $23.6 million and $24.6 million as of September 30, 2024 and
December 31, 2023, 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 5.19 years as of September 30, 2024. The ROU asset and lease liability
are recognized at lease commencement by calculating the present value of lease payments over the lease term. The ROU assets also
include any initial direct costs incurred and lease payments made at or before commencement date and are reduced by any lease incentives.

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 2.28% as
of September 30, 2024.

The total operating lease costs were $604,000 and $597,000 for the three months ended September 30, 2024 and 2023, respectively, and $1.8 million for the nine months each ended September
30, 2024 and 2023.

Operating lease payments due as of September 30, 2024 were as follows:

| Schedule of operating lease payments / (dollars in thousands) | Operating / Leases |
| --- | --- |
| 2024 | $531 |
| 2025 | 2,157 |
| 2026 | 2,210 |
| 2027 | 2,267 |
| 2028 | 2,015 |
| Thereafter | 20,187 |
| Total undiscounted lease payments | 29,367 |
| Discount effect of cash flows | 5,777 |
| Total lease liability | $23,590 |

### 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- and nine-month periods ended September 30, 2024 and
2023. Dilutive common shares arise from the potentially dilutive effect of the Company’s stock options that were outstanding at
September 30, 2024. The assumed conversion of stock options can create a difference between basic and dilutive net income per common share.
At September 30, 2024 and 2023, there were 263,387 and 351,746 options, respectively, that were not considered in computing diluted earnings
per common share because they were anti-dilutive.

| Schedule of earnings per share computations / (dollars in thousands, except share data) | Three months ended September 30, 2024 | Three months ended September 30, 2023 | Nine months ended September 30, 2024 | Nine months ended September 30, 2023 |
| --- | --- | --- | --- | --- |
| Numerator: |  |  |  |  |
| Net income available to common shareholders | $4,382 | 4,098 | $9,903 | 9,259 |
| Denominator: |  |  |  |  |
| Weighted-average common shares outstanding – basic | 8,064,283 | 8,052,926 | 8,100,003 | 8,043,410 |
| Common stock equivalents | 24,893 | 19,482 | 23,843 | 34,420 |
| Weighted-average common shares outstanding – diluted | 8,089,176 | 8,072,408 | 8,123,846 | 8,077,830 |
| Earnings per common share: |  |  |  |  |
| Basic | $0.54 | 0.51 | $1.22 | 1.15 |
| Diluted | 0.54 | 0.51 | 1.22 | 1.15 |

## 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- and nine-month periods ended September 30, 2024 as compared to the three- and nine-month periods ended September
30, 2023 and assesses our financial condition as of September 30, 2024 as compared to December 31, 2023. 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, 2023 included in our Annual Report on Form 10-K for that period.
Results for the three- and nine-month periods ended September 30, 2024 are not necessarily indicative of the results for the year ending
December 31, 2024 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 the upcoming 2024 federal elections and 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;
- Risks associated with complex and changing regulatory environments, including, among others, with respect to data privacy, artificial intelligence, information security, climate change or other environmental, social and governance matters, and labor matters, relating to our operations;
- 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, war or terrorist activities, such as the war in Ukraine, the Middle East conflict, and the conflict between China and Taiwan, disruptions in our customers’ supply chains, disruptions in transportation, essential utility outages or trade disputes and related tariffs; and disruptions caused from widespread cybersecurity incidents; 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, 2023, 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 September 30, 2024, we had total assets of $4.17
billion, a 2.9% increase from total assets of $4.06 billion at December 31, 2023. The largest component of our total assets is loans which
were $3.62 billion and $3.60 billion at September 30, 2024 and December 31, 2023, respectively. Our liabilities and shareholders’
equity at September 30, 2024 totaled $3.85 billion and $326.5 million, respectively, compared to liabilities of $3.74 billion and shareholders’
equity of $312.5 million at December 31, 2023. The principal component of our liabilities is deposits which were $3.52 billion and $3.38
billion at September 30, 2024 and December 31, 2023, 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 $4.4 million and $4.1 million for the three months ended September 30, 2024 and 2023, respectively. Diluted earnings per share (“EPS”)
was $0.54 for the third quarter of 2024 as compared to $0.51 for the same period in 2023. The increase in net income was primarily driven
by an increase in

net interest income resulting from additional interest income on our loan portfolio combined with an increase in noninterest
income, partially offset by an increase in noninterest expenses.

Our net income to common shareholders was $9.9 million
and $9.3 million for the nine months ended September 30, 2024 and 2023, respectively. Diluted EPS was $1.22 for the nine months ended
September 30, 2024 as compared to $1.15 for the same period in 2023. The increase in net income was primarily driven by the additional
interest income on our interest-earning assets.

**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 $20.6 million for the third quarter
of 2024, a 6.4% increase over net interest income of $19.3 million for the third quarter of 2023, driven primarily by a $3.7 million increase
in interest income on our interest-earning assets, partially offset by a $2.5 million increase in interest expense. In addition, our net
interest margin, on a tax-equivalent (TE) basis, was 2.08% for the third quarter of 2024 compared to 1.97% for the same period in 2023.

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- and nine-month periods ended September 30, 2024 and 2023. 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 September 30, 2024 / Average Balance | For the Three Months Ended September 30, 2024 / Income/ Expense | For the Three Months Ended September 30, 2024 / Yield/ Rate(1) | For the Three Months Ended September 30, 2023 / Average Balance | For the Three Months Ended September 30, 2023 / Income/ Expense | For the Three Months Ended September 30, 2023 / Yield/ Rate(1) |
| --- | --- | --- | --- | --- | --- | --- |
| Interest-earning assets |  |  |  |  |  |  |
| Federal funds sold and interest-bearing deposits with banks | $158,222 | $2,209 | 5.55% | $181,784 | 2,435 | 5.31% |
| Investment securities, taxable | 137,087 | 1,370 | 3.98% | 148,239 | 1,429 | 3.82% |
| Investment securities, nontaxable(2) | 8,047 | 55 | 2.70% | 7,799 | 55 | 2.77% |
| Loans(3) | 3,629,050 | 47,550 | 5.21% | 3,554,478 | 43,542 | 4.86% |
| Total interest-earning assets | 3,932,406 | 51,184 | 5.18% | 3,892,300 | 47,461 | 4.84% |
| Noninterest-earning assets | 158,550 |  |  | 159,103 |  |  |
| Total assets | $4,090,956 |  |  | $4,051,403 |  |  |
| Interest-bearing liabilities |  |  |  |  |  |  |
| NOW accounts | $314,669 | 835 | 1.06% | $297,028 | 620 | 0.83% |
| Savings & money market | 1,523,834 | 15,287 | 3.99% | 1,748,638 | 16,908 | 3.84% |
| Time deposits | 909,192 | 11,603 | 5.08% | 648,949 | 7,602 | 4.65% |
| Total interest-bearing deposits | 2,747,695 | 27,725 | 4.01% | 2,694,615 | 25,130 | 3.70% |
| FHLB advances and other borrowings | 240,065 | 2,297 | 3.81% | 264,141 | 2,414 | 3.63% |
| Subordinated debentures | 36,261 | 558 | 6.12% | 36,278 | 558 | 6.10% |
| Total interest-bearing liabilities | 3,024,021 | 30,580 | 4.02% | 2,995,034 | 28,102 | 3.72% |
| Noninterest-bearing liabilities | 744,025 |  |  | 752,433 |  |  |
| Shareholders’ equity | 322,910 |  |  | 303,936 |  |  |
| Total liabilities and shareholders’ equity | $4,090,956 |  |  | $4,051,403 |  |  |
| Net interest spread |  |  | 1.16% |  |  | 1.12% |
| Net interest income (tax equivalent) / margin |  | $20,604 | 2.08% |  | $19,359 | 1.97% |
| Less: tax-equivalent adjustment(2) |  | 13 |  |  | 14 |  |
| Net interest income |  | $20,591 |  |  | $19,345 |  |

(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) increased 11 basis points
to 2.08% during the third quarter of 2024, compared to the third quarter of 2023, primarily due to an increase in our interest-earning
assets, as well as an increase in the yield on our interest-earning assets. Our average interest-earning assets grew by $40.1 million
during the third quarter of 2024 from the prior year, while the average yield on these assets increased by 34 basis points to 5.18%. Our
average interest-bearing liabilities grew by $29.0 million during the third quarter of 2024 from the prior year, while the rate on these
liabilities increased 30 basis points to 4.02%.

The increase in average interest-earning assets for
the third quarter of 2024 related primarily to an increase of $74.6 million in our average loan balances from the prior year, partially
offset by a $23.6 million decrease in average federal funds sold and interest-bearing deposits with banks. The 34 basis point increase
in yield on our interest-earning assets was driven by a 35 basis point increase in loan yield and a 24 basis point increase in yield on
federal funds sold and interest-bearing deposits with banks.

The increase in our average interest-bearing liabilities
during the third quarter of 2024 resulted primarily from a $53.1 million increase in our interest-bearing deposits from the prior year,
while the 30 basis point increase in rate on our interest-bearing liabilities was driven by a 31 basis point increase in deposit rates.

Our net interest spread was
1.16% for the third quarter of 2024 compared to 1.12% for the same period in 2023. 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 34 basis point increase
in yield on our interest-earning assets was partially offset by a 30 basis point increase in the rate on our interest-bearing liabilities,
resulting in a 4 basis point increase in our net interest spread for the 2024 period. We anticipate continued pressure on our net interest
spread and net

interest margin in future
periods based on the competitive rate environment around our deposits and the potential for additional rate cuts by the Federal Reserve.

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

| (dollars in thousands) | For the nine Months Ended September 30, 2024 / Average Balance | For the nine Months Ended September 30, 2024 / Income/ Expense | For the nine Months Ended September 30, 2024 / Yield/ Rate(1) | For the nine Months Ended September 30, 2023 / Average Balance | For the nine Months Ended September 30, 2023 / Income/ Expense | For the nine Months Ended September 30, 2023 / Yield/ Rate(1) |
| --- | --- | --- | --- | --- | --- | --- |
| Interest-earning assets |  |  |  |  |  |  |
| Federal funds sold and interest-bearing deposits with banks | $146,452 | $6,072 | 5.54% | $113,269 | $4,295 | 5.07% |
| Investment securities, taxable | 131,828 | 4,183 | 4.24% | 111,551 | 2,663 | 3.19% |
| Investment securities, nontaxable(2) | 12,188 | 162 | 1.78% | 7,978 | 162 | 2.72% |
| Loans(3) | 3,632,527 | 139,700 | 5.14% | 3,467,550 | 121,380 | 4.68% |
| Total interest-earning assets | 3,922,995 | 150,117 | 5.11% | 3,700,348 | 128,500 | 4.64% |
| Noninterest-earning assets | 159,663 |  |  | 158,746 |  |  |
| Total assets | $4,082,658 |  |  | $3,859,094 |  |  |
| Interest-bearing liabilities |  |  |  |  |  |  |
| NOW accounts | $304,479 | 2,117 | 0.93% | $299,123 | 1,598 | 0.71% |
| Savings & money market | 1,585,224 | 47,930 | 4.04% | 1,712,827 | 44,197 | 3.45% |
| Time deposits | 870,078 | 32,826 | 5.04% | 588,876 | 18,450 | 4.19% |
| Total interest-bearing deposits | 2,759,781 | 82,873 | 4.01% | 2,600,826 | 64,245 | 3.30% |
| FHLB advances and other borrowings | 240,460 | 6,772 | 3.76% | 140,336 | 3,996 | 3.81% |
| Subordinated debentures | 36,318 | 1,671 | 6.15% | 36,251 | 1,627 | 6.00% |
| Total interest-bearing liabilities | 3,036,559 | 91,316 | 4.02% | 2,777,413 | 69,868 | 3.36% |
| Noninterest-bearing liabilities | 727,977 |  |  | 780,408 |  |  |
| Shareholders’ equity | 318,122 |  |  | 301,273 |  |  |
| Total liabilities and shareholders’ equity | $4,082,658 |  |  | $3,859,094 |  |  |
| Net interest spread |  |  | 1.09% |  |  | 1.28% |
| Net interest income (tax equivalent) / margin |  | $58,801 | 2.00% |  | $58,632 | 2.12% |
| Less: tax-equivalent adjustment(2) |  | 37 |  |  | 37 |  |
| Net interest income |  | $58,764 |  |  | $58,595 |  |

(1) Annualized for the nine-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.

During the first nine months of 2024, our net interest
margin (TE) decreased by 12 basis points to 2.00%, compared to 2.12% for the first nine months of 2023, driven by the increase in yield
on our interest-bearing liabilities. Our average interest-bearing liabilities grew by $259.1 million from the prior year, with the average
yield increasing by 66 basis points to 4.02%. In contrast, our average interest-earning assets grew by $222.6 million, while the rate
on these assets increased 47 basis points to 5.11%.

The increase in average interest-bearing liabilities
for the first nine months of 2024 was driven by an increase in interest-bearing deposits of $159.0 million and a $100.1 million increase
in FHLB advances and other borrowings, while the increase in cost was driven by a 71 basis point increase on our interest-bearing deposits.

The increase in average interest-earning assets for
the first nine months of 2024 related primarily to a $165.0 million increase in our average loan balances and a $33.2 million increase
in average federal funds sold and interest-bearing deposits with banks. The increase in yield on our interest-earning assets was driven
by a 47 basis point increase in the yield on federal funds sold and interest-bearing deposits with banks and a 46 basis point increase
in our loan yield.

Our net interest spread was
1.09% for the first nine months of 2024 compared to 1.28% for the same period in 2023. The 19 basis point decrease in our net interest
spread was driven by the 66 basis point increase in yield on our interest-bearing liabilities.

*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 / September 30, 2024 vs. 2023 / Increase (Decrease) Due to / Volume | Three Months Ended / September 30, 2024 vs. 2023 / Increase (Decrease) Due to / Rate | Three Months Ended / September 30, 2024 vs. 2023 / Increase (Decrease) Due to / Rate/ Volume | Three Months Ended / September 30, 2024 vs. 2023 / Increase (Decrease) Due to / Total | Three Months Ended / September 30, 2023 vs. 2022 / Increase (Decrease) Due to / Volume | Three Months Ended / September 30, 2023 vs. 2022 / Increase (Decrease) Due to / Rate | Three Months Ended / September 30, 2023 vs. 2022 / Increase (Decrease) Due to / Rate/ Volume | Three Months Ended / September 30, 2023 vs. 2022 / Increase (Decrease) Due to / Total |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Interest income |  |  |  |  |  |  |  |  |
| Loans | $1,047 | 2,891 | 70 | 4,008 | $6,233 | 6,248 | 1,309 | 13,790 |
| Investment securities | (103) | 48 | (3) | (58) | 271 | 451 | 242 | 964 |
| Federal funds sold and interest-bearing deposits with banks | (315) | 102 | (13) | (226) | 331 | 959 | 469 | 1,759 |
| Total interest income | 629 | 3,041 | 54 | 3,724 | 6,835 | 7,658 | 2,020 | 16,513 |
| Interest expense |  |  |  |  |  |  |  |  |
| Deposits | 295 | 2,273 | 27 | 2,595 | 762 | 16,798 | 2,549 | 20,109 |
| FHLB advances and other borrowings | (220) | 112 | (10) | (118) | 1,938 | 2 | 466 | 2,406 |
| Subordinated debentures | - | 1 | - | 1 | 1 | 106 | - | 107 |
| Total interest expense | 75 | 2,386 | 17 | 2,478 | 2,701 | 16,906 | 3,015 | 22,622 |
| Net interest income | $554 | 655 | 37 | 1,246 | $4,134 | (9,248) | (995) | (6,109) |

Net interest income, the largest component of our income,
was $20.6 million for the third quarter of 2024 and $19.3 million for the third quarter of 2023, a $1.2 million, or 6.4%, increase year
over year. The increase during 2024 was driven by a $3.7 million increase in interest income primarily due to higher yields on our loan
portfolio and an increase in average loan balances. Partially offsetting the increase in interest income was a $2.5 million increase in
interest expense which was primarily driven by higher rates on our interest-bearing deposits.

| (dollars in thousands) | Nine Months Ended / September 30, 2024 vs. 2023 / Increase (Decrease) Due to / Volume | Nine Months Ended / September 30, 2024 vs. 2023 / Increase (Decrease) Due to / Rate | Nine Months Ended / September 30, 2024 vs. 2023 / Increase (Decrease) Due to / Rate/ Volume | Nine Months Ended / September 30, 2024 vs. 2023 / Increase (Decrease) Due to / Total | Nine Months Ended / September 30, 2023 vs. 2022 / Increase (Decrease) Due to / Volume | Nine Months Ended / September 30, 2023 vs. 2022 / Increase (Decrease) Due to / Rate | Nine Months Ended / September 30, 2023 vs. 2022 / Increase (Decrease) Due to / Rate/ Volume | Nine Months Ended / September 30, 2023 vs. 2022 / Increase (Decrease) Due to / Total |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Interest income |  |  |  |  |  |  |  |  |
| Loans | $6,121 | 11,617 | 582 | 18,320 | $20,388 | 16,507 | 4,191 | 41,086 |
| Investment securities | 573 | 786 | 161 | 1,520 | 99 | 1,179 | 82 | 1,360 |
| Federal funds sold and interest-bearing deposits with banks | 1,262 | 398 | 117 | 1,777 | 148 | 2,781 | 451 | 3,380 |
| Total interest income | 7,956 | 12,801 | 860 | 21,617 | 20,635 | 20,467 | 4,724 | 45,826 |
| Interest expense |  |  |  |  |  |  |  |  |
| Deposits | 1,981 | 16,151 | 496 | 18,628 | 1,656 | 45,190 | 9,626 | 56,472 |
| FHLB advances and other borrowings | 2,857 | (47) | (34) | 2,776 | 636 | 545 | 2,686 | 3,867 |
| Subordinated debentures | 3 | 41 | - | 44 | 4 | 389 | 1 | 394 |
| Total interest expense | 4,841 | 16,145 | 462 | 21,448 | 2,296 | 46,124 | 12,313 | 60,733 |
| Net interest income | $3,115 | (3,344) | 398 | 169 | $18,339 | (25,657) | (7,589) | (14,907) |

Net interest
income for the first nine months of 2024 was $58.8 million compared to $58.6 million for 2023, a $169,000, or 0.29%, increase. The increase
in net interest income during 2024 was driven by a $21.6 million increase in interest income, offset by a $21.4 million increase in interest
expense.

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 did not record a provision for credit losses during
the third quarter of 2024, compared to a reversal of $500,000 to the provision for credit losses in the third quarter of 2023. We recorded
a provision expense of $325,000 and $2.2 million for the nine months ended September 30, 2024 and September 30, 2023, respectively. No
provision was recorded in the third quarter of 2024 due to low charge-offs and insignificant loan growth. The reversal of $500,000 in
the third quarter of 2023, included a $100,000 reversal of provision for credit losses and a $400,000 reversal for unfunded commitments.
The reversal of the provision for credit losses was driven by lower expected loss rates, while the reversal of the reserve for unfunded
commitments was driven by a decrease in the balance of unfunded commitments at September 30, 2023, compared to the previous quarter and
year. The $325,000 provision expense for the first nine months of 2024 included $750,000 provision for credit losses and a $425,000 reversal
for unfunded commitments. The $2.2 million provision expense for the first nine months of 2023 included a $2.9 million provision for credit
losses and a $615,000 reversal for unfunded commitments.

Noninterest Income

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

| (dollars in thousands) | Three months ended September 30, 2024 | Three months ended September 30, 2023 | Nine months ended September 30, 2024 | Nine months ended September 30, 2023 |
| --- | --- | --- | --- | --- |
| Mortgage banking income | $1,449 | 1,208 | $4,536 | 3,167 |
| Service fees on deposit accounts | 455 | 356 | 1,265 | 1,011 |
| ATM and debit card income | 599 | 588 | 1,730 | 1,680 |
| Income from bank owned life insurance | 401 | 349 | 1,162 | 1,018 |
| Other income | 271 | 249 | 669 | 653 |
| Total noninterest income | $3,175 | 2,750 | $9,362 | 7,529 |

Noninterest income was $3.2 million for the third quarter
of 2024, a $425,000, or 15.5%, increase from noninterest income of $2.8 million for the third quarter of 2023. Mortgage banking income
continues to be the largest component of our noninterest income at $1.5 million for the third quarter of 2024, an increase of $241,000,
or 20.0%, over the prior year. The increase was driven by higher mortgage volume during the third quarter of 2024. Service fees on deposit
accounts increased $99,000, or 27.8%, over the prior year. The increase was driven by fee income on our commercial credit cards and additional
wire fee income.

Noninterest income was $9.4 million for the first nine
months of 2024, a $1.8 million, or 24.4%, increase from noninterest income of $7.5 million for the first nine months of 2023. Mortgage
banking income increased by $1.4 million, or 43.2%, over the prior year while service fees on deposit accounts increased $254,000, or
25.1%, from the first nine months of 2023.

*Noninterest expenses*

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

| (dollars in thousands) | Three months ended September 30, 2024 | Three months ended September 30, 2023 | Nine months ended September 30, 2024 | Nine months ended September 30, 2023 |
| --- | --- | --- | --- | --- |
| Compensation and benefits | $10,789 | 10,231 | $32,936 | 30,874 |
| Occupancy | 2,595 | 2,562 | 7,704 | 7,537 |
| Outside service and data processing costs | 1,930 | 1,744 | 5,738 | 5,078 |
| Insurance | 1,025 | 1,243 | 2,945 | 2,829 |
| Professional fees | 548 | 504 | 1,748 | 1,914 |
| Marketing | 319 | 293 | 1,077 | 994 |
| Other | 833 | 725 | 2,634 | 2,573 |
| Total noninterest expense | $18,039 | 17,302 | $54,782 | 51,799 |

Noninterest expense was $18.0
million for the third quarter of 2024, a $737,000, or 4.3%, increase from noninterest expense of $17.3 million for the third quarter
of 2023. The increase in noninterest expense was driven primarily by the following:

- Compensation and benefits expense increased $558,000, or 5.5%, relating primarily to an increase in salaries, equity compensation expenses, and other employee benefits expenses.
- Outside service and data processing costs increased $186,000, or 10.7%, relating primarily to increases in software licensing and maintenance costs.

Noninterest expense was $54.8 million for the first
nine months of 2024, a $3.0 million, or 5.8%, increase from noninterest expense of $51.8 million for the first nine months of 2023. The
increase in noninterest expense was driven primarily by the following:

- Compensation and benefits expense increased $2.1 million, or 6.7%, relating primarily to annual salary increases, bonuses, and equity compensation expenses.
- Outside service and data processing costs increased $660,000, or 13.0%, relating primarily to increases in item processing, electronic banking and software licensing and maintenance costs.
- Occupancy costs increased $167,000, or 2.2%, primarily due to depreciation on the Dream Mortgage Center which opened in the fourth quarter of 2023.
- Insurance costs increased $116,000, or 4.1%, as a result of higher FDIC insurance premiums.

Partially offsetting these increases, professional
fees decreased $166,000, or 8.7%, relating primarily to decreases in loan appraisal fees, legal fees and other consulting fees.

Our efficiency ratio was 75.9% for the third quarter
of 2024, compared to 78.3% for the third quarter of 2023. 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 improvement during the 2024 period is due to the higher level of net interest income recorded.

We incurred income tax expense of $1.3 million and
$1.2 million for the three months ended September 30, 2024 and 2023, respectively, and $3.1 million and $2.8 million for the nine months
ended September 30, 2024 and 2023, respectively. Our effective tax rate was 23.9% and 23.4% for the nine months ended September 30, 2024
and 2023, respectively. The higher tax rate during the first nine months of 2024 was driven by the effect of equity compensation transactions
during the period.

**Balance Sheet Review**

Investment Securities

At September 30, 2024, the $154.2 million in our investment
securities portfolio represented approximately 3.7% 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 $134.6 million and an amortized cost of $146.1 million, resulting in an unrealized loss of $11.5 million. At December
31, 2023, the $154.6 million in our investment securities portfolio represented approximately 3.8% of our total assets, including investment
securities with a fair value of $134.7 million and an amortized cost of $149.1 million for an unrealized loss of $14.4 million. In addition,
other investments, which include FHLB Stock and other nonmarketable investments, decreased $299,000 from December 31, 2023 to $19.6 million
at September 30, 2024.

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 nine months ended September 30, 2024 and 2023 were $3.62 billion and $3.46 billion,
respectively. Before the allowance for credit losses, total loans outstanding at September 30, 2024 and December 31, 2023 were $3.62 billion
and $3.60 billion, respectively.

The principal component of our
loan portfolio is loans secured by real estate mortgages. As of September 30, 2024, our loan portfolio included $3.05 billion, or 84.4%,
of real estate loans, compared to $3.05 billion, or 84.8%, at December 31, 2023. 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 $195.4 million as of September 30, 2024, of which approximately 45% were in a
first lien position, while the remaining balance was second liens. At December 31, 2023, our home equity lines of credit totaled $183.0
million, of which approximately 46% were in first lien positions, while the remaining balance was in second liens. The average home equity
loan had a balance of approximately $89,000 and a loan to value of 73% as of September 30, 2024, compared to an average loan balance of
$85,000 and a loan to value of approximately 73% as of December 31, 2023. Further, 0.3% and 0.8% of our total home equity lines of credit
were over 30 days past due as of September 30, 2024 and December 31, 2023, respectively.

Following is a summary of our loan composition at September
30, 2024 and December 31, 2023. During the first nine months of 2024, our loan portfolio increased by $16.9 million, or 0.47%, primarily
driven by a $15.5 million increase in consumer loans secured by real estate. Our consumer real estate portfolio
grew by $49.9 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 23 years, and an average rate of 4.33% as of September 30, 2024, compared to a principal
balance of $469,000, a term of 23 years, and an average rate of 4.10% as of December 31, 2023.

| (dollars in thousands) | September 30, 2024 / Amount | September 30, 2024 / % of Total | December 31, 2023 / Amount | December 31, 2023 / % of Total |
| --- | --- | --- | --- | --- |
| Commercial |  |  |  |  |
| Owner occupied RE | $642,608 | 17.8% | $631,657 | 17.5% |
| Non-owner occupied RE | 917,642 | 25.3% | 942,529 | 26.2% |
| Construction | 144,665 | 4.0% | 150,680 | 4.2% |
| Business | 521,535 | 14.4% | 500,161 | 13.9% |
| Total commercial loans | 2,226,450 | 61.5% | 2,225,027 | 61.8% |
| Consumer |  |  |  |  |
| Real estate | 1,132,371 | 31.3% | 1,082,429 | 30.0% |
| Home equity | 195,383 | 5.4% | 183,004 | 5.1% |
| Construction | 21,582 | 0.6% | 63,348 | 1.7% |
| Other | 43,770 | 1.2% | 48,819 | 1.4% |
| Total consumer loans | 1,393,106 | 38.5% | 1,377,600 | 38.2% |
| Total gross loans, net of deferred fees | 3,619,556 | 100.0% | 3,602,627 | 100.0% |
| Less—allowance for credit losses | (40,166) |  | (40,682) |  |
| Total loans, net | $3,579,390 |  | $3,561,945 |  |

We have included the table
below to provide additional clarity on our commercial real estate exposure. We have not identified any geographic concentrations
within these collateral types. Our level of non-owner occupied commercial real estate represents 257.3% of the Bank’s total risk-based capital at September 30, 2024.

| (dollars in thousands) | Outstanding | September 30, 2024 / % of Loan Portfolio | September 30, 2024 / Average Loan Size | September 30, 2024 / Weighted Average LTV |
| --- | --- | --- | --- | --- |
| Collateral |  |  |  |  |
| Office | $222,508 | 6.15% | $1,403 | 56% |
| Retail | 176,096 | 4.87% | 1,565 | 51% |
| Hotel | 126,529 | 3.50% | 7,250 | 48% |
| Multifamily | 107,915 | 2.98% | 2,958 | 47% |

*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 September
30, 2024 and December 31, 2023, we had no loans 90 days past due and still accruing.

Following is a summary of our nonperforming assets.

| (dollars in thousands) | September 30, 2024 | December 31, 2023 |
| --- | --- | --- |
| Commercial | $8,742 | 1,742 |
| Consumer | 2,841 | 2,221 |
| Total nonaccrual loans | 11,583 | 3,963 |
| Other real estate owned | - | - |
| Total nonperforming assets | $11,583 | 3,963 |

At September 30, 2024, nonperforming assets were $11.6
million, or 0.28% of total assets and 0.32% of gross loans. Comparatively, nonperforming assets were $4.0 million, or 0.10% of total assets
and 0.11% of gross loans at December 31, 2023. Nonaccrual loans increased $7.6 million during the first nine months of 2024 due primarily
to two relationships totaling $6.9 million that went on nonaccrual during the second quarter. The amount of foregone interest income on
nonaccrual loans in the first nine months of 2024 and 2023 was $134,000 and $48,000, respectively.

At September 30, 2024 and December 31, 2023, the allowance
for credit losses represented 346.78% and 1,026.58% of the total amount of nonperforming loans, respectively. A significant portion of
the nonperforming loans at September 30, 2024 were secured by real estate. 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 September 30, 2024, 84.4% of our loans
were collateralized by real estate and 98.8% 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 September 30, 2024, 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 individually
evaluated loans when we do not expect repayment to occur as agreed upon under the original terms of the loan agreement.

At September 30, 2024, individually evaluated loans
totaled $12.4 million with a reserve of approximately $1.6 million allocated in the allowance for credit losses. Comparatively, individually
evaluated loans totaled $4.8 million at December 31, 2023 for which $3.7 million of these loans had a reserve of approximately $688,000
allocated in the allowance for credit losses.

*Allowance for Credit Losses*

The allowance for credit losses was $40.2 million,
representing 1.11% of outstanding loans and providing coverage of 346.78% of nonperforming loans at September 30, 2024 compared to $40.7
million, or 1.13% of outstanding loans and 1,026.55% of nonperforming loans at December 31, 2023. At September 30, 2023, the allowance
for credit losses was $41.1 million, or 1.16% of outstanding loans and 953.25% 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 30% 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 $2.93 billion, or 83.3%
of total deposits, while our wholesale deposits represented $588.5 million, or 16.7%, of total deposits at September 30, 2024. At December
31, 2023, retail deposits represented $3.00 billion, or 88.8%, of our total deposits and wholesale deposits were $379.4 million, representing
11.2% of our total deposits. Our loan-to-deposit ratio was 103% at September 30, 2024 and 107% at December 31, 2023.

The following is a detail of our deposit accounts:

| (dollars in thousands) | September 30, 2024 | December 31, 2023 |
| --- | --- | --- |
| Non-interest bearing | $689,749 | 674,167 |
| Interest bearing: |  |  |
| NOW accounts | 339,412 | 310,218 |
| Money market accounts | 1,423,403 | 1,605,278 |
| Savings | 29,283 | 31,669 |
| Time, less than $250,000 | 223,582 | 190,167 |
| Time and out-of-market deposits, $250,000 and over | 813,396 | 568,065 |
| Total deposits | $3,518,825 | 3,379,564 |

Our primary focus is 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. While our non-interest bearing deposits increased by $15.6 million from $674.2 million at December
31, 2023, our core deposits decreased to $2.71 billion from $2.81 billion at December 31, 2023. In addition, at September 30, 2024 and
December 31, 2023, we estimate that we have approximately $1.3 billion, or 36.3% and 38.7% 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) | Nine months ended September 30, 2024 / Amount | Nine months ended September 30, 2024 / Rate | Nine months ended September 30, 2023 / Amount | Nine months ended September 30, 2023 / Rate |
| --- | --- | --- | --- | --- |
| Noninterest-bearing demand deposits | $669,911 | 0.00% | $726,661 | 0.00% |
| Interest-bearing demand deposits | 304,479 | 0.93% | 299,123 | 0.72% |
| Money market accounts | 1,555,198 | 4.10% | 1,675,181 | 3.53% |
| Savings accounts | 30,026 | 0.23% | 37,646 | 0.10% |
| Time deposits less than $250,000 | 213,748 | 4.66% | 119,069 | 3.78% |
| Time deposits greater than $250,000 | 656,330 | 5.14% | 469,807 | 4.31% |
| Total deposits | $3,429,692 | 3.22% | $3,327,487 | 2.58% |

During the first nine months of 2024, our average transaction
account balances decreased by $179.0 million, or 6.5%, from the prior year, while our average time deposit balances increased by $281.2
million, or 47.8%.

All of our time deposits are certificates of deposits.
The maturity distribution of our time deposits $250,000 or more at September 30, 2024 was as follows:

| (dollars in thousands) | September 30, 2024 |
| --- | --- |
| Three months or less | $118,352 |
| Over three through six months | 205,059 |
| Over six through twelve months | 266,240 |
| Over twelve months | 223,745 |
| Total | $813,396 |

Time deposits that meet or exceed the FDIC insurance
limit of $250,000 at September 30, 2024 and December 31, 2023 were $813.4 million and $568.1 million, respectively. We have a relationship
with IntraFi Promontory Network, allowing us to provide deposit customers with access to aggregate FDIC insurance in amounts exceeding
$250,000. This gives us the ability, as and when needed, to attract and retain large deposits from insurance conscious customers. With
IntraFi, we have the option to keep deposits on balance sheet or sell them to other members of the network.

At September 30, 2024, we had $240.0 million of convertible
fixed rate FHLB advances with a weighted average rate of 3.74%, while at December 31, 2023, we had $275.0 million in FHLB Advances. Of
the $275.0 million outstanding at December 31, 2023, $35.0 million was at a variable rate and $240.0 million was at fixed rates. At September
30, 2024, the $240.0 million was secured with approximately $1.24 billion of mortgage loans and $14.5 million of stock in the FHLB. At
December 31, 2023, the $275.0 million was secured with approximately $1.25 billion of mortgage loans and $16.1 million of stock in the
FHLB.

Listed below is a summary of the terms and maturities
of the advances outstanding at September 30, 2024 and December 31, 2023.

| (dollars in thousands) / Maturity | September 30, 2024 / Amount | September 30, 2024 / Rate | December 31, 2023 / Amount | December 31, 2023 / Rate |
| --- | --- | --- | --- | --- |
| February 29, 2024 | - | - | $35,000 | 5.57% |
| April 28, 2028 | 40,000 | 3.51% | 40,000 | 3.51% |
| May 15, 2028 | - | - | 35,000 | 3.13% |
| June 28, 2028 | 40,000 | 3.54% | 40,000 | 3.54% |
| July 10, 2028 | - | - | 45,000 | 3.78% |
| July 10, 2028 | 40,000 | 3.87% | 40,000 | 3.87% |
| July 10, 2028 | 40,000 | 3.96% | 40,000 | 3.96% |
| May 15, 2029 | 35,000 | 3.90% | - | - |
| July 10, 2029 | 45,000 | 3.69% | - | - |
|  | $240,000 | 3.74% | $275,000 | 3.89% |

**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 several large bank failures across the United States in
the first five months of 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 institution’s 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 September 30, 2024 and December 31, 2023, our cash
and cash equivalents totaled $260.6 million and $156.2 million, respectively, or 6.2% and 3.9% of total assets, respectively. Our investment
securities at September 30, 2024 and December 31, 2023 amounted to $154.2 million and $154.6 million, respectively, or 3.7% and 3.8% 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 six federal funds purchased lines of credit with
correspondent banks totaling $128.5 million for which there were no borrowings against the lines of credit at September 30, 2024. We also
had $172.8 million pledged and available with the Federal Reserve Discount Window at September 30, 2024. Comparatively, at December 31,
2023, we had $227.1 million pledged and available with the Federal Reserve Discount Window. At December 31, 2023, we had $13.0 million
of marketable investment securities pledged in the Federal Reserve’s Bank Term Funding Program which closed on March 11, 2024.

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 September 30, 2024 was $716.7
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 September 30, 2024 and December
31, 2023 we had $276.5 million and $388.3 million, respectively, of letters of credit outstanding with the FHLB to secure client deposits.

We have a relationship with IntraFi Promontory Network,
allowing us to provide deposit customers with access to aggregate FDIC insurance in amounts exceeding $250,000. This gives us the ability,
as and when needed, to attract and retain large deposits from insurance conscious customers. With IntraFi, we have the option to keep
deposits on balance sheet or sell them to other members of the network. Additionally, subject to certain limits, the Bank can use IntraFi
to purchase cost-effective funding without collateralization and in lieu of generating funds through traditional brokered CDs or the FHLB.
In this manner, IntraFi can provide us with another funding option. Thus, it serves as a deposit-gathering tool and an additional liquidity
management tool. Under the Economic Growth, Regulatory Relief, and Consumer Protection Act, a well capitalized bank with a CAMELS rating
of 1 or 2 may hold reciprocal deposits up to the lesser of 20% of its total liabilities or $5 billion without those deposits being treated
as brokered deposits.

We also have a line of credit with another financial
institution for $15.0 million, which was unused at September 30, 2024. The line of credit was issued on December 28, 2023 at an interest
rate of the U.S. Prime Rate plus 0.25% and a maturity date of February 28, 2025.

On September 30, 2024, in conjunction with the semi-annual
interest payment, we redeemed $11.5 million of our outstanding subordinated debt. Beginning September 30, 2024, the interest rate shall
reset quarterly to an interest rate per annum equal to the Three-Month Term SOFR plus 340.8 basis points, payable quarterly in arrears.

We believe that our existing
stable base of core deposits, federal funds purchased lines of credit with correspondent banks, availability with the Federal Reserve
Discount Window, 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 $326.5 million
at September 30, 2024 and $312.5 million at December 31, 2023. The $14.1 million increase from December 31, 2023 is primarily related
to net income of $9.9 million during the first nine months of 2024, stock option exercises and equity compensation expenses of $1.9 million,
and a $2.3 million decrease in other comprehensive loss related to our available for sale securities.

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 nine months ended September 30, 2024 and the year ended December 31, 2023. Since our inception, we have not paid cash
dividends.

| Line item | September 30, 2024 | December 31, 2023 |
| --- | --- | --- |
| Return on average assets | 0.32% | 0.34% |
| Return on average equity | 4.16% | 4.44% |
| Return on average common equity | 4.16% | 4.44% |
| Average equity to average assets ratio | 7.79% | 7.71% |
| Tangible common equity to assets ratio | 7.82% | 7.70% |

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 as Basel
III, impose minimum capital requirements for bank holding companies and banks. The Basel III rules apply to all national and state banks
and savings 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 September 30, 2024 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 | September 30, 2024 / For capital adequacy purposes minimum plus the capital conservation buffer / Amount | September 30, 2024 / For capital adequacy purposes minimum plus the capital conservation buffer / Ratio | September 30, 2024 / To be well capitalized under prompt corrective action provisions minimum / Amount | September 30, 2024 / To be well capitalized under prompt corrective action provisions minimum / Ratio |
| --- | --- | --- | --- | --- | --- | --- |
| Total Capital (to risk weighted assets) | $396,451 | 12.50% | $253,645 | 8.00% | $317,056 | 10.00% |
| Tier 1 Capital (to risk weighted assets) | 356,812 | 11.25% | 190,233 | 6.00% | 253,645 | 8.00% |
| Common Equity Tier 1 Capital (to risk weighted assets) | 356,812 | 11.25% | 142,675 | 4.50% | 206,086 | 6.50% |
| Tier 1 Capital (to average assets) | 356,812 | 8.70% | 164,141 | 4.00% | 205,176 | 5.00% |

| (dollars in thousands) | Actual / Amount | Actual / Ratio | December 31, 2023 / For capital adequacy purposes minimum plus the capital conservation buffer / Amount | December 31, 2023 / For capital adequacy purposes minimum plus the capital conservation buffer / Ratio | December 31, 2023 / To be well capitalized under prompt corrective action provisions minimum / Amount | December 31, 2023 / To be well capitalized under prompt corrective action provisions minimum / Ratio |
| --- | --- | --- | --- | --- | --- | --- |
| Total Capital (to risk weighted assets) | $390,197 | 12.28% | $254,278 | 8.00% | $317,847 | 10.00% |
| Tier 1 Capital (to risk weighted assets) | 350,455 | 11.03% | 190,708 | 6.00% | 254,278 | 8.00% |
| Common Equity Tier 1 Capital (to risk weighted assets) | 350,455 | 11.03% | 143,031 | 4.50% | 206,601 | 6.50% |
| Tier 1 Capital (to average assets) | 350,455 | 8.47% | 165,414 | 4.00% | 206,767 | 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 | September 30, 2024 / For capital adequacy purposes minimum plus the capital conservation buffer (1) / Amount | September 30, 2024 / For capital adequacy purposes minimum plus the capital conservation buffer (1) / Ratio | September 30, 2024 / To be well capitalized under prompt corrective action provisions minimum / Amount | September 30, 2024 / To be well capitalized under prompt corrective action provisions minimum / Ratio |
| --- | --- | --- | --- | --- | --- | --- |
| Total Capital (to risk weighted assets) | $399,736 | 12.61% | $253,631 | 8.00% | N/A | N/A |
| Tier 1 Capital (to risk weighted assets) | 348,600 | 11.00% | 190,223 | 6.00% | N/A | N/A |
| Common Equity Tier 1 Capital (to risk weighted assets) | 335,600 | 10.59% | 142,667 | 4.50% | N/A | N/A |
| Tier 1 Capital (to average assets) | 348,600 | 8.49% | 164,164 | 4.00% | N/A | N/A |
|  |  |  | December 31, 2023 |  |  |  |
|  | Actual |  | For capital adequacy purposes minimum plus the capital conservation buffer |  | To be well capitalized under prompt corrective action provisions minimum(1) |  |
| (dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio |
| Total Capital (to risk weighted assets) | $399,551 | 12.57% | $254,278 | 8.00% | N/A | N/A |
| Tier 1 Capital (to risk weighted assets) | 336,809 | 10.60% | 190,708 | 6.00% | N/A | N/A |
| Common Equity Tier 1 Capital (to risk weighted assets) | 323,809 | 10.19% | 143,031 | 4.50% | N/A | N/A |
| Tier 1 Capital (to average assets) | 336,809 | 8.14% | 165,436 | 4.00% | N/A | N/A |

*(1)* *The prompt corrective action provisions are only applicable at the Bank level. The Bank exceeded the general minimum regulatory requirements to be considered “well capitalized.”*

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 September 30, 2024 unfunded commitments to
extend credit were $699.9 million, of which $76.3 million were at fixed rates and $623.6 million were at variable rates. At December 31,
2023, unfunded commitments to extend credit were $724.6 million, of which approximately $145.6 million were at fixed rates and $579.0
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 September
30, 2024, the reserve for unfunded commitments was $1.4 million or 0.20% of total unfunded commitments. As of December 31, 2023, the reserve
for unfunded commitments was $1.8 million or 0.25% of total unfunded commitments.

At September 30, 2024 and December 31, 2023, there
were commitments under letters of credit for $13.6 million and $16.1 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, 2023, 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 no less than quarterly and a board risk committee that
meets quarterly. These committees are responsible for maintaining the level of interest rate sensitivity of our interest sensitive assets
and liabilities within board-approved limits.

As of September 30, 2024, 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 | (9.34 |
| Up 200 basis points | (5.57 |
| Up 100 basis points | (2.23 |
| Base | - |
| Down 100 basis points | 3.73% |
| Down 200 basis points | 12.73% |
| Down 300 basis points | 26.29% |

## 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 nine months ended September 30, 2024, 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,
2023, 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.

There have been no material changes to the risk
factors previously disclosed in the Company’s (i) Annual Report on Form 10-K for fiscal year ended December 31, 2023.

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

(a) Sales of Unregistered Securities - None

(b) Use of Proceeds – Not applicable

(c) Issuer Purchases of Securities

As of September 30, 2024, the Company does not have an authorized share
repurchase program.

## Item 3. DEFAULTS UPON SENIOR SECURITIES.

None.

## Item 4. MINE SAFETY DISCLOSURES.

Not applicable.

## Item 5. OTHER INFORMATION.

Trading Plans

During the nine months ended September 30, 2024, no director or “officer”
of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,”
as each term is defined in Item 408 of Regulation S-K of the Securities Act of 1933.

## 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 |
| --- | --- |
| 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 September 30, 2024, 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) |

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: November 1, 2024 /s/R. Arthur Seaver, Jr.

R. Arthur Seaver, Jr.

Chief Executive Officer (Principal Executive Officer)

Date: November 1, 2024 /s/Christian J. Zych

Christian J. Zych

Chief Financial Officer (Principal Financial Officer)

47

---

## CERTIFICATION

SEC source: [sfst4399411-ex311.htm](https://www.sec.gov/Archives/edgar/data/1090009/000120677424000990/sfst4399411-ex311.htm)

**Exhibit 31.1**

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

**Exhibit 31.1**

|  |  |  |
| --- | --- | --- |
| 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: November 1, 2024 By: /s/ R. Arthur Seaver, Jr.

R. Arthur Seaver, Jr.

Chief Executive Officer

---

## CERTIFICATION

SEC source: [sfst4399411-ex312.htm](https://www.sec.gov/Archives/edgar/data/1090009/000120677424000990/sfst4399411-ex312.htm)

**Exhibit 31.2**

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

---

**Exhibit 31.2**

|  |  |  |
| --- | --- | --- |
| 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: November 1, 2024 By: /s/Christian J. Zych

Christian J. Zych

Principal Financial Officer

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## CERTIFICATION

SEC source: [sfst4399411-ex32.htm](https://www.sec.gov/Archives/edgar/data/1090009/000120677424000990/sfst4399411-ex32.htm)

**Exhibit 32**

Section 1350 Certifications.

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**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 Principal 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 September 30, 2024 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: November 1, 2024

/s/ Christian J. Zych

Christian J. Zych

Principal Financial Officer

Date: November 1, 2024