UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K x Annual Report Pursuant To Section 13 Or 15(d) of The Securities
                        Exchange Act Of 1934 For The Fiscal Year December 31, 2009. 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 of Incorporation)
                           
                           
                           
                           
                           
                           (I.R.S. Employer Identification No.)100 Verdae Boulevard, Greenville, SC
                           
                           
                           
                           
                           
                           29607(Address of principal executive offices)
                           
                           
                           
                           
                           
                           (Zip Code)  864-679-9000(Telephone Number) Securities registered pursuant to Section 12(b) of the Act:  Title of class
                           
                           
                           Name of each exchange on which registeredCommon Stock
                           
                           
                           The NASDAQ Global Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned
                     issuer, as defined in Rule 405 of the Securities Act. Yes o No x Indicate by check mark if the registrant is not required to file
                     reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
                      Yes o No x Indicate by check mark whether the registrant (1) has filed all
                     reports required to be filed by Section 13 or 15(d) of the Securities
                     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 and posted on its corporate Web site, if any, every
                     Interactive Data File required to be submitted and posted pursuant to
                     Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
                     preceding 12 months (or for such shorter period that the registrant
                     was required to submit and post such files). Yes o No o Indicate by check mark if disclosure of delinquent filers pursuant to
                     Item 405 of Regulation S-K is not contained herein, and will not be
                     contained, to the best of registrant's knowledge, in definitive proxy
                     or information statements incorporated by reference in Part III of
                     this Form 10-K or any amendment to this Form 10-K. x Indicate by check mark whether the registrant is a large accelerated
                     filer, an accelerated filer, or a non-accelerated filer. See
                     definition of "accelerated filer and large accelerated filer" in Rule
                     12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller Reporting Company x 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 The aggregate market value of the voting common stock held by
                     non-affiliates of the registrant (computed by reference to the price
                     at which the common stock was recently sold) was $17,927,071 as of
                     the last business day of the registrant's most recently completed
                     second fiscal quarter. 3,135,206 shares of the registrant's common stock were outstanding as of March 1, 2010 DOCUMENTS INCORPORATED BY REFERENCE  Proxy Statement for the Annual Meeting of Shareholders to be held on May 18, 2010.
                           
                           
                           Part III (Portions of Items 10-14)


CAUTIONARY STATEMENT REGARDINGFORWARD-LOOKING STATEMENTS This Report, including information included or incorporated by
                     reference in this document, 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. Forward-looking statements may relate to our financial
                     condition, results of operation, 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,"
                     "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, those
                     described below under Item 1A- Risk Factors and the following:  reduced earnings due to higher credit losses generally and
                        specifically because losses in the sectors of our loan portfolio
                        secured by real estate are greater than expected due to economic
                        factors, including, but not limited to, declining real estate values,
                        increasing interest rates, increasing unemployment, or changes in
                        payment behavior or other factors;
                     reduced earnings due to higher credit losses because our loans are
                        concentrated by loan type, industry segment, borrower type, or
                        location of the borrower or collateral;
                     the thigh concentration of our real estate-based loans collateralized
                        by real estate in a weak commercial real estate market;
                     significant increases in competitive pressure in the banking and
                        financial services industries;
                     changes in the interest rate environment which could reduce anticipated margins;
                     changes in political conditions or the legislative or regulatory environment;
                     general economic conditions, either nationally or regionally and
                        especially in our primary service area, being less favorable than
                        expected resulting in, among other things, a deterioration in credit
                        quality;
                     changes occurring in business conditions and inflation;
                     changes in deposit flows;
                     changes in technology;
                     changes in monetary and tax policies;
                     adequacy of the level of our allowance for loan loss;
                     the rate of delinquencies and amount of loans charged-off;
                     the rate of loan growth;
                     adverse changes in asset quality and resulting credit risk-related
                        losses and expenses;
                     loss of consumer confidence and economic disruptions resulting from
                        terrorist activities;
                     changes in the securities markets; and
                     other risks and uncertainties detailed from time to time in our
                        filings with the Securities and Exchange Commission. These risks are exacerbated by the developments over the past two
                     years in national and international financial markets, and we are
                     unable to predict what effect these uncertain market conditions will
                     have on our Company. During 2008 and 2009, the capital and credit
                     markets experienced unprecedented levels of extended volatility and
                     disruption. There can be no assurance that these unprecedented recent
                     developments will not materially and adversely affect our business,
                     financial condition and results of operations. All forward-looking statements in this report are based on
                     information available to us as of the date of this report. Although
                     we believe that the expectations reflected in our forward-looking
                     statements are reasonable, we cannot guarantee you that these
                     expectations will be achieved. We undertake no obligation to publicly
                     update or otherwise revise any forward-looking statements, whether as
                     a result of new information, future events, or otherwise.
 1


PART I Item 1. Business General Southern First Bancshares, Inc.(the "company") is a South Carolina corporation that owns all of the
                     capital stock of Southern First Bank, N.A. (the "bank") and all of
                     the stock of Greenville First Statutory Trust I and II (collectively,
                     the "Trusts"). On July 2, 2007, the company and bank changed their name to Southern First
                     Bancshares, Inc. and Southern First Bank, N.A., respectively. The
                     bank is a national bank organized under the laws of the United States
                     with offices located in Greenville and Richland Counties, South
                     Carolina. The bank is primarily engaged in the business of accepting
                     demand deposits and savings deposits insured by the Federal Deposit
                     Insurance Corporation (the "FDIC"), and providing commercial,
                     consumer and mortgage loans to the general public. The Trusts are
                     special purpose subsidiaries organized for the sole purpose of
                     issuing trust preferred securities. On February 27, 2009, as part of the U.S. Treasury Department's (the "Treasury
                     Department") Capital Purchase Program (the "CPP"), the company
                     entered into a Letter Agreement and a Securities Purchase Agreement
                     (collectively, the "CPP Purchase Agreement") with the Treasury,
                     pursuant to which the company sold 17,299 shares of its Fixed Rate
                     Cumulative Perpetual Preferred Stock, Series T (the "Series T
                     Preferred Stock") and a warrant (the "CPP Warrant") to purchase
                     330,554 shares of the company's common stock for an aggregate
                     purchase price of $17.3 million in cash. The Series T Preferred Stock
                     qualifies as Tier 1 capital and is entitled to cumulative dividends
                     at a rate of 5% per annum for the first five years, and 9% per annum
                     thereafter. The company must consult with the Office of the
                     Comptroller of the Currency ("OCC") before it may redeem the Series T
                     Preferred Stock but, contrary to the original restrictions in the
                     Emergency Economic Stabilization Act of 2008 (the "EESA"), will not
                     necessarily be required to raise additional equity capital in order
                     to redeem this stock. The CPP Warrant has a 10-year term and is
                     immediately exercisable upon its issuance, with an exercise price,
                     subject to anti-dilution adjustments equal to $7.85 per share of the
                     common stock. The fair value allocation of the $17.3 million between
                     the shares of Series T Preferred Stock and the CPP Warrant resulted
                     in $15.9 million allocated to the shares of Series T Preferred Stock
                     and $1.4 million allocated to the CPP Warrant. Non-GAAP Financial Information This report also contains financial information determined by methods
                     other than in accordance with Generally Accepted Accounting
                     Principles ("GAAP"). Management uses these non-GAAP measures to
                     analyze the company's performance in comparison to prior years.
                     During 2008, the company recorded an other than temporary impairment
                     charge of $1.9 million on our Fannie Mae preferred stock. Also,
                     during 2007 the company recorded a $319,291 gain on sale of long
                     lived assets. These items are discussed further in "Income Statement
                     Review  Noninterest income (loss)." Management uses operating
                     measures, which exclude the impairment charges and gain on sale of
                     long lived assets, in the calculation of certain company ratios to
                     analyze on a consistent basis and over a longer period of time, the
                     performance of which it considers to be its core banking operations.
                     These disclosures should not be viewed as a substitute for GAAP
                     measures, and furthermore, the company's non-GAAP measures may not
                     necessarily be comparable to non-GAAP performance measures of other
                     companies. (See Item 6. Selected Financial Data.) Marketing Focus We commenced operations in January 2000 and at that time were the
                     first community bank organized in the city of Greenville, South
                     Carolina in over 10 years. During the 1990s, several community banks
                     operating in the Greenville market were acquired by larger regional
                     financial institutions. We formed the bank to take advantage of
                     market opportunities resulting from this continued consolidation of
                     the financial services industry. Responding to this opportunity, we
                     created a marketing plan focusing on the professional market in
                     Greenville, including doctors, dentists, and small business owners.
                     We serve this market with a client-focused structure called
                     relationship teams, which provides each client with a specific banker
                     contact and support team responsible for all of the client's 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." We emphasize this ClientFIRST culture in the training
                     that we provide our employees, and we strive to reflect this
                     ClientFIRST culture in all aspects of our business. During 2007, we
                     opened an office in Columbia, South Carolina, broadening our market
                     to include Richland and Lexington Counties and utilizing the same
                     client-focused structure, culture, and marketing plan. In conjunction
                     with our entrance into this new market, we changed the name of our
                     bank to Southern First Bank; however, we continue to operate as
                     Greenville First Bank in Greenville County.
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Location and Service Area Historically, our primary market was Greenville County, South
                     Carolina. In January 2007, we entered into the Columbia market which
                     includes Richland and Lexington Counties. Greenville County is located in the upstate region of South Carolina,
                     approximately midway between Atlanta and Charlotte on the heavily
                     traveled I-85 business corridor. It is South Carolina's most populous
                     county with approximately 441,000 residents. Greenville is also one
                     of the state's wealthiest counties, with estimated median household
                     income of $53,000 for 2009. In the past decade, Greenville County has
                     attracted more than $6 billion in new business investments and 43,000
                     new jobs and continues to trend in this direction. Greenville County
                     is considered the "economic engine of South Carolina" and was
                     recognized by Expansion Management Magazine in 2007 as the 3rd top real estate market in the country for expanding and relocating businesses. We opened our first branch office, located on The Parkway near
                     Thornblade Country Club in Greenville, in March 2005 and our second
                     branch office, located in the mature and historic Augusta Road area
                     of Greenville, in November 2005. On July 7, 2008, we opened our third branch office in Greenville County, located in
                     the fast-growing area of Woodruff Road. We believe that the
                     demographics and growth characteristics of these locations will
                     provide us with significant opportunities to further develop existing
                     client relationships and expand our client base. Columbia, South Carolina is the State capital and largest city in the
                     State. Columbia is home to Fort Jackson, the largest and most active
                     initial entry training center of the United States Army. Richland
                     County is the 2nd largest county in the State with a population of approximately
                     369,000 residents, while Lexington County is the 5th largest county with a population of approximately 251,000. From 2000
                     to 2009, the combined estimated population of Richland and
                     neighboring Lexington counties grew approximately 15.4% to an
                     estimated 619,000. The median household income for Richland and
                     Lexington Counties combined was $55,000 for 2009. In January 2007, we opened our first office in Columbia as a loan
                     production office which became a full-service branch in July 2007. On July 14, 2008 we opened our second branch office in the Columbia market which is
                     located on Sunset Avenue in Lexington. On August 2, 2009 we opened our Columbia regional headquarters building located on
                     Knox Abbott Drive and subsequently closed our temporary office
                     location on Lady Street. Lending Activities General. We emphasize a range of lending services, including real estate,
                     commercial, and equity-line consumer loans to individuals and small-
                     to medium-sized businesses and professional firms that are located in
                     or conduct a substantial portion of their business in our market
                     area. Our underwriting standards vary for each type of loan, as
                     described below. Since loans typically provide higher interest yields
                     than other types of interest-earning assets, we invest a substantial
                     percentage of our earning assets in our loan portfolio. At December 31, 2009, we had net loans of $566.5 million, representing 78.8% of our total assets. We have focused our lending activities primarily on the professional
                     markets in Greenville and Columbia, including doctors, dentists, and
                     small business owners. By focusing on this client base and by serving
                     each client with a consistent relationship team of bankers, we have
                     generated a loan portfolio with larger average loan amounts than we
                     believe is typical for a community bank. As of December 31, 2009, our average loan size was approximately $208,000. Excluding home
                     equity lines of credit, the average loan size was approximately
                     $287,000. At the same time, we have strived to maintain a diversified
                     loan portfolio and limit the amount of our loans to any single
                     client. As of December 31, 2009, our 10 largest client loan relationships represented approximately
                     $56.0 million, or 9.9% of our loan portfolio. Loan Approval. Certain credit risks are inherent in making loans. These include
                     prepayment risks, risks resulting from uncertainties in the future
                     value of collateral, risks resulting from changes in economic and
                     industry conditions, and risks inherent in dealing with individual
                     borrowers. We attempt to mitigate repayment risks by adhering to
                     internal credit policies and procedures. These policies and
                     procedures include officer and client lending limits, a multi-layered
                     approval process for larger loans, documentation examination, and
                     follow-up procedures for any exceptions to credit policies. Our loan
                     approval policies provide for various levels of officer lending
                     authority. When the amount of aggregate loans to a single borrower
                     exceeds an individual officer's lending authority, the loan request
                     will be considered by an officer with a higher lending limit or by
                     the officers' loan committee, which is comprised of our four most
                     senior lenders and our chief credit officer. The officers' loan
                     committee has pre-determined lending limits, and any loans in excess
                     of this lending limit will be submitted for approval by the finance
                     committee of our board or by the full board. We do not make any loans
                     to any director or executive
 3


officer of the bank unless the loan is approved by the board of
                     directors of the bank and all loans to directors, officers and
                     employees are on terms not more favorable to such person than would
                     be available to a person not affiliated with the bank, consistent
                     with federal banking regulations. Management monitors exposure to credit risk from potential
                     concentrations of loans to particular borrowers or groups of
                     borrowers, industries and geographic regions, as well as
                     concentrations of lending products and practices such as loans that
                     subject borrowers to substantial payment increases (e.g. principal
                     deferral periods, loans with initial interest-only periods, etc.),
                     and loans with high loan-to-value ratios. As of December 31, 2009, approximately $69.1 million, or 12.0% of our loans had
                     loan-to-value ratios which exceeded regulatory supervisory limits, of
                     which 88 loans totaling approximately $18.4 million had loan-to-value
                     ratios of 100% or more. These types of loans are subject to strict
                     underwriting standards and are more closely monitored than a loan
                     with a low loan-to-value ratio. In addition, our allowance for loan
                     loss model considers and allocates a higher reserve for these types
                     of loans. Furthermore, there are industry practices that could
                     subject the company to increased credit risk should economic
                     conditions change over the course of a loan's life. For example, the
                     company makes variable rate loans and fixed rate principal-amortizing
                     loans with maturities prior to the loan being fully paid (i.e.
                     balloon payment loans). The various types of loans are individually
                     underwritten and monitored to manage the associated risks. Credit Administration and Loan Review. We maintain a continuous loan review system. We also apply a credit
                     grading system to each loan, and we use an independent process to
                     review the loan files on a test basis to assess the grading of each
                     loan. The bank has a chief credit officer that reviews performance
                     benchmarks established by management in the areas of nonperforming
                     assets, charge-offs, past dues, and loan documentation. Each loan
                     officer is responsible for each loan he or she makes, regardless of
                     whether other individuals or committees joined in the approval. This
                     responsibility continues until the loan is repaid or until the loan
                     is officially assigned to another officer. Lending Limits. Our lending activities are subject to a variety of lending limits
                     imposed by federal law. In general, the bank is subject to a legal
                     limit on loans to a single borrower equal to 15% of the bank's
                     capital and unimpaired surplus. Based upon the capitalization of the
                     bank at December 31, 2009, the maximum amount we could lend to one borrower is $11.7 million.
                     However, our internal lending limit at December 31, 2009 is $6.0 million and may vary based on our assessment of the lending
                     relationship. The board of directors will adjust the internal lending
                     limit as deemed necessary to continue to mitigate risk and serve the
                     bank's clients. The bank's legal lending limit will increase or
                     decrease in response to increases or decreases in the bank's level of
                     capital. We are able to sell participations in our larger loans to
                     other financial institutions, which allow us to manage the risk
                     involved in these loans and to meet the lending needs of our clients
                     requiring extensions of credit in excess of these limits. Real Estate Mortgage Loans. The principal component of our loan portfolio is loans secured by
                     real estate mortgages. We obtain a security interest in real estate
                     whenever possible, in addition to any other available collateral, in
                     order to increase the likelihood of the ultimate repayment of the
                     loan. At December 31, 2009, loans secured by first or second mortgages on real estate made up
                     approximately 79.0% of our loan portfolio. These loans will generally fall into one of four categories:
                     commercial real estate loans, construction and development loans,
                     residential real estate loans, or home equity loans. Most of our real
                     estate loans are secured by residential or commercial property.
                     Interest rates for all categories may be fixed or adjustable, and
                     will more likely be fixed for shorter-term loans. We generally charge
                     an origination fee for each loan which is taken into income over the
                     life of the loan as an adjustment to the loan yield. Other loan fees
                     consist primarily of late charge fees. Real estate loans are subject
                     to the same general risks as other loans and are particularly
                     sensitive to fluctuations in the value of real estate. Fluctuations
                     in the value of real estate, as well as other factors arising after a
                     loan has been made, could negatively affect a borrower's cash flow,
                     creditworthiness, and ability to repay the loan. Although, the loans
                     are collateralized by real estate, the primary source of repayment
                     may not be the sale of real estate.  Commercial Real Estate Loans. At December 31, 2009, commercial real estate loans (other than construction loans)
                        amounted to $293.0 million, or approximately 51.0% of our loan
                        portfolio. Of our commercial real estate loan portfolio, $160.5
                        million in loans were not owner-occupied properties, representing
                        54.8% of our commercial real estate portfolio and 27.9% of our total
                        loan portfolio. The remainder of our commercial real estate loan
                        portfolio, $132.6 million in loans or 45.2% of the commercial loan
                        portfolio, were owner-occupied. Owner-occupied loans represented
                        23.1% of our total loan portfolio. At December 31, 2009, our individual commercial real estate loans ranged in size from
                        approximately $2,700 to $3.7 million, with an average loan size of
                        approximately $478,000. These loans generally have terms of five
                        years or less, although payments may be structured on a longer
                        amortization basis. We evaluate each borrower on an individual basis
                        and attempt to determine the business risks and credit profile of
                        each borrower. We attempt to reduce credit risk in the commercial
                        real estate portfolio by emphasizing loans on
 4


owner-occupied office and retail buildings where the loan-to-value
                        ratio, established by independent appraisals, does not exceed 85%. We
                        also generally require that a borrower's cash flow exceeds 115% of
                        monthly debt service obligations. In order to ensure secondary
                        sources of payment and liquidity to support a loan request, we
                        typically review all of the personal financial statements of the
                        principal owners and require their personal guarantees.  Construction and Development Real Estate Loans.We offer adjustable and fixed rate residential and commercial
                        construction loans to builders and developers and to consumers who
                        wish to build their own homes. At December 31, 2009, total construction loans amounted to $30.7 million, or 5.4% of our
                        loan portfolio. Included in the $30.7 million was $22.7 million, or
                        4.0% of our loan portfolio, that were commercial construction, and
                        $7.9 million, or 1.4% of our loan portfolio, that were consumer
                        construction loans. At December 31, 2009, our commercial construction and development real estate loans
                        ranged in size from approximately $27,000 to $3.5 million, with an
                        average loan size of approximately $650,000. At December 31, 2009, our individual residential construction and development real estate
                        loans ranged in size from approximately $34,000 to $1.8 million, with
                        an average loan size of approximately $496,000. The duration of our
                        construction and development loans generally is limited to 18 months,
                        although payments may be structured on a longer amortization basis.
                        Commercial construction and development loans generally carry a
                        higher degree of risk than long-term financing of existing properties
                        because repayment depends on the ultimate completion of the project
                        and sometimes on the sale of the property. Specific risks include:  cost overruns;  mismanaged construction;  inferior or improper construction techniques;  economic changes or downturns during construction;  a downturn in the real estate market;  rising interest rates which may prevent sale of the property; and  failure to sell completed projects in a timely manner. We attempt to reduce the risk associated with construction and
                     development loans by obtaining personal guarantees where possible and
                     by keeping the loan-to-value ratio of the completed project at or
                     below 80%.  Residential Real Estate Loans and Home Equity Loans. We do not generally originate traditional long term residential
                        mortgages, but we do issue traditional second mortgage residential
                        real estate loans and home equity lines of credit. At December 31, 2009, residential real estate loans (other than construction loans)
                        amounted to $129.7 million, or 22.6% of our loan portfolio. Included
                        in the residential real estate loans was $55.4 million, or 9.6% of
                        our loan portfolio, in first and second mortgages on individuals'
                        homes, and $74.3 million, or 13.0% of our loan portfolio, in home
                        equity loans. At December 31, 2009, our individual residential real estate loans ranged in size from
                        $12,700 to $2.7 million, with an average loan size of approximately
                        $270,000. Generally, we limit the loan-to-value ratio on our
                        residential real estate loans to 85%. We offer fixed and adjustable
                        rate residential real estate loans with terms of up to 30 years. We
                        typically offer these fixed rate loans through a third party rather
                        than originating and retaining these loans ourselves. We also offer
                        home equity lines of credit. At December 31, 2009, our individual home equity lines of credit ranged in size from
                        $1,200 to $1.8 million, with an average of approximately $109,000.
                        Our underwriting criteria and the risks associated with home equity
                        loans and lines of credit are generally the same as those for first
                        mortgage loans. Home equity lines of credit typically have terms of
                        five years or less. We generally limit the extension of credit to 90%
                        of the market value of each property, although we may extend up to
                        100% of the market value. Commercial Business Loans. We make loans for commercial purposes in various lines of
                     businesses, including the manufacturing, service industry, and
                     professional service areas. At December 31, 2009, commercial business loans amounted to $110.5 million, or 19.3% of
                     our loan portfolio, and ranged in size from approximately $1,000 to
                     $2.6 million, with an average loan size of approximately $162,000.
                     Commercial loans are generally considered to have greater risk than
                     first or second mortgages on real estate because commercial loans may
                     be unsecured, or if they are secured, the value of the collateral may
                     be difficult to assess and more likely to decrease than real estate. We are eligible to offer small business loans utilizing government
                     enhancements such as the Small Business Administration's ("SBA") 7(a)
                     program and SBA's 504 programs. These loans typically are partially
                     guaranteed by the
 5


government, which helps to reduce their risk. Government guarantees
                     of SBA loans do not exceed, and are generally less than, 80% of the
                     loan. As of December 31, 2009, we had not originated any small business loans utilizing government
                     enhancements. Consumer Loans. We make a variety of loans to individuals for personal and household
                     purposes, including secured and unsecured installment loans and
                     revolving lines of credit. Consumer loans are underwritten based on
                     the borrower's income, current debt level, past credit history, and
                     the availability and value of collateral. Consumer rates are both
                     fixed and variable, with terms negotiable. At December 31, 2009, consumer loans amounted to $11.0 million, or 1.9% of our loan
                     portfolio, and ranged in size from $100 to $950,000, with an average
                     loan size of approximately $20,000. Our installment loans typically
                     amortize over periods up to 60 months. We will offer consumer loans
                     with a single maturity date when a specific source of repayment is
                     available. We typically require monthly payments of interest and a
                     portion of the principal on our revolving loan products. Consumer
                     loans are generally considered to have greater risk than first or
                     second mortgages on real estate because they may be unsecured, or, if
                     they are secured, the value of the collateral may be difficult to
                     assess and more likely to decrease in value than real estate. Deposit Services Our principal source of funds is core deposits. We offer a full range
                     of deposit services, including checking accounts, commercial checking
                     accounts, savings accounts, and other time deposits of various types,
                     ranging from daily money market accounts to long-term certificates of
                     deposit. Because of the historically low interest rate environment in
                     the last three years, we have chosen to obtain a portion of our
                     deposits from outside our local markets. Our out-of-market, or
                     wholesale, certificates of deposits represented 29.9% of total
                     deposits at December 31, 2009. The deposits obtained outside of our market area generally have
                     lower rates than rates being offered for certificates of deposits in
                     our local market. In an effort to obtain lower costing deposits, we
                     are focusing on expanding our retail deposit program. Accordingly, we
                     opened a new regional retail office in the Columbia, South Carolina
                     area in August 2009, which will assist us in obtaining low cost
                     transaction accounts that are less affected by rising rates. Deposit
                     rates are reviewed regularly by senior management of the bank. We
                     believe that the rates we offer are competitive with those offered by
                     other financial institutions in our area. We focus on customer
                     service and our ClientFIRST culture to attract and retain deposits. Other Banking Services We offer other bank services including safe deposit boxes, traveler's
                     checks, direct deposit, United States Savings Bonds, and banking by
                     mail. We earn fees for most of these services, including debit and
                     credit card transactions, sales of checks, and wire transfers. We
                     also receive ATM transaction fees from transactions performed by our
                     clients. We are associated with the Honor, Cirrus, and Master-Money
                     ATM networks, which are available to our clients throughout the
                     country. Since we outsource our ATM services, we are charged related
                     transaction fees from our ATM service provider. We have contracted
                     with Fidelity Integrated Financial Solutions, an outside computer
                     service company, to provide our core data processing services and our
                     ATM processing. By outsourcing these services, we believe we are able
                     to reduce our overhead by matching the expense in each period to the
                     transaction volume that occurs during the period, as a significant
                     portion of the fee charged is directly related to the number of loan
                     and deposit accounts and the related number of transactions we have
                     during the period. We believe that by being associated with a shared
                     network of ATMs, we are better able to serve our clients and are able
                     to attract clients who are accustomed to the convenience of using
                     ATMs, although we do not believe that maintaining this association is
                     critical to our success. We also offer Internet banking services,
                     bill payment services, and cash management services. We do not expect
                     to exercise trust powers during our next few years of operations. Competition The banking business is highly competitive, and we experience
                     competition in our market from many other financial institutions.
                     Competition among financial institutions is based upon interest rates
                     offered on deposit accounts, interest rates charged on loans, other
                     credit and service charges relating to loans, the quality and scope
                     of the services rendered, the convenience of banking facilities, and,
                     in the case of loans to commercial borrowers, relative lending
                     limits. We compete with commercial banks, credit unions, savings and
                     loan associations, mortgage banking firms, consumer finance
                     companies, securities brokerage firms, insurance companies, money
                     market funds, and other mutual funds, as well as other
                     super-regional, national, and international financial institutions
                     that operate offices in Greenville, Richland and Lexington Counties
                     and elsewhere. As of June 30, 2009, there were 35 financial institutions other than us in our primary
                     market of Greenville County and 30 other financial institutions in
                     the Columbia market. We compete with these institutions both in
                     attracting deposits and in making loans. In addition, we have to
                     attract our customer base from other existing financial institutions
                     and from new
 6


residents. Many of our competitors are well-established, larger
                     financial institutions with substantially greater resources and
                     lending limits, such as BB&T, Bank of America, Wachovia, and Carolina
                     First Bank. These institutions offer some services, such as extensive
                     and established branch networks and trust services that we do not
                     provide. In addition, many of our non-bank competitors are not
                     subject to the same extensive federal regulations that govern bank
                     holding companies and federally insured banks. We believe our commitment to quality and personalized banking
                     services through our ClientFIRST culture is a factor that contributes
                     to our competitiveness and success. Market Share As of June 30, 2009, the most recent date for which market data is available, total
                     deposits in the bank's primary service area, Greenville County, were
                     over $10.5 billion, which represented a 4.1% deposit increase from
                     2008. At June 30, 2009, our deposits represented 4.6% of the market. We first entered the retail deposit market in Columbia as a
                     full-service branch office in July 2007. Our service area in the
                     Columbia market includes both Lexington and Richland counties which
                     combined represented over $13.1 billion in deposits as of June 30, 2009, a 6.9% increase from 2008. Our deposits represent 0.17% of the market. Employees At December 31, 2009 and 2008, we employed a total of 105 and 91 full-time equivalent
                     employees, respectively. We provide our full-term employees and
                     certain part-time employees with a comprehensive program of benefits,
                     including medical benefits, life insurance, long-term disability
                     coverage and a 401(k) plan. Our employees are not represented by a
                     collective bargaining agreement. Management considers its employee
                     relations to be excellent. SUPERVISION AND REGULATION Both the company and the bank are subject to extensive state and
                     federal banking laws and regulations that impose specific
                     requirements or restrictions on and provide for general regulatory
                     oversight of virtually all aspects of our operations. These laws and
                     regulations are generally intended to protect depositors, not
                     shareholders. The following summary is qualified by reference to the
                     statutory and regulatory provisions discussed. Changes in applicable
                     laws or regulations may have a material effect on our business and
                     prospects. Our operations may be affected by legislative changes and
                     the policies of various regulatory authorities. We cannot predict the
                     effect that fiscal or monetary policies, economic control, or new
                     federal or state legislation may have on our business and earnings in
                     the future. The following discussion is not intended to be a complete list of all
                     the activities regulated by the banking laws or of the impact of such
                     laws and regulations on our operations. It is intended only to
                     briefly summarize some material provisions. Recent Legislative and Regulatory Developments The Congress, the Treasury Department and the federal banking
                     regulators, including the FDIC, have taken broad actions since early
                     September 2008 to address the volatility and disruption in the U.S.
                     banking system. Several regulatory and governmental actions have been
                     announced including:  In October 2008, the Emergency Economic Stabilization Act of 2008
                        ("EESA") was enacted. The EESA authorizes the Treasury Department to
                        purchase from financial institutions and their holding companies up
                        to $700 billion in mortgage loans, mortgage-related securities and
                        certain other financial instruments, including debt and equity
                        securities issued by financial institutions and their holding
                        companies in a troubled asset relief program ("TARP").  The purpose
                        of TARP is to restore confidence and stability to the U.S. banking
                        system and to encourage financial institutions to increase their
                        lending to customers and to each other.  The Treasury has allocated
                        $250 billion towards the TARP Capital Purchase Program
                        ("CPP").  Under the CPP, the Treasury Department purchased debt or
                        equity securities from participating institutions.  TARP also
                        includes direct purchases or guarantees of troubled assets of
                        financial institutions. Participants in the CPP are subject to
                        executive compensation limits and are encouraged to expand their
                        lending and mortgage loan modifications.  On February 27, 2009, as part of the CPP, Southern First entered into a Letter Agreement
                        and Securities Purchase Agreement (collectively, the "CPP Purchase
                        Agreement") with the Treasury Department, pursuant to which Southern
                        First sold (i) 17,299 shares of Southern First's Fixed Rate
                        Cumulative Perpetual Preferred Stock, Series T (the "Series T
                        Preferred Stock") and (ii) a warrant (the "CPP Warrant") to purchase
                        330,554 shares of Southern First's common stock for an aggregate
                        purchase price of $17.3 million in cash. The Series T Preferred Stock
                        qualifies as Tier 1 capital
 7


and is entitled to cumulative dividends at a rate of 5% per annum for
                        the first five years, and 9% per annum thereafter. Southern First
                        must consult with the OCC before it may redeem the Series T Preferred
                        Stock but, contrary to the original restrictions in the EESA, will
                        not necessarily be required to raise additional equity capital in
                        order to redeem this stock. The Warrant has a 10-year term and is
                        immediately exercisable upon its issuance, with an exercise price,
                        subject to anti-dilution adjustments, equal to $7.85 per share of the
                        common stock.  EESA also increased FDIC deposit insurance on most accounts from
                        $100,000 to $250,000.  This increase is in place until the end of
                        2013 and is not covered by deposit insurance premiums paid by the
                        banking industry.  On October 14, 2008, the FDIC established the Temporary Liquidity Guarantee Program
                        ("TLGP").  TLGP includes the Transaction Account Guarantee Program
                        ("TAGP"), which provides unlimited deposit insurance coverage through June 30, 2010 for noninterest-bearing transaction accounts (typically business
                        checking accounts) and certain funds swept into noninterest-bearing
                        savings accounts.  Institutions participating in TLGP pay a 10 basis
                        points fee (annualized) on the balance of each covered account in
                        excess of $250,000, while the extra deposit insurance is in
                        place.  TLGP also includes the Debt Guarantee Program ("DGP"), under
                        which the FDIC guarantees certain newly-issued senior unsecured
                        debt.  The guarantee would apply to new debt issued on or before October 31, 2009 and would provide protection until December 31, 2012. Participants in DGP would pay a 75 basis point fee for the
                        guarantee.  TAGP and DGP are in effect for all eligible entities,
                        unless the entity opted out on or before December 5, 2008.  We are participating in the TAGP and have opted out of the DGP.  On February 10, 2009, the Treasury Department announced the Financial Stability Plan,
                        which earmarked $350 billion of the TARP funds authorized under EESA.
                        Among other things, the Financial Stability Plan includes:  A capital assistance program that invested in mandatory
                     convertible preferred stock of certain qualifying institutions
                     determined on a basis and through a process similar to the Capital
                     Purchase Program;  A consumer and business lending initiative to fund new consumer
                     loans, small business loans and commercial mortgage asset-backed
                     securities issuances;  A public-private investment fund program that is intended to
                     leverage public and private capital with public financing to purchase
                     up to $500 billion to $1 trillion of legacy "toxic assets" from
                     financial institutions; and  Assistance for homeowners by providing up to $75 billion to
                     reduce mortgage payments and interest rates and establishing loan
                     modification guidelines for government and private programs.  On February 17, 2009, the American Recovery and Reinvestment Act (the "Recovery Act") was
                        signed into law in an effort to, among other things, create jobs and
                        stimulate growth in the United States economy. The Recovery Act
                        specifies appropriations of approximately $787 billion for a wide
                        range of Federal programs and will increase or extend certain
                        benefits payable under the Medicaid, unemployment compensation, and
                        nutrition assistance programs. The Recovery Act also reduces
                        individual and corporate income tax collections and makes a variety
                        of other changes to tax laws. The Recovery Act also imposes certain
                        limitations on compensation paid by participants in TARP.
                     On March 23, 2009, the U.S. Treasury, in conjunction with the FDIC and the Federal
                        Reserve, announced the Public-Private Partnership Investment Program
                        for Legacy Assets which consists of two separate plans, addressing
                        two distinct asset groups:  The first plan is the Legacy Loan Program, which has a primary
                     purpose to facilitate the sale of troubled mortgage loans by eligible
                     institutions, including FDIC-insured federal or state banks and
                     savings associations. Eligible assets are not strictly limited to
                     loans; however, what constitutes an eligible asset will be determined
                     by participating banks, their primary regulators, the FDIC and the
                     Treasury. Under the Legacy Loan Program, the FDIC has sold certain
                     troubled assets out of an FDIC receivership in two separate
                     transactions relating to the failed Illinois bank, Corus Bank, NA,
                     and the failed Texas bank, Franklin Bank, S.S.B. These transactions
                     were completed in September 2009 and October 2009, respectively.  The second plan is the Securities Program, which is
                     administered by the Treasury and involves the creation of
                     public-private investment funds to target investments in eligible
                     residential mortgage-backed securities and commercial mortgage-backed
                     securities issued before 2009 that originally were rated AAA or the
                     equivalent by two or more nationally recognized statistical rating
                     organizations, without regard to rating enhancements (collectively,
                     "Legacy Securities"). Legacy Securities must be directly secured by
                     actual mortgage loans, leases or other assets, and may be purchased
                     only from financial institutions that meet TARP eligibility
                     requirements. Treasury received over 100 unique applications to
                     participate in the Legacy Securities PPIP and in July 2009 selected
                     nine public-private investment fund managers. As of December 31, 2009, public-private investment
 8


funds have completed initial and subsequent closings on
                     approximately $6.2 billion of private sector equity capital, which
                     was matched 100% by Treasury, representing $12.4 billion of total
                     equity capital. Treasury has also provided $12.4 billion of debt
                     capital, representing $24.8 billion of total purchasing power. As of December 31, 2009, public-private investment funds have drawn-down approximately $4.3
                     billion of total capital which has been invested in certain
                     non-agency residential mortgage backed securities and commercial
                     mortgage backed securities and cash equivalents pending investment.  On May 22, 2009, the FDIC levied a one-time special assessment on all banks due on September 30, 2009.  On November 12, 2009, the FDIC issued a final rule to require banks to prepay their
                        estimated quarterly risk-based assessments for the fourth quarter of
                        2009 and for all of 2010, 2011 and 2012 and to increase assessment
                        rates effective on January 1, 2011. As a result of the enhancements to deposit insurance protection and
                     the expectation that there will be demands on the FDIC's deposit
                     insurance fund, our deposit insurance costs increased significantly
                     in 2009. Regardless of our lack of participation, governmental
                     intervention and new regulations under these programs could
                     materially and adversely affect our business, financial condition and
                     results of operation. Although it is likely that further regulatory actions will arise as
                     the Federal government attempts to address the economic situation, we
                     cannot predict the effect that fiscal or monetary policies, economic
                     control, or new federal or state legislation may have on our business
                     and earnings in the future. Southern First Bancshares, Inc. We own 100% of the outstanding capital stock of the bank, and
                     therefore we are considered to be a bank holding company under the
                     federal Bank Holding Company Act of 1956 (the "Bank Holding Company
                     Act"). As a result, we are primarily subject to the supervision,
                     examination and reporting requirements of the Board of Governors of
                     the Federal Reserve (the "Federal Reserve") under the Bank Holding
                     Company Act and its regulations promulgated thereunder. Moreover, as
                     a bank holding company of a bank located in South Carolina, we also
                     are subject to the South Carolina Banking and Branching Efficiency
                     Act. Permitted Activities. Under the Bank Holding Company Act, a bank holding company is
                     generally permitted to engage in, or acquire direct or indirect
                     control of more than 5% of the voting shares of any company engaged
                     in, the following activities:  banking or managing or controlling banks;
                     furnishing services to or performing services for our subsidiaries; and
                     any activity that the Federal Reserve determines to be so closely
                        related to banking as to be a proper incident to the business
                        of banking. Activities that the Federal Reserve has found to be so closely
                     related to banking as to be a proper incident to the business of
                     banking include:  factoring accounts receivable;
                     making, acquiring, brokering or servicing loans and usual related activities;
                     leasing personal or real property;
                     operating a non-bank depository institution, such as a savings association;
                     trust company functions;
                     financial and investment advisory activities;
                     conducting discount securities brokerage activities;
                     underwriting and dealing in government obligations and money market instruments;
                     providing specified management consulting and counseling activities;
                     performing selected data processing services and support services;
                     acting as agent or broker in selling credit life insurance and other
                        types of insurance in connection with credit transactions; and
 9


performing selected insurance underwriting activities. As a bank holding company we also can elect to be treated as a
                     "financial holding company," which would allow us to engage in a
                     broader array of activities. In summary, a financial holding company
                     can engage in activities that are financial in nature or incidental
                     or complimentary to financial activities, including insurance
                     underwriting, sales and brokerage activities, providing financial and
                     investment advisory services, underwriting services and limited
                     merchant banking activities. We have not sought financial holding
                     company status, but may elect such status in the future as our
                     business matures. If we were to elect financial holding company
                     status, each insured depository institution we control would have to
                     be well capitalized, well managed and have at least a satisfactory
                     rating under the Community Reinvestment Act as discussed below. The Federal Reserve has the authority to order a bank holding company
                     or its subsidiaries to terminate any of these activities or to
                     terminate its ownership or control of any subsidiary when it has
                     reasonable cause to believe that the bank holding company's continued
                     ownership, activity or control constitutes a serious risk to the
                     financial safety, soundness or stability of it or any of its bank
                     subsidiaries. Change in Control. In addition, and subject to certain exceptions, the Bank Holding
                     Company Act and the Change in Bank Control Act, together with
                     regulations promulgated there under, require Federal Reserve approval
                     prior to any person or company acquiring "control" of a bank holding
                     company. Control is conclusively presumed to exist if an individual
                     or company acquires 25% or more of any class of voting securities of
                     a bank holding company. Following the relaxing of these restrictions
                     by the Federal Reserve in September 2008, control will be rebuttably
                     presumed to exist if a person acquires more than 33% of the total
                     equity of a bank or bank holding company, of which it may own,
                     control or have the power to vote not more than 15% of any class of
                     voting securities. Source of Strength. In accordance with Federal Reserve Board policy, we are expected to
                     act as a source of financial strength to the bank and to commit
                     resources to support the bank in circumstances in which we might not
                     otherwise do so. Under the Bank Holding Company Act, the Federal
                     Reserve Board may require a bank holding company to terminate any
                     activity or relinquish control of a non-bank subsidiary, other than a
                     non-bank subsidiary of a bank, upon the Federal Reserve's
                     determination that such activity or control constitutes a serious
                     risk to the financial soundness or stability of any depository
                     institution subsidiary of a bank holding company. Additionally,
                     federal bank regulatory authorities have additional discretion to
                     require a bank holding company to divest itself of any bank or
                     non-bank subsidiaries if the agency determines that divestiture may
                     aid the depository institution's financial condition. Further, any
                     loans by bank holding company to a subsidiary bank are subordinate in
                     right of payment to deposits and certain other indebtedness of the
                     subsidiary bank. In the event of a bank holding company's bankruptcy,
                     any commitment by the bank holding company to a federal bank
                     regulatory agency to maintain the capital of a subsidiary bank at a
                     certain level would be assumed by the bankruptcy trustee and entitled
                     to priority payment. Capital Requirements. The Federal Reserve Board imposes certain capital requirements on
                     the bank holding company under the Bank Holding Company Act,
                     including a minimum leverage ratio and a minimum ratio of
                     "qualifying" capital to risk-weighted assets. These requirements are
                     described below under "Southern First Bank - Capital Regulations."
                     Subject to our capital requirements and certain other restrictions,
                     we are able to borrow money to make capital contributions to the
                     bank, and these loans may be repaid from dividends paid from the bank
                     to the company. Our ability to pay dividends is subject to regulatory restrictions as
                     described below in "Southern First Bank  Dividends." We are also
                     able to raise capital for contribution to the bank by issuing
                     securities without having to receive regulatory approval, subject to
                     compliance with federal and state securities laws. South Carolina State Regulation. As a South Carolina bank holding company under the South Carolina
                     Banking and Branching Efficiency Act, we are subject to limitations
                     on sale or merger and to regulation by the South Carolina Board of
                     Financial Institutions (the "S.C. Board"). We are not required to
                     obtain the approval of the S.C. Board prior to acquiring the capital
                     stock of a national bank, but we must notify them at least 15 days
                     prior to doing so. We must receive the Board's approval prior to
                     engaging in the acquisition of a South Carolina state chartered bank
                     or another South Carolina bank holding company. Southern First Bank, N.A. The bank operates as a national banking association incorporated
                     under the laws of the United States and subject to examination by the
                     Office of the Comptroller of the Currency (the "OCC"). Deposits in
                     the bank are insured by the Federal Deposit Insurance Corporation
                     ("FDIC") up to a maximum amount, which is generally $100,000 for each
                     non-retirement depositor and $250,000 for certain retirement-account
                     depositors. However, the FDIC has increased the coverage up to
 10


$250,000 for each non-retirement depositor through December 31, 2013, and the bank is participating in the FDIC's Temporary Liquidity
                     Guarantee Program (discussed below in greater detail) which, in part,
                     fully insures non-interest bearing transaction accounts until June 30, 2010. The OCC and the FDIC regulate or monitor virtually all areas of the
                     bank's operations, including  security devices and procedures;
                     adequacy of capitalization and loss reserves;
                     loans;
                     investments;
                     borrowings;
                     deposits;
                     mergers;
                     issuances of securities;
                     payment of dividends;
                     interest rates payable on deposits;
                     interest rates or fees chargeable on loans;
                     establishment of branches;
                     corporate reorganizations;
                     maintenance of books and records; and
                     adequacy of staff training to carry on safe lending and deposit
                        gathering practices. The OCC requires the bank to maintain specified capital ratios and
                     imposes limitations on the bank's aggregate investment in real
                     estate, bank premises, and furniture and fixtures. Two categories of
                     regulatory capital are used in calculating these ratios  Tier 1
                     capital and total capital. Tier 1 capital generally includes common
                     equity, retained earnings, a limited amount of qualifying preferred
                     stock, and qualifying minority interests in consolidated
                     subsidiaries, reduced by goodwill and certain other intangible
                     assets, such as core deposit intangibles, and certain other assets.
                     Total capital generally consists of Tier 1 capital plus Tier 2
                     capital, which includes the allowance for loan losses, preferred
                     stock that did not qualify as Tier 1 capital, certain types of
                     subordinated debt and a limited amount of other items. The bank is required to calculate three ratios: the ratio of Tier 1
                     capital to risk-weighted assets, the ratio of Total capital to
                     risk-weighted assets, and the "leverage ratio," which is the ratio of
                     Tier 1 capital to average assets on a non-risk-adjusted basis. For
                     the two ratios of capital to risk-weighted assets, certain assets,
                     such as cash and U.S. Treasury securities, have a zero risk
                     weighting. Others, such as commercial and consumer loans, have a 100%
                     risk weighting. Some assets, notably purchase-money loans secured by
                     first-liens on residential real property, are risk-weighted at 50%.
                     Assets also include amounts that represent the potential funding of
                     off-balance sheet obligations such as loan commitments and letters of
                     credit. These potential assets are assigned to risk categories in the
                     same manner as funded assets. The total assets in each category are
                     multiplied by the appropriate risk weighting to determine
                     risk-adjusted assets for the capital calculations. The minimum capital ratios for both the company and the bank are
                     generally 8% for total capital, 4% for Tier 1 capital and 4% for
                     leverage. To be eligible to be classified as "well capitalized," the
                     bank must generally maintain a total capital ratio of 10% or more, a
                     Tier 1 capital ratio of 6% or more, and a leverage ratio of 5% or
                     more. Certain implications of the regulatory capital classification
                     system are discussed in greater detail below. The OCC also requires the bank to prepare annual reports on the
                     bank's financial condition and to conduct an annual audit of its
                     financial affairs in compliance with its minimum standards and
                     procedures All insured institutions must undergo regular on-site examinations by
                     their appropriate banking agency. The cost of examinations of insured
                     depository institutions and any affiliates may be assessed by the
                     appropriate federal banking agency against each institution or
                     affiliate as it deems necessary or appropriate. Insured institutions
                     are required to submit annual reports to the FDIC, their federal
                     regulatory agency, and state supervisor when applicable. The FDIC has
                     developed a method for insured depository institutions to provide
                     supplemental disclosure of the estimated fair market value of assets
                     and liabilities, to the extent feasible and practicable, in any
                     balance sheet, financial statement, report of condition or any other
 11


report of any insured depository institution. The federal banking
                     regulatory agencies to prescribe, by regulation, standards for all
                     insured depository institutions and depository institution holding
                     companies relating, among other things, to the following:  internal controls;
                     information systems and audit systems;
                     loan documentation;
                     credit underwriting;
                     interest rate risk exposure; and
                     asset quality. Prompt Corrective Action. As an insured depository institution, the bank is required to comply
                     with the capital requirements promulgated under the Federal Deposit
                     Insurance Act and the OCC's prompt corrective action regulations
                     thereunder, which set forth five capital categories, each with
                     specific regulatory consequences. Under these regulations, the
                     categories are:  Well Capitalized  The institution exceeds the required minimum level
                        for each relevant capital measure. A well capitalized institution is
                        one (i) having a total capital ratio of 10% or greater, (ii) having a
                        tier 1 capital ratio of 6% or greater, (iii) having a leverage
                        capital ratio of 5% or greater and (iv) that is not subject to any
                        order or written directive to meet and maintain a specific capital
                        level for any capital measure.  Adequately Capitalized  The institution meets the required minimum
                        level for each relevant capital measure. No capital distribution may
                        be made that would result in the institution becoming
                        undercapitalized. An adequately capitalized institution is one (i)
                        having a total capital ratio of 8% or greater, (ii) having a tier 1
                        capital ratio of 4% or greater and (iii) having a leverage capital
                        ratio of 4% or greater or a leverage capital ratio of 3% or greater
                        if the institution is rated composite 1 under the CAMELS (Capital,
                        Assets, Management, Earnings, Liquidity and Sensitivity to market
                        risk) rating system.  Undercapitalized  The institution fails to meet the required minimum
                        level for any relevant capital measure. An undercapitalized
                        institution is one (i) having a total capital ratio of less than 8%
                        or (ii) having a tier 1 capital ratio of less than 4% or (iii) having
                        a leverage capital ratio of less than 4%, or if the institution is
                        rated a composite 1 under the CAMEL rating system, a leverage capital
                        ratio of less than 3%.  Significantly Undercapitalized  The institution is significantly
                        below the required minimum level for any relevant capital measure. A
                        significantly undercapitalized institution is one (i) having a total
                        capital ratio of less than 6% or (ii) having a tier 1 capital ratio
                        of less than 3% or (iii) having a leverage capital ratio of less
                        than 3%.  Critically Undercapitalized  The institution fails to meet a
                        critical capital level set by the appropriate federal banking agency.
                        A critically undercapitalized institution is one having a ratio of
                        tangible equity to total assets that is equal to or less than 2%. If the OCC determines, after notice and an opportunity for hearing,
                     that the bank is in an unsafe or unsound condition, the regulator is
                     authorized to reclassify the bank to the next lower capital category
                     (other than critically undercapitalized) and require the submission
                     of a plan to correct the unsafe or unsound condition. Usually, if the bank is not well capitalized, it cannot accept
                     brokered deposits without prior FDIC approval and, if approval is
                     granted, cannot offer an effective yield in excess of 75 basis points
                     on interests paid on deposits of comparable size and maturity in such
                     institution's normal market area for deposits accepted from within
                     its normal market area, or national rate paid on deposits of
                     comparable size and maturity for deposits accepted outside a bank's
                     normal market area. Moreover, if the bank becomes less than
                     adequately capitalized, it must adopt a capital restoration plan
                     acceptable to the OCC that is subject to a limited performance
                     guarantee by the corporation. The bank also would become subject to
                     increased regulatory oversight, and is increasingly restricted in the
                     scope of its permissible activities. Each company having control over
                     an undercapitalized institution also must provide a limited guarantee
                     that the institution will comply with its capital restoration plan.
                     Except under limited circumstances consistent with an accepted
                     capital restoration plan, an undercapitalized institution may not
                     grow. An undercapitalized institution may not acquire another
                     institution, establish additional branch offices or engage in any new
                     line of business unless determined by the appropriate Federal banking
                     agency to be consistent with an accepted capital restoration plan, or
                     unless the FDIC determines that the proposed action will further the
                     purpose of prompt corrective action. The appropriate federal banking
                     agency may take any action authorized for a significantly
                     undercapitalized
 12


institution if an undercapitalized institution fails to submit an
                     acceptable capital restoration plan or fails in any material respect
                     to implement a plan accepted by the agency. A critically
                     undercapitalized institution is subject to having a receiver or
                     conservator appointed to manage its affairs and for loss of its
                     charter to conduct banking activities. An insured depository institution may not pay a management fee to a
                     bank holding company controlling that institution or any other person
                     having control of the institution if, after making the payment, the
                     institution, would be undercapitalized. In addition, an institution
                     cannot make a capital distribution, such as a dividend or other
                     distribution that is in substance a distribution of capital to the
                     owners of the institution if following such a distribution the
                     institution would be undercapitalized. Thus, if payment of such a
                     management fee or the making of such would cause the bank to become
                     undercapitalized, it could not pay a management fee or dividend to us. As of December 31, 2009, the bank was deemed to be "well capitalized." Standards for Safety and Soundness. The Federal Deposit Insurance Act also requires the federal banking
                     regulatory agencies to prescribe, by regulation or guideline,
                     operational and managerial standards for all insured depository
                     institutions relating to: (i) internal controls, information systems
                     and internal audit systems; (ii) loan documentation; (iii) credit
                     underwriting; (iv) interest rate risk exposure; and (v) asset growth.
                     The agencies also must prescribe standards for asset quality,
                     earnings, and stock valuation, as well as standards for compensation,
                     fees and benefits. The federal banking agencies have adopted
                     regulations and Interagency Guidelines Prescribing Standards for
                     Safety and Soundness ("Guidelines") to implement these required
                     standards. The Guidelines set forth the safety and soundness
                     standards that the federal banking agencies use to identify and
                     address problems at insured depository institutions before capital
                     becomes impaired. Under the regulations, if the OCC determines that
                     the bank fails to meet any standards prescribed by the Guidelines,
                     the agency may require the bank to submit to the agency an acceptable
                     plan to achieve compliance with the standard, as required by the OCC.
                     The final regulations establish deadlines for the submission and
                     review of such safety and soundness compliance plans. Insurance of Accounts and Regulation by the FDIC. Southern First's deposits are insured up to applicable limits by the
                     Deposit Insurance Fund of the FDIC. The Deposit Insurance Fund is the
                     successor to the Bank Insurance Fund and the Savings Association
                     Insurance Fund, which were merged effective March 31, 2006. As insurer, the FDIC imposes deposit insurance premiums and is
                     authorized to conduct examinations of and to require reporting by
                     FDIC-insured institutions. It also may prohibit any FDIC-insured
                     institution from engaging in any activity the FDIC determines by
                     regulation or order to pose a serious risk to the insurance fund. The
                     FDIC also has the authority to initiate enforcement actions against
                     savings institutions, after giving the Office of Thrift Supervision
                     an opportunity to take such action, and may terminate the deposit
                     insurance if it determines that the institution has engaged in unsafe
                     or unsound practices or is in an unsafe or unsound condition. Under regulations effective January 1, 2007, the FDIC adopted a new risk-based premium system that provides for
                     quarterly assessments based on an insured institution's ranking in
                     one of four risk categories based upon supervisory and capital
                     evaluations. For deposits held as of March 31, 2009, institutions were assessed at annual rates ranging from 12 to 50
                     basis points, depending on each institution's risk of default as
                     measured by regulatory capital ratios and other supervisory measures.
                     Effective April 1, 2009, assessments also took into account each institution's reliance on
                     secured liabilities and brokered deposits. This resulted in
                     assessments ranging from 7 to 77.5 basis points. In May 2009, the
                     FDIC issued a final rule which levied a special assessment applicable
                     to all insured depository institutions totaling 5 basis points of
                     each institution's total assets less Tier 1 capital as of June 30, 2009, not to exceed 10 basis points of domestic deposits. This special
                     assessment was part of the FDIC's efforts to rebuild the Deposit
                     Insurance Fund. We paid this one-time special assessment in the
                     amount of $336,000 to the FDIC at the end of the third quarter 2009. In November 2009, the FDIC issued a rule that required all insured
                     depository institutions, with limited exceptions, to prepay their
                     estimated quarterly risk-based assessments for the fourth quarter of
                     2009 and for all of 2010, 2011 and 2012. The FDIC also adopted a
                     uniform three-basis point increase in assessment rates effective on January 1, 2011. In December 2009, we paid $3.2 million in prepaid risk-based
                     assessments, which included $207,000 million related to the fourth
                     quarter of 2009 that would have been otherwise payable in the first
                     quarter of 2010. This amount is included in deposit insurance expense
                     for 2009. The remaining $3.0 million in prepaid deposit insurance is
                     included in other assets in the accompanying balance sheet as of December 31, 2009. As a result, we incurred increased insurance costs during 2009 than
                     in previous periods. FDIC insured institutions are required to pay a Financing Corporation
                     assessment to fund the interest on bonds issued to resolve thrift
                     failures in the 1980s. The Financing Corporation quarterly assessment
                     equaled 4.04 basis points for each $100 in domestic deposits. These
                     assessments, which may be revised based upon the level of deposits,
                     will continue until the bonds mature in the years 2017 through 2019.
 13


The FDIC may terminate the deposit insurance of any insured
                     depository institution, including the bank, if it determines after a
                     hearing that the institution has engaged in unsafe or unsound
                     practices, is in an unsafe or unsound condition to continue
                     operations or has violated any applicable law, regulation, rule,
                     order or condition imposed by the FDIC or the OCC. It also may
                     suspend deposit insurance temporarily during the hearing process for
                     the permanent termination of insurance, if the institution has no
                     tangible capital. If insurance of accounts is terminated, the
                     accounts at the institution at the time of the termination, less
                     subsequent withdrawals, shall continue to be insured for a period of
                     six months to two years, as determined by the FDIC. Management of the
                     bank is not aware of any practice, condition or violation that might
                     lead to termination of the bank's deposit insurance. Transactions with Affiliates and Insiders. The bank is subject to the provisions of Section 23A of the Federal
                     Reserve Act, which places limits on the amount of loans or extensions
                     of credit to, or investments in, or certain other transactions with,
                     affiliates and on the amount of advances to third parties
                     collateralized by the securities or obligations of affiliates. The
                     aggregate of all covered transactions is limited in amount, as to any
                     one affiliate, to 10% of the bank's capital and surplus and, as to
                     all affiliates combined, to 20% of the bank's capital and surplus.
                     Furthermore, within the foregoing limitations as to amount, each
                     covered transaction must meet specified collateral requirements.
                     Compliance is also required with certain provisions designed to avoid
                     the taking of low quality assets. The bank also is subject to the provisions of Section 23B of the
                     Federal Reserve Act which, among other things, prohibits an
                     institution from engaging in certain transactions with certain
                     affiliates unless the transactions are on terms substantially the
                     same, or at least as favorable to such institution or its
                     subsidiaries, as those prevailing at the time for comparable
                     transactions with nonaffiliated companies. The bank is subject to
                     certain restrictions on extensions of credit to executive officers,
                     directors, certain principal shareholders, and their related
                     interests. Such extensions of credit (i) must be made on
                     substantially the same terms, including interest rates and
                     collateral, as those prevailing at the time for comparable
                     transactions with third parties and (ii) must not involve more than
                     the normal risk of repayment or present other unfavorable features. The Federal Reserve Board has issued Regulation W, which codifies
                     prior regulations under Sections 23A and 23B of the Federal Reserve
                     Act and interpretative guidance with respect to affiliate
                     transactions. Regulation W incorporates the exemption from the
                     affiliate transaction rules but expands the exemption to cover the
                     purchase of any type of loan or extension of credit from an
                     affiliate. In addition, under Regulation W:  a bank and its subsidiaries may not purchase a low-quality asset from
                        an affiliate;
                     covered transactions and other specified transactions between a bank
                        or its subsidiaries and an affiliate must be on terms and conditions
                        that are consistent with safe and sound banking practices; and
                     with some exceptions, each loan or extension of credit by a bank to
                        an affiliate must be secured by collateral with a market value
                        ranging from 100% to 130%, depending on the type of collateral, of
                        the amount of the loan or extension of credit. Regulation W generally excludes all non-bank and non-savings
                     association subsidiaries of banks from treatment as affiliates,
                     except to the extent that the Federal Reserve Board decides to treat
                     these subsidiaries as affiliates. The regulation also limits the
                     amount of loans that can be purchased by a bank from an affiliate to
                     not more than 100% of the bank's capital and surplus. Dividends. A national bank may not pay cash dividends from its permanent
                     capital. All cash dividends must be paid out of undivided profits
                     then on hand, after deducting expenses, including reserves for losses
                     and bad debts. In addition, a national bank is prohibited from
                     declaring a cash dividend on its shares of common stock until its
                     surplus equals its stated capital, unless there has been transferred
                     to surplus no less than one-tenth of the bank's net profits of the
                     preceding two consecutive half-year periods (in the case of an annual
                     dividend). The approval of the OCC is required if the total of all
                     cash dividends declared by a national bank in any calendar year
                     exceeds the total of its net profits for that year combined with its
                     retained net profits for the preceding two years, less any required
                     transfers to surplus. Branching. National banks are required by the National Bank Act to adhere to
                     branch office banking laws applicable to state banks in the states in
                     which they are located. Under current South Carolina law, the bank
                     may open branch offices throughout South Carolina with the prior
                     approval of the OCC. In addition, with prior regulatory approval, the
                     bank is able to acquire existing banking operations in South
                     Carolina. Furthermore, federal legislation permits interstate
                     branching, including out-of-state acquisitions by bank holding
                     companies, interstate branching by banks if allowed by state law, and
                     interstate merging by banks. However, South Carolina law, with
                     limited exceptions, currently permits branching across state lines
                     only through interstate mergers.
 14


Anti-Tying Restrictions. Under amendments to the Bank Holding Company Act and Federal Reserve
                     regulations, a bank is prohibited from engaging in certain tying or
                     reciprocity arrangements with its customers. In general, a bank may
                     not extend credit, lease, sell property, or furnish any services or
                     fix or vary the consideration for these arrangements on the condition
                     that (i) the customer obtain or provide some additional credit,
                     property, or services from or to the bank, the bank holding company
                     or subsidiaries thereof or (ii) the customer may not obtain some
                     other credit, property, or services from a competitor, except to the
                     extent reasonable conditions are imposed to assure the soundness of
                     the credit extended. Certain arrangements are permissible: a bank may
                     offer combined-balance products and may otherwise offer more
                     favorable terms if a customer obtains two or more traditional bank
                     products; and certain foreign transactions are exempt from the
                     general rule. A bank holding company or any bank affiliate also is
                     subject to anti-tying requirements in connection with electronic
                     benefit transfer services. Community Reinvestment Act. The Community Reinvestment Act requires that the OCC evaluate the
                     record of the bank in meeting the credit needs of its local
                     community, including low and moderate income neighborhoods. These
                     factors are also considered in evaluating mergers, acquisitions, and
                     applications to open a branch or facility. Failure to adequately meet
                     these criteria could impose additional requirements and limitations
                     on our bank. On June 2, 2008, the date of the most recent examination, the bank received a
                     satisfactory rating. Finance Subsidiaries. Under the Gramm-Leach-Bliley Act (the "GLBA"), subject to certain
                     conditions imposed by their respective banking regulators, national
                     and state-chartered banks are permitted to form "financial
                     subsidiaries" that may conduct financial or incidental activities,
                     thereby permitting bank subsidiaries to engage in certain activities
                     that previously were impermissible. The GLBA imposes several
                     safeguards and restrictions on financial subsidiaries, including that
                     the parent bank's equity investment in the financial subsidiary be
                     deducted from the bank's assets and tangible equity for purposes of
                     calculating the bank's capital adequacy. In addition, the GLBA
                     imposes new restrictions on transactions between a bank and its
                     financial subsidiaries similar to restrictions applicable to
                     transactions between banks and non-bank affiliates. As of December 31, 2009, the company did not have any financial subsidiaries. Consumer Protection Regulations. Activities of the bank are subject to a variety of statutes and
                     regulations designed to protect consumers. Interest and other charges
                     collected or contracted for by the bank are subject to state usury
                     laws and federal laws concerning interest rates. The bank's loan
                     operations are also subject to federal laws applicable to credit
                     transactions, such as:  the federal Truth-In-Lending Act, governing disclosures of credit
                        terms to consumer borrowers;
                     the Home Mortgage Disclosure Act of 1975, requiring financial
                        institutions to provide information to enable the public and public
                        officials to determine whether a financial institution is fulfilling
                        its obligation to help meet the housing needs of the community
                        it serves;
                     the Equal Credit Opportunity Act, prohibiting discrimination on the
                        basis of race, creed or other prohibited factors in extending credit;
                     the Fair Credit Reporting Act of 1978, governing the use and
                        provision of information to credit reporting agencies;
                     the Fair Debt Collection Act, governing the manner in which consumer
                        debts may be collected by collection agencies; and
                     the rules and regulations of the various federal agencies charged
                        with the responsibility of implementing such federal laws. The deposit operations of the bank also are subject to:  the Right to Financial Privacy Act, which imposes a duty to maintain
                        confidentiality of consumer financial records and prescribes
                        procedures for complying with administrative subpoenas of financial
                        records; and
                     the Electronic Funds Transfer Act and Regulation E issued by the
                        Federal Reserve Board to implement that Act, which governs automatic
                        deposits to and withdrawals from deposit accounts and customers'
                        rights and liabilities arising from the use of automated teller
                        machines and other electronic banking services. Enforcement Powers. The bank and its "institution-affiliated parties," including its
                     management, employees agents independent contractors and consultants
                     such as attorneys and accountants and others who participate in the
                     conduct of the financial institution's affairs, are subject to
                     potential civil and criminal penalties for violations of law,
                     regulations or written orders of a government agency. These practices
                     can include the failure of an institution to timely file required
                     reports or the filing of false or misleading information or the
                     submission of inaccurate reports. Civil penalties may be as high as
                     $1,000,000 a day for such violations. Criminal penalties for some
                     financial institution crimes have been increased to twenty years. In
 15


addition, regulators are provided with greater flexibility to
                     commence enforcement actions against institutions and
                     institution-affiliated parties. Possible enforcement actions include
                     the termination of deposit insurance. Furthermore, banking agencies'
                     power to issue cease-and-desist orders were expanded. Such orders
                     may, among other things, require affirmative action to correct any
                     harm resulting from a violation or practice, including restitution,
                     reimbursement, indemnifications or guarantees against loss. A
                     financial institution may also be ordered to restrict its growth,
                     dispose of certain assets, rescind agreements or contracts, or take
                     other actions as determined by the ordering agency to be appropriate. Anti-Money Laundering. Financial institutions must maintain anti-money laundering programs
                     that include established internal policies, procedures, and controls;
                     a designated compliance officer; an ongoing employee training
                     program; and testing of the program by an independent audit function.
                     The company and the bank are also prohibited from entering into
                     specified financial transactions and account relationships and must
                     meet enhanced standards for due diligence and "knowing your customer"
                     in their dealings with foreign financial institutions and foreign
                     customers. Financial institutions must take reasonable steps to
                     conduct enhanced scrutiny of account relationships to guard against
                     money laundering and to report any suspicious transactions, and
                     recent laws provide law enforcement authorities with increased access
                     to financial information maintained by banks. Anti-money laundering
                     obligations have been substantially strengthened as a result of the
                     USA Patriot Act, enacted in 2001 and renewed in 2006. Bank regulators
                     routinely examine institutions for compliance with these obligations
                     and are required to consider compliance in connection with the
                     regulatory review of applications. The regulatory authorities have
                     been active in imposing "cease and desist" orders and money penalty
                     sanctions against institutions found to be violating these
                     obligations. USA PATRIOT Act. The USA PATRIOT Act became effective on October 26, 2001, amended, in part, the Bank Secrecy Act and provides, in part, for
                     the facilitation of information sharing among governmental entities
                     and financial institutions for the purpose of combating terrorism and
                     money laundering by enhancing anti-money laundering and financial
                     transparency laws, as well as enhanced information collection tools
                     and enforcement mechanics for the U.S. government, including: (i)
                     requiring standards for verifying customer identification at account
                     opening; (ii) rules to promote cooperation among financial
                     institutions, regulators, and law enforcement entities in identifying
                     parties that may be involved in terrorism or money laundering; (iii)
                     reports by nonfinancial trades and businesses filed with the Treasury
                     Department's Financial Crimes Enforcement Network for transactions
                     exceeding $10,000; and (iv) filing suspicious activities reports by
                     brokers and dealers if they believe a customer may be violating U.S.
                     laws and regulations and requires enhanced due diligence requirements
                     for financial institutions that administer, maintain, or manage
                     private bank accounts or correspondent accounts for non-U.S. persons.
                     Bank regulators routinely examine institutions for compliance with
                     these obligations and are required to consider compliance in
                     connection with the regulatory review of applications. Under the USA PATRIOT Act, the Federal Bureau of Investigation
                     ("FBI") can send our banking regulatory agencies lists of the names
                     of persons suspected of involvement in terrorist activities. The bank
                     can be requested, to search its records for any relationships or
                     transactions with persons on those lists. If the bank finds any
                     relationships or transactions, it must file a suspicious activity
                     report and contact the FBI. The Office of Foreign Assets Control ("OFAC"), which is a division of
                     the Treasury Department, is responsible for helping to insure that
                     United States entities do not engage in transactions with "enemies"
                     of the United States, as defined by various Executive Orders and Acts
                     of Congress. OFAC has sent, and will send, our banking regulatory
                     agencies lists of names of persons and organizations suspected of
                     aiding, harboring or engaging in terrorist acts. If the bank finds a
                     name on any transaction, account or wire transfer that is on an OFAC
                     list, it must freeze such account, file a suspicious activity report
                     and notify the FBI. The bank has appointed an OFAC compliance officer
                     to oversee the inspection of its accounts and the filing of any
                     notifications. The bank actively checks high-risk OFAC areas such as
                     new accounts, wire transfers and customer files. The bank performs
                     these checks utilizing software, which is updated each time a
                     modification is made to the lists provided by OFAC and other agencies
                     of Specially Designated Nationals and Blocked Persons. Privacy and Credit Reporting. Financial institutions are required to disclose their policies for
                     collecting and protecting confidential information. Customers
                     generally may prevent financial institutions from sharing nonpublic
                     personal financial information with nonaffiliated third parties
                     except under narrow circumstances, such as the processing of
                     transactions requested by the consumer. Additionally, financial
                     institutions generally may not disclose consumer account numbers to
                     any nonaffiliated third party for use in telemarketing, direct mail
                     marketing or other marketing to consumers. It is the bank's policy
                     not to disclose any personal information unless required by law. Like other lending institutions, the bank utilizes credit bureau data
                     in its underwriting activities. Use of such data is regulated under
                     the Federal Credit Reporting Act on a uniform, nationwide basis,
                     including credit reporting, prescreening,
 16


sharing of information between affiliates, and the use of credit
                     data. The Fair and Accurate Credit Transactions Act of 2003 (the
                     "FACT Act") authorizes states to enact identity theft laws that are
                     not inconsistent with the conduct required by the provisions of the
                     FACT Act. Check 21. The Check Clearing for the 21st Century Act gives "substitute
                     checks," such as a digital image of a check and copies made from that
                     image, the same legal standing as the original paper check. Some of
                     the major provisions include:  allowing check truncation without making it mandatory;
                     demanding that every financial institution communicate to
                        accountholders in writing a description of its substitute check
                        processing program and their rights under the law;
                     legalizing substitutions for and replacements of paper checks without
                        agreement from consumers;
                     retaining in place the previously mandated electronic collection and
                        return of checks between financial institutions only when individual
                        agreements are in place;
                     requiring that when accountholders request verification, financial
                        institutions produce the original check (or a copy that accurately
                        represents the original) and demonstrate that the account debit was
                        accurate and valid; and
                     requiring the re-crediting of funds to an individual's account on the
                        next business day after a consumer proves that the financial
                        institution has erred. Effect of Governmental Monetary Policies. Our earnings are affected by domestic economic conditions and the
                     monetary and fiscal policies of the United States government and its
                     agencies. The Federal Reserve Bank's monetary policies have had, and
                     are likely to continue to have, an important impact on the operating
                     results of commercial banks through its power to implement national
                     monetary policy in order, among other things, to curb inflation or
                     combat a recession. The monetary policies of the Federal Reserve
                     Board have major effects upon the levels of bank loans, investments
                     and deposits through its open market operations in United States
                     government securities and through its regulation of the discount rate
                     on borrowings of member banks and the reserve requirements against
                     member bank deposits. It is not possible to predict the nature or
                     impact of future changes in monetary and fiscal policies. Proposed Legislation and Regulatory Action. Legislative and regulatory proposals regarding changes in banking,
                     and the regulation of banks, federal savings institutions, and other
                     financial institutions and bank and bank holding company powers are
                     being considered by the executive branch of the federal government,
                     Congress and various state governments. Certain of these proposals,
                     if adopted, could significantly change the regulation or operations
                     of banks and the financial services industry. New regulations and
                     statutes are regularly proposed that contain wide-ranging proposals
                     for altering the structures, regulations, and competitive
                     relationships of the nation's financial institutions. On June 17, 2009, the U.S. Treasury released a white paper entitled "Financial
                     Regulatory Reform  A New Foundation: Rebuilding Financial
                     Supervision and Regulation" (the "Proposal") which calls for sweeping
                     regulatory and supervisory reforms for the entire financial sector
                     and seeks to advance the following five key objectives: (i) promote
                     robust supervision and regulation of financial firms, (ii) establish
                     comprehensive supervision of financial markets, (iii) protect
                     consumers and investors from financial abuse, (iv) provide the
                     government with additional powers to monitor systemic risks,
                     supervise and regulate financial products and markets, and to resolve
                     firms that threaten financial stability, and (v) raise international
                     regulatory standards and improve international cooperation. The Proposal includes the creation of a new federal government
                     agency, the National Bank Supervisor ("NBS") that would charter and
                     supervise all federally chartered depository institutions, and all
                     federal branches and agencies of foreign banks. It is proposed that
                     the NBS take over the responsibilities of the OCC, which currently
                     charters and supervises nationally chartered banks, such as the Bank,
                     and the responsibility for the institutions currently supervised by
                     the Office of Thrift Supervision, which supervises federally
                     chartered savings institutions and federal savings institution
                     holding companies. The elimination of the OCC, as proposed by the administration, also
                     would result in a new regulatory authority for the Bank. There is no
                     assurance as to how this new supervision by the NBS will affect our
                     operations going forward. The Proposal also includes the creation of a new federal agency
                     designed to enforce consumer protection laws. The Consumer Financial
                     Protection Agency ("CFPA") would have authority to protect consumers
                     of financial products and services and to regulate all providers
                     (bank and non-bank) of such services. The CFPA would be authorized to
                     adopt rules for all providers of consumer financial services,
                     supervise and examine such institutions for compliance, and enforce
                     compliance through orders, fines, and penalties. The rules of the
                     CFPA would serve as a "floor" and individual states would
 17


be permitted to adopt and enforce stronger consumer protection laws.
                     If adopted as proposed, we may become subject to multiple laws
                     affecting its provision of loans and other credit services to
                     consumers, which may substantially increase the cost of providing
                     such services. On February 2, 2010, the U.S. President called on the U.S. Congress to create a new
                     Small Business Lending Fund. Under this proposal, $30 billion in TARP
                     funds would be transferred to a new program outside of TARP to
                     support small business lending. As proposed, only small- and
                     medium-sized banks would qualify to participate in the program. New regulations and statutes are regularly proposed that contain
                     wide-ranging proposals for altering the structures, regulations, and
                     competitive relationships of the nation's financial institutions. We
                     cannot predict whether or in what form any proposed regulation or
                     statute will be adopted or the extent to which our business may be
                     affected by any new regulation or statute. Item 1A. Risk Factors. Our business, financial condition, and results of operations could be
                     harmed by any of the following risks, or other risks that have not
                     been identified or which we believe are immaterial or unlikely.
                     Shareholders should carefully consider the risks described below in
                     conjunction with the other information in this Form 10-K and the
                     information incorporated by reference in this Form 10-K, including
                     our consolidated financial statements and related notes. Negative developments in the financial industry and the domestic and
                           international credit markets have adversely affected our operations
                           and results. Negative developments from the latter half of 2007 through 2009 in
                     the global credit and securitization markets have resulted in
                     uncertainty in the financial markets in general with the expectation
                     of the general economic downturn continuing into 2010. As a result of
                     this "credit crunch," commercial as well as consumer loan portfolio
                     performances have deteriorated at many institutions and the
                     competition for deposits and quality loans has increased
                     significantly. In addition, the values of real estate collateral
                     supporting many commercial loans and home mortgages have declined and
                     may continue to decline. Global securities markets, and bank holding
                     company stock prices in particular, have been negatively affected, as
                     has the ability of banks and bank holding companies to raise capital
                     or borrow in the debt markets. As a result, significant new federal
                     laws and regulations relating to financial institutions, including,
                     without limitation, the EESA and the U.S. Treasury Department's
                     Capital Purchase Program, have been adopted. Furthermore, the
                     potential exists for additional federal or state laws and regulations
                     regarding, among other matters, lending and funding practices and
                     liquidity standards, and bank regulatory agencies are expected to be
                     active in responding to concerns and trends identified in
                     examinations, including the expected issuance of many formal
                     enforcement orders. Negative developments in the financial industry
                     and the domestic and international credit markets, and the impact of
                     new legislation in response to those developments, may negatively
                     impact our operations by restricting our business operations,
                     including our ability to originate or sell loans, and adversely
                     impact our financial performance. We can provide no assurance
                     regarding the manner in which any new laws and regulations will
                     affect us. There can be no assurance that recently enacted legislation will help
                           stabilize the U.S. financial system. As described above under "Supervision and Regulation", in response to
                     the challenges facing the financial services sector, a number of
                     regulatory and governmental actions have been enacted or announced.
                     There can be no assurance that these government actions will achieve
                     their purpose. The failure of the financial markets to stabilize, or
                     a continuation or worsening of the current financial market
                     conditions, could have a material adverse affect on our business, our
                     financial condition, the financial condition of our customers, our
                     common stock trading price, as well as our ability to access credit.
                     It could also result in declines in our investment portfolio which
                     could be "other-than-temporary impairments." Because of our participation in the Treasury Department's Capital
                           Purchase Program, we are subject to several restrictions including
                           restrictions on compensation paid to our executives. Pursuant to the terms of the CPP Purchase Agreement between us and
                     the Treasury Department, we adopted certain standards for executive
                     compensation and corporate governance for the period during which the
                     Treasury Department holds the equity issued pursuant to the CPP
                     Purchase Agreement, including the common stock which may be issued
                     pursuant to the CPP Warrant. These standards generally apply to our
                     Chief Executive Officer, Chief Financial Officer and the three next
                     most highly compensated senior executive officers. The standards
                     include (1) ensuring that incentive compensation for senior
                     executives does not encourage unnecessary and excessive risks that
                     threaten the value of the financial institution; (2) required
                     clawback of any bonus or incentive compensation paid to a senior
                     executive based on statements of earnings, gains or other
 18


criteria that are later proven to be materially inaccurate; (3)
                     prohibition on making golden parachute payments to senior executives;
                     and (4) agreement not to deduct for tax purposes executive
                     compensation in excess of $500,000 for each senior executive. In
                     particular, the change to the deductibility limit on executive
                     compensation will likely increase the overall cost of our
                     compensation programs in future periods and may make it more
                     difficult to attract suitable candidates to serve as executive
                     officers. Legislation or regulatory changes could cause us to seek to
                           repurchase the preferred stock and warrants that we sold to the
                           Treasury Department pursuant to the Capital Purchase Program. Legislation that has been adopted after we closed on our sale of
                     Series A Preferred Stock and warrants to the Treasury Department for
                     $17.3 million pursuant to the CPP on February 27, 2009, or any legislation or regulations that may be implemented in the
                     future, may have a material impact on the terms of our CPP
                     transaction with the Treasury Department. If we determine that any
                     such legislation or any regulations, in whole or in part, alter the
                     terms of our CPP transaction with the Treasury Department in ways
                     that we believe are adverse to our ability to effectively manage our
                     business, then it is possible that we may seek to unwind, in whole or
                     in part, the CPP transaction by repurchasing some or all of the
                     preferred stock and warrants that we sold to the Treasury pursuant to
                     the CPP. If we were to repurchase all or a portion of such preferred
                     stock or warrants, then our capital levels could be materially
                     reduced. The Series T Preferred Stock impacts net income available to our
                           common shareholders and earnings per common share, and the warrant we
                           issued to Treasury may be dilutive to holders of our common stock. The dividends declared on the Series T Preferred Stock will reduce
                     the net income available to common shareholders and our earnings per
                     common share. The Series T Preferred Stock will also receive
                     preferential treatment in the event of liquidation, dissolution or
                     winding up of the company. Additionally, the ownership interest of
                     the existing holders of our common stock will be diluted to the
                     extent the warrant we issued to Treasury in conjunction with the sale
                     to Treasury of the Series T Preferred Stock is exercised. The shares
                     of common stock underlying the warrant represent approximately 9.65%
                     of the shares of our common stock outstanding as of December 31, 2009 (including the shares issuable upon exercise of the warrant in total
                     shares outstanding). Although Treasury has agreed not to vote any of
                     the shares of common stock it receives upon exercise of the warrant,
                     a transferee of any portion of the warrant or of any shares of common
                     stock acquired upon exercise of the warrant is not bound by this
                     restriction. Moreover, the securities purchase agreement between us and the
                     Treasury pursuant to the CPP provides that prior to the earlier
                     of (i) three years from the date of sale and (ii) the date on which
                     all of the shares of the preferred stock have been redeemed by us or
                     transferred by the Treasury to third parties, we may not, without the
                     consent of the Treasury, (a) increase the cash dividend on our common
                     stock or (b) subject to limited exceptions, redeem, repurchase or
                     otherwise acquire shares of our common stock or preferred stock
                     (other than the Series T Preferred Stock) or trust preferred
                     securities. Continuation of the economic downturn could reduce our customer base,
                           our level of deposits, and demand for financial products such as
                           loans. Our success significantly depends upon the growth in population,
                     income levels, deposits, and housing starts in our markets. The
                     current economic downturn has negatively affected the markets in
                     which we operate and, in turn, the quality of our loan portfolio. If
                     the communities in which we operate do not grow or if prevailing
                     economic conditions locally or nationally remain unfavorable, our
                     business may not succeed. A continuation of the economic downturn or
                     prolonged recession would likely result in the continued
                     deterioration of the quality of our loan portfolio and reduce our
                     level of deposits, which in turn would hurt our business. Interest
                     received on loans represented approximately 87.7% of our interest
                     income for the year ended December 31, 2009. If the economic downturn continues or a prolonged economic
                     recession occurs in the economy as a whole, borrowers will be less
                     likely to repay their loans as scheduled. Moreover, in many cases the
                     value of real estate or other collateral that secures our loans has
                     been adversely affected by the economic conditions and could continue
                     to be negatively affected. Unlike many larger institutions, we are
                     not able to spread the risks of unfavorable local economic conditions
                     across a large number of diversified economies. A continued economic
                     downturn could, therefore, result in losses that materially and
                     adversely affect our business. A significant portion of our loan portfolio is secured by real
                           estate, and events that negatively impact the real estate market
                           could hurt our business. A significant portion of our loan portfolio is secured by real estate. As of December 31, 2009, approximately 79.0% of our loans had real estate as a primary or
                     secondary component of collateral. The real estate collateral in each
                     case provides an alternate source of repayment in the event of
                     default by the borrower and may deteriorate in value during the time
                     the
 19


credit is extended. A weakening of the real estate market in our
                     primary market areas could result in an increase in the number of
                     borrowers who default on their loans and a reduction in the value of
                     the collateral securing their loans, which in turn could have an
                     adverse effect on our profitability and asset quality. If we are
                     required to liquidate the collateral securing a loan to satisfy the
                     debt during a period of reduced real estate values, our earnings and
                     capital could be adversely affected. Acts of nature, including
                     hurricanes, tornados, earthquakes, fires and floods, which may cause
                     uninsured damage and other loss of value to real estate that secures
                     these loans, may also negatively impact our financial condition. Our
                     loan portfolio contains a number of real estate loans with relatively
                     large balances. The deterioration of one or a few of these loans
                     could cause a significant increase in nonperforming loans, and an
                     increase in overall nonperforming loans could result in a net loss of
                     earnings, an increase in the provision for loan losses and an
                     increase in loan charge-offs, all of which could have a material
                     adverse effect on our financial condition and results of operations. Our FDIC Deposit Insurance premiums have risen significantly in the
                           recent past and may continue to increase in the future as a result of
                           our risk assessment category and increased assessment rates imposed
                           by the FDIC. As a member institution of the FDIC, we are required to pay quarterly
                     deposit insurance premium assessments to the FDIC. During the year
                     ended December 31, 2009, we paid approximately $664,000 in deposit insurance assessments and
                     an additional one-time special assessment of $336,000. Due to the
                     recent failure of several unaffiliated FDIC insurance depository
                     institutions, and the FDIC's new Temporary Liquidity Guarantee
                     Program, the deposit insurance premium assessments paid by all banks
                     has increased. In addition, the new FDIC requirements shift a greater
                     share of any increase in such assessments onto institutions with
                     higher risk profiles, including banks with heavy reliance on brokered
                     deposits, such as our bank. In the fourth quarter of 2009, the FDIC
                     collected prepaid insurance assessments for the three years ending December 31, 2012 in an effort to restore fund balances. We were required to pay
                     approximately $3.2 million in prepaid insurance premiums which is
                     included in other assets at December 31, 2009. Continued increases in this expense would have a material adverse
                     effect on our financial condition. Our decisions regarding credit risk and reserves for loan losses may
                           materially and adversely affect our business. Making loans and other extensions of credit is an essential element
                     of our business. Although we seek to mitigate risks inherent in
                     lending by adhering to specific underwriting practices, our loans and
                     other extensions of credit may not be repaid. The risk of nonpayment
                     is affected by a number of factors, including:  the duration of the credit;
                     credit risks of a particular customer;
                     changes in economic and industry conditions; and
                     in the case of a collateralized loan, risks resulting from
                        uncertainties about the future value of the collateral. We attempt to maintain an appropriate allowance for loan losses to
                     provide for probable losses in our loan portfolio. We periodically
                     determine the amount of the allowance based on consideration of
                     several factors, including:  an ongoing review of the quality, mix, and size of our overall loan portfolio;
                     our historical loan loss experience;
                     evaluation of economic conditions;
                     regular reviews of loan delinquencies and loan portfolio quality; and
                     the amount and quality of collateral, including guarantees, securing the loans. There is no precise method of predicting credit losses; therefore, we
                     face the risk that charge-offs in future periods may exceed our
                     allowance for loan losses and that additional increases in the
                     allowance for loan losses will be required. Additions to the
                     allowance for loan losses would result in a decrease of our net
                     income, and possibly our capital. Lack of seasoning of our loan portfolio may increase the risk of
                           credit defaults in the future. Due to the rapid growth of our bank over the past several years and
                     our relatively short operating history, a large portion of the loans
                     in our loan portfolio and of our lending relationships are of
                     relatively recent origin. In general, loans do not begin to show
                     signs of credit deterioration or default until they have been
                     outstanding for some period of time, a process we refer to as
                     "seasoning." As a result, a portfolio of older loans will usually
                     behave more predictably than a newer portfolio. Because our loan
                     portfolio is relatively new, the current level of delinquencies and
                     defaults may not be representative of the level
 20


that will prevail when the portfolio becomes more seasoned, which may
                     be higher than current levels. If delinquencies and defaults
                     increase, we may be required to increase our provision for loan
                     losses, which would adversely affect our results of operations and
                     financial condition. Our small- to medium-sized business target markets may have fewer
                           financial resources to weather a downturn in the economy. We target the banking and financial services needs of small- and
                     medium-sized businesses. These businesses generally have fewer
                     financial resources in terms of capital borrowing capacity than
                     larger entities. If general economic conditions continue to
                     negatively impact these businesses in the markets in which we
                     operate, our business, financial condition, and results of operation
                     may be adversely affected. We depend on the accuracy and completeness of information about
                           clients and counterparties and our financial condition could be
                           adversely affected if it relies on misleading information. In deciding whether to extend credit or to enter into other
                     transactions with clients and counterparties, we may rely on
                     information furnished to us by or on behalf of clients and
                     counterparties, including financial statements and other financial
                     information, which we do not independently verify. We also may rely
                     on representations of clients and counterparties as to the accuracy
                     and completeness of that information and, with respect to financial
                     statements, on reports of independent auditors. For example, in
                     deciding whether to extend credit to clients, we may assume that a
                     customer's audited financial statements conform with GAAP and present
                     fairly, in all material respects, the financial condition, results of
                     operations and cash flows of the customer. Our financial condition
                     and results of operations could be negatively impacted to the extent
                     we rely on financial statements that do not comply with GAAP or are
                     materially misleading. Changes in prevailing interest rates may reduce our profitability. Our results of operations depend in large part upon the level of our
                     net interest income, which is the difference between interest income
                     from interest-earning assets, such as loans and investment
                     securities, and interest expense on interest-bearing liabilities,
                     such as deposits and other borrowings. Depending on the terms and
                     maturities of our assets and liabilities, a significant change in
                     interest rates could have a material adverse effect on our
                     profitability. Many factors cause changes in interest rates,
                     including governmental monetary policies and domestic and
                     international economic and political conditions. While we intend to
                     manage the effects of changes in interest rates by adjusting the
                     terms, maturities, and pricing of our assets and liabilities, our
                     efforts may not be effective and our financial condition and results
                     of operations could suffer. We are dependent on key individuals and the loss of one or more of
                           these key individuals could curtail our growth and adversely affect
                           our prospects. R. Arthur Seaver, Jr., our chief executive officer, has extensive and
                     long-standing ties within our primary market area and substantial
                     experience with our operations, and he has contributed significantly
                     to our growth. If we lose the services of Mr. Seaver, he would be
                     difficult to replace and our business and development could be
                     materially and adversely affected. Our success also depends, in part, on our continued ability to
                     attract and retain experienced loan originators, as well as other
                     management personnel, including Justin Strickland, Jim Austin, Fred
                     Gilmer, III, Eddie Terrell, Gwen Bridges, and Mike Strickland.
                     Competition for personnel is intense, and we may not be successful in
                     attracting or retaining qualified personnel. Our failure to compete
                     for these personnel, or the loss of the services of several of such
                     key personnel, could adversely affect our growth strategy and
                     seriously harm our business, results of operations, and financial
                     condition. We are subject to extensive regulation that could limit or restrict
                           our activities. We operate in a highly regulated industry and are subject to
                     examination, supervision, and comprehensive regulation by various
                     regulatory agencies. Our compliance with these regulations is costly
                     and restricts certain of our activities, including payment of
                     dividends, mergers and acquisitions, investments, loans and interest
                     rates charged, interest rates paid on deposits, and locations of
                     offices. We are also subject to capitalization guidelines established
                     by our regulators, which require us to maintain adequate capital to
                     support our growth. The laws and regulations applicable to the banking industry could
                     change at any time, and we cannot predict the effects of these
                     changes on our business and profitability. Because government
                     regulation greatly affects the business and financial results of all
                     commercial banks and bank holding companies, our cost of compliance
                     could adversely affect our ability to operate profitably.
 21


The Sarbanes-Oxley Act of 2002, and the related rules and regulations
                     promulgated by the Securities and Exchange Commission that are now
                     applicable to us, have increased the scope, complexity, and cost of
                     corporate governance, reporting, and disclosure practices. We have
                     experienced, and we expect to continue to experience, greater
                     compliance costs, including costs related to internal controls, as a
                     result of the Sarbanes-Oxley Act. Proposals for further regulation of the financial services industry
                     are continually be introduced in the U.S. Congress. The agencies
                     regulating the financial services industry also periodically adopt
                     changes to their regulations. See the "Supervision and Regulation"
                     section of this Form 10-K for a summary description of proposed
                     regulations and legislative action that has been introduced and/or
                     adopted over the past two years. It is possible that additional
                     legislative proposals may be adopted or regulatory changes may be
                     made that would have an adverse effect on our business. We may be adversely affected by the soundness of other financial institutions. Financial services institutions are interrelated as a result of
                     trading, clearing, counterparty, or other relationships. We have
                     exposure to many different industries and counterparties, and
                     routinely execute transactions with counterparties in the financial
                     services industry, including commercial banks, brokers and dealers,
                     investment banks, and other institutional clients. Many of these
                     transactions expose us to credit risk in the event of a default by a
                     counterparty or client. In addition, our credit risk may be
                     exacerbated when the collateral held by the bank cannot be realized
                     upon or is liquidated at prices not sufficient to recover the full
                     amount of the credit or derivative exposure due to the bank. Any such
                     losses could have a material adverse affect on our financial
                     condition and results of operations. We may need to raise additional capital in the future to redeem the
                           Series T Preferred Stock or to support further growth, but that
                           capital may not be available when it is needed. We are required by regulatory authorities to maintain adequate levels
                     of capital to support our operations. To support our continued
                     growth, we may need to raise additional capital. In addition, we
                     intend to redeem the Series T Preferred Stock that we issued to the
                     Treasury Department under the CPP before the dividends on the Series
                     T Preferred Stock increase from 5% per annum to 9% per annum in 2014,
                     and we may need to raise additional capital to do so. Our ability to
                     raise additional capital, if needed, will depend in part on
                     conditions in the capital markets at that time, which are outside our
                     control. Accordingly, we cannot assure you of our ability to raise
                     additional capital, if needed, on terms acceptable to us. If we
                     cannot raise additional capital when needed, our ability to further
                     expand our operations through internal growth and acquisitions could
                     be materially impaired. In addition, if we decide to raise additional
                     equity capital, your interest could be diluted. Liquidity needs could adversely affect our financial condition and
                           results of operation. Dividends from our bank provide one source of funds for our company.
                     The primary sources of funds of our bank are customer deposits and
                     loan repayments. While scheduled loan repayments are a relatively
                     stable source of funds, they are subject to the ability of borrowers
                     to repay the loans. The ability of borrowers to repay loans can be
                     adversely affected by a number of factors, including changes in
                     economic conditions, adverse trends or events affecting business
                     industry groups, reductions in real estate values or markets,
                     business closings or lay-offs, inclement weather, which could be
                     exacerbated by potential climate change, natural disasters and
                     international instability. Additionally, deposit levels may be affected by a number of factors,
                     including rates paid by competitors, general interest rate levels,
                     regulatory capital requirements, returns available to customers on
                     alternative investments and general economic conditions. Accordingly,
                     we may be required from time to time to rely on secondary sources of
                     liquidity to meet withdrawal demands or otherwise fund operations.
                     Such sources include proceeds from Federal Home Loan Bank advances,
                     sales of investment securities and loans, and federal funds lines of
                     credit from correspondent banks, as well as out-of-market time
                     deposits. While we believe that these sources are currently adequate,
                     there can be no assurance they will be sufficient to meet future
                     liquidity demands, particularly if we continue to grow and experience
                     increasing loan demand. We may be required to slow or discontinue
                     loan growth, capital expenditures or other investments or liquidate
                     assets should such sources not be adequate. We depend heavily on out of market deposits as a source of funding. As of December 31, 2009, 29.9% of our deposits were obtained from out of market sources. To
                     continue to have access to this source of funding, we are required to
                     be classified as a "well-capitalized" bank by the OCC; whereas, if we
                     only "meet" the capital requirement, we must obtain permission from
                     the OCC in order to continue utilizing this source of funding. During
                     2008, many of the institutional investors began to require that bank
                     participation in the wholesale funding program have an IDC rating at
                     levels that meet their various expectations. As of September 30, 2009, the last published date, our IDC rating
 22


was 145. This is considered by most investors to meet their
                     definition of a satisfactory rated institution. Should our financial
                     condition deteriorate, our IDC rating would most likely decline. Such
                     a decline could result in a reduction of some or all investors and
                     could result in higher brokerage costs to the bank. We face strong competition for clients, which could prevent us from
                           obtaining clients and may cause us to pay higher interest rates to
                           attract clients. The banking business is highly competitive, and we experience
                     competition in our market from many other financial institutions. We
                     compete with commercial banks, credit unions, savings and loan
                     associations, mortgage banking firms, consumer finance companies,
                     securities brokerage firms, insurance companies, money market funds,
                     and other mutual funds, as well as other super-regional, national,
                     and international financial institutions that operate offices in our
                     primary market areas and elsewhere. We compete with these
                     institutions both in attracting deposits and in making loans. In
                     addition, we have to attract our client base from other existing
                     financial institutions and from new residents. Many of our
                     competitors are well-established, larger financial institutions.
                     These institutions offer some services, such as extensive and
                     established branch networks, that we do not provide. There is a risk
                     that we will not be able to compete successfully with other financial
                     institutions in our market, and that we may have to pay higher
                     interest rates to attract deposits, resulting in reduced
                     profitability. In addition, competitors that are not depository
                     institutions are generally not subject to the extensive regulations
                     that apply to us. We will face risks with respect to future expansion and acquisitions or mergers. We may seek to acquire other financial institutions or parts of those
                     institutions. We may also expand into new markets, as we did in
                     Columbia, South Carolina in 2007. We may also expand our lines of
                     business or offer new products or services. These activities would
                     involve a number of risks, including:  the potential inaccuracy of the estimates and judgments used to
                        evaluate credit, operations, management, and market risks with
                        respect to a target institution;  the time and costs of evaluating new markets, hiring or retaining
                        experienced local management, and opening new offices and the time
                        lags between these activities and the generation of sufficient assets
                        and deposits to support the costs of the expansion;  the incurrence and possible impairment of goodwill associated with an
                        acquisition and possible adverse effects on our results of
                        operations; and  the risk of loss of key employees and customers. The success of our growth strategy depends on our ability to identify
                           and retain individuals with experience and relationships in the
                           markets in which we intend to expand. To expand our franchise successfully, we must identify and retain
                     experienced key management members with local expertise and
                     relationships in these markets. We expect that competition for
                     qualified management in the markets in which we may expand will be
                     intense and that there will be a limited number of qualified persons
                     with knowledge of and experience in the community banking industry in
                     these markets. Even if we identify individuals that we believe could
                     assist us in establishing a presence in a new market, we may be
                     unable to recruit these individuals away from more established
                     financial institutions. In addition, the process of identifying and
                     recruiting individuals with the combination of skills and attributes
                     required to carry out our strategy requires both management and
                     financial resources and is often lengthy. Our inability to identify,
                     recruit, and retain talented personnel to manage new offices
                     effectively would limit our growth and could materially adversely
                     affect our business, financial condition, and results of operations. Our decisions regarding credit risk and reserves for loan losses may
                           materially and adversely affect our business. While we generally underwrite the loans in our portfolio in
                     accordance with our own internal underwriting guidelines and
                     regulatory supervisory guidelines, in certain circumstances we have
                     made loans which exceed either our internal underwriting guidelines,
                     supervisory guidelines, or both. As of December 31, 2009, approximately $69.1 million of our loans, or 12.0% of total loans
                     and 89.4% of our bank's risk-based capital, had loan-to-value ratios
                     that exceeded regulatory supervisory guidelines, of which 88 loans
                     totaling approximately $18.4 million had loan-to-value ratios of 100%
                     or more. Included in the $69.2 million of loans that exceeded
                     supervisory guidelines at December 31, 2009, $27.3 million of our
 23


commercial loans, or 4.7% of total loans, exceeded the supervisory
                     loan to value ratio. The number of loans in our portfolio with
                     loan-to-value ratios in excess of supervisory guidelines, our
                     internal guidelines, or both could increase the amount of loss given
                     default on the loan. A small percentage of the loans in our portfolio currently include
                           exceptions to our loan policies and supervisory guidelines. All of the loans that we make are subject to written loan policies
                     adopted by our board of directors and to supervisory guidelines
                     imposed by our regulators. Our loan policies are designed to reduce
                     the risks associated with the loans that we make by requiring our
                     loan officers to take certain steps that vary depending on the type
                     and amount of the loan, prior to closing a loan. These steps include,
                     among other things, making sure the proper liens are documented and
                     perfected on property securing a loan, and requiring proof of
                     adequate insurance coverage on property securing loans. Loans that do
                     not fully comply with our loan policies are known as "exceptions." We
                     categorize exceptions as policy exceptions, financial statement
                     exceptions and collateral exceptions. As of December 31, 2009, approximately 5% of the loans in our portfolio included collateral
                     exceptions to our loan policies, which is less than our internal
                     limit. As a result of these exceptions, such loans may have a higher
                     risk of loan loss than the other loans in our portfolio that fully
                     comply with our loan policies. In addition, we may be subject to
                     regulatory action by federal or state banking authorities if they
                     believe the number of exceptions in our loan portfolio represents an
                     unsafe banking practice. We are exposed to the possibility of technology failure and a
                           disruption in our operations may adversely affect our business. We rely on our computer systems and the technology of outside service
                     providers. Our daily operations depend on the operational
                     effectiveness of their technology. We rely on our systems to
                     accurately track and record our assets and liabilities. If our
                     computer systems or outside technology sources become unreliable,
                     fail, or experience a breach of security, our ability to maintain
                     accurate financial records may be impaired, which could materially
                     affect our business operations and financial condition. In addition,
                     a disruption in our operations resulting from failure of
                     transportation and telecommunication systems, loss of power,
                     interruption of other utilities, natural disaster, fire, global
                     climate changes, computer hacking or viruses, failure of technology,
                     terrorist activity or the domestic and foreign response to such
                     activity or other events outside of our control could have an
                     adverse impact on the financial services industry as a whole and/or
                     on our business. Our business recovery plan may not be adequate and
                     may not prevent significant interruptions of our operations or
                     substantial losses. Item 1B. Unresolved Staff Comments. None. Item 2. Properties. In January 2007, we relocated our main office and headquarters
                     facility to Verdae Boulevard near downtown Greenville, South
                     Carolina. The building is a full service banking facility with three
                     drive-through banking stations and an automatic teller machine. We
                     have a ten-year, five-month lease on the building. We opened our Parkway office in March 2005, which is located in the
                     Thornblade area of Greenville, South Carolina, near the intersection
                     of I-85 and Pelham Road. We own these premises. We opened our Augusta Road office, in Greenville, South Carolina, in
                     November 2005. We lease the land for this office from Augusta Road
                     Holdings, LLC, which is owned by one of our directors, Mark A.
                     Cothran, and own the banking office. The initial term of the land
                     lease is 20 years. In July 2008, we opened our Woodruff Road office which is located in
                     one of the fastest growing areas of Greenville County. We own these
                     premises. We also opened a second full-service branch office in July
                     2008. Our second retail office in the Columbia Market, our Lexington
                     office, is located on Sunset Avenue at the intersection of Saluda
                     Springs Road and Highway 378. We have a land lease on this property
                     with an initial term of 20 years and own the banking office. In August 2009, we opened our Columbia regional headquarters building
                     in Cayce, South Carolina near the historic Guignard brick works. We
                     own these premises. Prior to the opening of the new Columbia
                     location, we operated a full-service branch office on Lady Street in
                     Columbia, South Carolina. Our lease on this temporary office location
                     expired in December 2009. We believe that all of our properties are adequately covered by insurance.
 24


Item 3. Legal Proceedings. In the ordinary course of operations, we may be a party to various
                     legal proceedings from time to time. We do not believe that there is
                     any pending or threatened proceeding against us, which, if determined
                     adversely, would have a material effect on our business, results of
                     operations, or financial condition. Item 4. [Reserved.] PART II Item 5. Market for Common Equity and Related Shareholder Matters. Our common stock is currently traded on the NASDAQ Global Market
                     under the symbol "SFST." From the date of our initial public offering
                     on October 26, 1999 to September 24, 2004, our common stock had been quoted on the OTC Bulletin Board under
                     the symbol "GVBK." On September 24, 2004, our common stock began trading on the NASDAQ Global Market. On July 2, 2007, we changed our symbol to "SFST" in conjunction with the change in
                     our corporate name to Southern First Bancshares. We had approximately
                     1,000 shareholders of record on February 28, 2010. We have not declared or paid any cash dividends on our common stock
                     since our inception. For the foreseeable future we do not intend to
                     declare cash dividends. We intend to retain earnings to grow our
                     business and strengthen our capital base. Our ability to pay cash
                     dividends depends primarily on the ability of our subsidiary,
                     Southern First Bank, to pay dividends to us. As a national bank,
                     Southern First Bank may only pay cash dividends out of its net
                     profits, after deducting expenses, including losses and bad debts. In
                     addition, the bank is prohibited from declaring a cash dividend on
                     its shares of common stock until its surplus equals its stated
                     capital, unless there has been transferred to surplus no less than
                     one-tenth of the bank's net profits of the preceding two consecutive
                     half-year periods (in the case of an annual dividend). The approval
                     of the OCC will be required if the total of all cash dividends
                     declared in any calendar year by the bank exceeds the bank's net
                     profits to date for that year combined with its retained net profits
                     for the preceding two years less any required transfers to surplus.
                     The OCC also has the authority under federal law to enjoin a national
                     bank from engaging in what in its opinion constitutes an unsafe or
                     unsound practice in conducting its business, including the payment of
                     a cash dividend under certain circumstances. The following table shows the reported high and low common stock
                     prices reported by the NASDAQ Global Market for 2009 and 2008.  2009
                           
                           
                           High
                           
                           
                           LowFirst Quarter
                           
                           $
                           8.18
                           
                           $
                           4.75Second Quarter
                           
                           
                           6.99
                           
                           
                           5.00Third Quarter
                           
                           
                           8.50
                           
                           
                           6.16Fourth Quarter
                           
                           
                           8.44
                           
                           
                           6.102008
                           
                           
                           High
                           
                           
                           LowFirst Quarter
                           
                           $
                           15.10
                           
                           $
                           13.20Second Quarter
                           
                           
                           15.20
                           
                           
                           9.73Third Quarter
                           
                           
                           13.14
                           
                           
                           10.00Fourth Quarter
                           
                           
                           11.00
                           
                           
                           8.00
 25


The following table sets forth equity compensation plan information at December 31, 2009. The number of shares and the exercise prices for options and
                     warrants has been adjusted for the 3 for 2 stock split in 2003 and
                     the subsequent 10% stock dividend in 2006.  Plan Category
                           
                           
                           
                           
                           
                           Number of securities to be issued upon exercise of outstanding options,warrants and rights (a)
                           
                           
                           Weighted-averageexercise price ofoutstanding options,warrants and rights (b)
                           
                           
                           Number of securities remaining available for future issuance under equity compensation plans (c)(excluding securities reflected in column(a))Equity compensation plans approved by security holdersStock options (1)
                           
                           
                           
                           
                           
                           339,165
                           
                           $
                           8.89
                           
                           
                           53,199Restricted stock
                           
                           
                           
                           
                           
                           -
                           
                           
                           -
                           
                           
                           8,500Equity compensation plans not approved by security holders (2)73,493
                           
                           $
                           6.06
                           
                           
                           -Total
                           
                           
                           
                           
                           
                           412,658
                           
                           $
                           8.39
                           
                           
                           61,699  (1)
                           
                           
                           The number of shares of common stock available under the 2000
                              Greenville First Bancshares, Inc. Stock Incentive Plan automatically
                              increases each time we issue additional shares so that it continues
                              to equal 15% of our total outstanding shares. Our board of directors
                              has approved 436,424 shares of common stock to be issued as stock
                              options. Under the terms of Plan no further awards may be granted, effective
                              March 2010; however, the Plan will remain in effect until all awards
                              granted have vested of been forfeited.(2)
                           
                           
                           Each of our organizers received, for no additional consideration, a
                              warrant to purchase one share of common stock for $6.06 per share for
                              every two shares purchased during our initial public offering. The
                              warrants are represented by separate warrant agreements. All of the
                              warrants have vested and are exercisable in whole or in part during
                              the ten-year period that ended January 10, 2010. The warrants may not be assigned, pledged, or hypothecated in any
                              way. The 73,493 of shares issued pursuant to the exercise of such
                              warrants are transferable, subject to compliance with applicable
                              securities laws. If the Federal Reserve, OCC, or FDIC issues a
                              capital directive or other order requiring the bank to obtain
                              additional capital, the warrants will be forfeited, if not
                              immediately exercised.
 26


Item 6. Selected Financial Data  Years Ended December 31,2009
                           
                           
                           2008
                           
                           
                           2007
                           
                           
                           2006
                           
                           
                           2005(Dollars and shares in thousands, except per share amounts)Summary Balance Sheet Data:Assets
                           
                           $
                           719,297
                           
                           $
                           692,979
                           
                           $
                           628,129
                           
                           $
                           509,344
                           
                           $
                           405,313Federal funds sold
                           
                           
                           6,462
                           
                           
                           8,800
                           
                           
                           9,257
                           
                           
                           7,467
                           
                           
                           19,381Investment securities
                           
                           
                           94,633
                           
                           
                           85,412
                           
                           
                           87,507
                           
                           
                           74,304
                           
                           
                           36,131Loans, net (1)
                           
                           
                           566,510
                           
                           
                           559,602
                           
                           
                           503,098
                           
                           
                           397,234
                           
                           
                           334,041Allowance for loan losses
                           
                           
                           7,760
                           
                           
                           7,005
                           
                           
                           5,751
                           
                           
                           4,949
                           
                           
                           4,490Deposits
                           
                           
                           494,084
                           
                           
                           469,537
                           
                           
                           412,821
                           
                           
                           345,504
                           
                           
                           254,148FHLB advances and related debt
                           
                           
                           142,700
                           
                           
                           149,675
                           
                           
                           150,500
                           
                           
                           108,500
                           
                           
                           94,180Note payable
                           
                           
                           4,250
                           
                           
                           15,000
                           
                           
                           8,020
                           
                           
                           -
                           
                           
                           -Junior subordinated debentures
                           
                           
                           13,403
                           
                           
                           13,403
                           
                           
                           13,403
                           
                           
                           13,403
                           
                           
                           13,403Shareholders' equity
                           
                           
                           59,841
                           
                           
                           39,786
                           
                           
                           38,278
                           
                           
                           34,583
                           
                           
                           30,473Summary Results of Operations Data:Interest income
                           
                           $
                           36,177
                           
                           $
                           40,213
                           
                           $
                           39,520
                           
                           $
                           30,929
                           
                           $
                           21,670Interest expense
                           
                           
                           16,895
                           
                           
                           21,853
                           
                           
                           22,781
                           
                           
                           16,579
                           
                           
                           9,585Net interest income
                           
                           
                           19,282
                           
                           
                           18,360
                           
                           
                           16,739
                           
                           
                           14,350
                           
                           
                           12,085Provision for loan losses
                           
                           
                           4,310
                           
                           
                           3,161
                           
                           
                           2,050
                           
                           
                           1,650
                           
                           
                           1,000Net interest income after provision for loan losses
                           
                           
                           14,972
                           
                           
                           15,199
                           
                           
                           14,689
                           
                           
                           12,700
                           
                           
                           11,085Noninterest income (loss)
                           
                           
                           1,843
                           
                           
                           (400
                           )
                           
                           1,262
                           
                           
                           579
                           
                           
                           826Noninterest expenses
                           
                           
                           15,051
                           
                           
                           12,321
                           
                           
                           10,875
                           
                           
                           7,351
                           
                           
                           7,856Income before income tax expense
                           
                           
                           1,764
                           
                           
                           2,478
                           
                           
                           5,076
                           
                           
                           5,928
                           
                           
                           4,055Income tax expense
                           
                           
                           345
                           
                           
                           626
                           
                           
                           1,641
                           
                           
                           2,027
                           
                           
                           1,541Net income
                           
                           $
                           1,419
                           
                           $
                           1,852
                           
                           $
                           3,435
                           
                           $
                           3,901
                           
                           $
                           2,514Preferred stock dividends
                           
                           
                           730
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -Dividend accretion
                           
                           
                           424
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -Net income available to common shareholders
                           
                           $
                           265
                           
                           $
                           1,852
                           
                           $
                           3,435
                           
                           $
                           3,901
                           
                           $
                           2,514Net operating income (4)
                           
                           $
                           1,419
                           
                           $
                           3,109
                           
                           $
                           3,224
                           
                           $
                           3,901
                           
                           $
                           3,444Per Common Share Data (2):Basic
                           
                           $
                           0.09
                           
                           $
                           0.62
                           
                           $
                           1.17
                           
                           $
                           1.33
                           
                           $
                           0.86Diluted
                           
                           $
                           0.09
                           
                           $
                           0.58
                           
                           $
                           1.06
                           
                           $
                           1.20
                           
                           $
                           0.78Book value
                           
                           $
                           14.35
                           
                           $
                           13.07
                           
                           $
                           12.99
                           
                           $
                           11.79
                           
                           $
                           11.46Weighted average number of common shares outstanding:Basic
                           
                           
                           3,055
                           
                           
                           2,998
                           
                           
                           2,942
                           
                           
                           2,932
                           
                           
                           2,922Diluted
                           
                           
                           3,081
                           
                           
                           3,167
                           
                           
                           3,234
                           
                           
                           3,238
                           
                           
                           3,223Performance Ratios:Return on average assets:GAAP
                           
                           
                           0.20
                           %
                           
                           0.27
                           %
                           
                           0.60
                           %
                           
                           0.85
                           %
                           
                           0.70
                           %Operating (4)
                           
                           
                           0.20
                           %
                           
                           0.46
                           %
                           
                           0.56
                           %
                           
                           0.85
                           %
                           
                           0.96
                           %Return on average equity:GAAP
                           
                           
                           2.51
                           %
                           
                           4.73
                           %
                           
                           9.40
                           %
                           
                           11.95
                           %
                           
                           8.44
                           %Operating (4)
                           
                           
                           2.51
                           %
                           
                           7.95
                           %
                           
                           8.82
                           %
                           
                           11.95
                           %
                           
                           11.56
                           %Return on average common equity:GAAP
                           
                           
                           0.64
                           %
                           
                           4.73
                           %
                           
                           9.40
                           %
                           
                           11.95
                           %
                           
                           8.44
                           %Operating (4)
                           
                           
                           0.64
                           %
                           
                           7.95
                           %
                           
                           8.82
                           %
                           
                           11.95
                           %
                           
                           11.56
                           %Net interest margin, tax equivalent
                           
                           
                           2.84
                           %
                           
                           2.82
                           %
                           
                           3.05
                           %
                           
                           3.27
                           %
                           
                           3.45
                           %Loan to deposit ratio (1)
                           
                           
                           116.23
                           %
                           
                           120.67
                           %
                           
                           123.26
                           %
                           
                           116.40
                           %
                           
                           133.20
                           %Efficiency ratio (3):GAAP
                           
                           
                           71.25
                           %
                           
                           68.60
                           %
                           
                           60.41
                           %
                           
                           49.24
                           %
                           
                           60.85
                           %Operating (4)
                           
                           
                           70.24
                           %
                           
                           61.61
                           %
                           
                           60.50
                           %
                           
                           49.24
                           %
                           
                           49.23
                           %
 27


Years Ended December 31,2009
                        
                        
                        2008
                        
                        
                        2007
                        
                        
                        2006
                        
                        
                        2005(Dollars and shares in thousands, except per share amounts)Asset Quality Ratios:Nonperforming assets, past due and restructuredloans to total loans (1)
                        
                        
                        2.69
                        %
                        
                        1.73
                        %
                        
                        0.92
                        %
                        
                        0.62
                        %
                        
                        0.14
                        %Nonperforming assets, past due and restructuredloans to total assets
                        
                        
                        2.15
                        %
                        
                        1.42
                        %
                        
                        0.75
                        %
                        
                        0.49
                        %
                        
                        0.12
                        %Net charge-offs to average total loans (1)
                        
                        
                        0.63
                        %
                        
                        0.35
                        %
                        
                        0.27
                        %
                        
                        0.32
                        %
                        
                        0.07
                        %Allowance for loan losses to nonperforming loans
                        
                        
                        66.09
                        %
                        
                        91.00
                        %
                        
                        129.65
                        %
                        
                        332.46
                        %
                        
                        962.74
                        %Allowance for loan losses to total loans (1)
                        
                        
                        1.35
                        %
                        
                        1.24
                        %
                        
                        1.13
                        %
                        
                        1.23
                        %
                        
                        1.33
                        %Capital Ratios:Equity to assets
                        
                        
                        8.32
                        %
                        
                        5.74
                        %
                        
                        6.09
                        %
                        
                        6.79
                        %
                        
                        7.52
                        %Common equity to assets
                        
                        
                        6.17
                        %
                        
                        5.74
                        %
                        
                        6.09
                        %
                        
                        6.79
                        %
                        
                        7.52
                        %Leverage ratio
                        
                        
                        10.00
                        %
                        
                        7.70
                        %
                        
                        8.30
                        %
                        
                        9.40
                        %
                        
                        11.60
                        %Tier 1 risk-based capital ratio
                        
                        
                        12.00
                        %
                        
                        9.20
                        %
                        
                        10.00
                        %
                        
                        11.90
                        %
                        
                        13.60
                        %Total risk-based capital ratio
                        
                        
                        13.30
                        %
                        
                        10.40
                        %
                        
                        11.10
                        %
                        
                        13.10
                        %
                        
                        14.90
                        %Growth Ratios and Other Data:Percentage change in net income available to common shareholder
                        
                        
                        (85.69
                        )%
                        
                        (46.09
                        )%
                        
                        (11.93
                        )%
                        
                        55.15
                        %
                        
                        24.89
                        %Percentage change in diluted net income per common share
                        
                        
                        (84.48
                        )%
                        
                        (45.28
                        )%
                        
                        (11.67
                        )%
                        
                        53.85
                        %
                        
                        (4.44
                        )%Percentage change in assets
                        
                        
                        3.80
                        %
                        
                        10.32
                        %
                        
                        23.32
                        %
                        
                        25.67
                        %
                        
                        28.34
                        %Percentage change in loans(1)
                        
                        
                        1.35
                        %
                        
                        11.35
                        %
                        
                        26.52
                        %
                        
                        18.92
                        %
                        
                        20.75
                        %Percentage change in deposits
                        
                        
                        5.23
                        %
                        
                        13.74
                        %
                        
                        19.48
                        %
                        
                        35.95
                        %
                        
                        24.06
                        %Percentage change in equity
                        
                        
                        50.41
                        %
                        
                        3.94
                        %
                        
                        10.68
                        %
                        
                        13.49
                        %
                        
                        8.53
                        %Reconciliation of GAAP to Non-GAAP Measures:Net income, as reported (GAAP)
                        
                        $
                        1,419
                        
                        $
                        1,852
                        
                        $
                        3,435
                        
                        $
                        3,901
                        
                        $
                        2,514Non-operating items:Other than temporary impairment on investments, net of income tax
                        
                        
                        -
                        
                        
                        1,257Gain on sale of long lived assets, net of income tax
                        
                        
                        -
                        
                        
                        -
                        
                        
                        (211
                        )
                        
                        -
                        
                        
                        -Impariment on long lived assets, net of income tax
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        930Net operating income (net income, excluding non-operating items)
                        
                        $
                        1,419
                        
                        $
                        3,109
                        
                        $
                        3,224
                        
                        $
                        3,901
                        
                        $
                        3,444Noninterest income, as reported (GAAP)
                        
                        $
                        1,843
                        
                        $
                        (400
                        )
                        $
                        1,262
                        
                        $
                        579
                        
                        $
                        826Non-operating items:Other than temporary impairment on investments
                        
                        
                        -
                        
                        $
                        (1,931
                        )Gain on sale of long lived assets
                        
                        
                        -
                        
                        
                        -
                        
                        $
                        319
                        
                        
                        -
                        
                        
                        -Operating noninterest expense (noninterest expense, excluding
                           non-operating items)
                        
                        $
                        1,843
                        
                        $
                        1,531
                        
                        $
                        943
                        
                        $
                        579
                        
                        $
                        826Noninterest expense, as reported (GAAP)
                        
                        $
                        15,051
                        
                        $
                        12,321
                        
                        $
                        10,875
                        
                        $
                        7,351
                        
                        $
                        7,856Non-operating items:Impairment on long lived assets
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        1,500Operating noninterest expense (noninterest expense, excluding
                           non-operating items)
                        
                        $
                        15,051
                        
                        $
                        12,321
                        
                        $
                        10,875
                        
                        $
                        7,351
                        
                        $
                        6,356  (1)
                           
                           
                           Includes nonperforming loans.(2)
                           
                           
                           Adjusted for all years presented giving retroactive effect to a
                              three-for-two common stock split in November 2003 and subsequent 10%
                              stock dividend in July 2006.(3)
                           
                           
                           Computed by dividing noninterest expense by the sum of net interest
                              income on a tax equivalent basis and noninterest income, net of
                              securities gains, losses, or impairment, and real estate activity.(4)
                           
                           
                           Return on average assets, return on average equity and the efficiency
                              ratio, on an operating basis, are calculated using operating earnings
                              and operating noninterest expense and are non-GAAP measures which
                              have been calculated on a pro-forma basis above and are further
                              explained in "General  Non-GAAP Financial Measures."
 28


Item 7. Management's Discussion and Analysis of Financial Condition
                           and Results of Operation. The following discussion and analysis also identifies significant
                     factors that have affected our financial position and operating
                     results during the periods included in the accompanying financial
                     statements. We encourage you to read this discussion and analysis in
                     conjunction with the financial statements and the related notes and
                     the other statistical information also included in this report. CRITICAL ACCOUNTING POLICIES We have adopted various accounting policies that govern the
                     application of accounting principles generally accepted in the United
                     States of America and with general practices within the banking
                     industry in the preparation of our financial statements. Our
                     significant accounting policies are described in footnote 1 to our
                     audited consolidated financial statements as of December 31, 2009. Certain accounting policies involve significant judgments and
                     assumptions by us that have a material impact on the carrying value
                     of certain assets and liabilities. We consider these accounting
                     policies to be critical accounting policies. The judgment and
                     assumptions we use are based on historical experience and other
                     factors, which we believe to be reasonable under the circumstances.
                     Because of the nature of the judgment and assumptions we make, actual
                     results could differ from these judgments and estimates that could
                     have a material impact on the carrying values of our assets and
                     liabilities and our results of operations. Allowance for Loan Losses The allowance for loan losses is established as losses are estimated
                     to have occurred through a provision for loan losses charged to
                     earnings. Loan losses are charged against the allowance when
                     management believes the uncollectability of a loan balance is
                     confirmed. Subsequent recoveries, if any, are credited to the
                     allowance. The allowance for loan losses is evaluated on a regular
                     basis by management and is based upon management's periodic review of
                     the collectability of the loans in light of historical experience,
                     the nature and volume of the loan portfolio, adverse situations that
                     may affect the borrower's ability to repay, estimated value of any
                     underlying collateral and prevailing economic conditions. This
                     evaluation is inherently subjective as it requires estimates that are
                     susceptible to significant revision as more information becomes
                     available. Income Taxes The financial statements have been prepared on the accrual basis.
                     When income and expenses are recognized in different periods for
                     financial reporting purposes versus for the purposes of computing
                     income taxes currently payable, deferred taxes are provided on such
                     temporary differences. Deferred tax assets and liabilities are
                     recognized for the expected future tax consequences of events that
                     have been recognized in the consolidated financial statements or tax
                     returns. Deferred tax assets and liabilities are measured using the
                     enacted tax rates expected to apply to taxable income in the years in
                     which those temporary differences are expected to be realized
                     or settled. Fair Value Determination and Other-Than-Temporary Impairment Analysis Many debt and equity securities have experienced significant and
                     often extended declines in value due to current economic conditions
                     and issuer-specific concerns. These declines have focused more
                     attention on the processes for determining whether such declines
                     indicate that the securities are "other-than-temporarily impaired".
                     Management evaluates numerous factors to assess whether or not it is
                     probable that all amounts due according to contractual terms will be
                     collected to determine if any other-than-temporary impairment exists.
                     The process of evaluating other-than-temporary impairment is
                     inherently judgmental, involving the weighing of positive and
                     negative factors and evidence that may be objective or subjective. Real Estate Acquired in Settlement of Loans Real estate acquired through foreclosure is initially recorded at the
                     lower of cost or estimated fair value. Subsequent to the date of
                     acquisition, it is carried at the lower of cost or fair value,
                     adjusted for net selling costs. Fair values of real estate owned are
                     reviewed regularly and writedowns are recorded when it is determined
                     that the carrying value of real estate exceeds the fair value less
                     estimated costs to sell. Costs relating to the development and
                     improvement of such property are capitalized, whereas those costs
                     relating to holding the property are expensed.
 29


GENERAL We were incorporated in March 1999 to organize and serve as the
                     holding company for Greenville First Bank, N.A. On July 2, 2007, we changed the name of our company and bank to Southern First
                     Bancshares, Inc. and Southern First Bank, N.A. Our primary reason for
                     the name change was related to our expansion into the Columbia, South
                     Carolina market. Since we opened our bank in January 2000, we have
                     experienced consistent growth in total assets, loans, deposits, and
                     shareholders' equity. 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
                     difference 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. There are risks inherent in all loans, so we maintain an allowance
                     for loan losses to absorb probable losses on existing loans that may
                     become uncollectible. We maintain this allowance by charging a
                     provision for loan losses against our operating earnings for each
                     period. We have included a detailed discussion of this process, as
                     well as several tables describing our allowance for loan losses. In addition to earning interest on our loans and investments, we earn
                     income through fees and other charges to our clients. We have also
                     included a discussion of the various components of this noninterest
                     income, as well as of our noninterest expense. The efficiency ratio represents the percentage of one dollar of
                     expense required to be incurred to earn a full dollar of revenue. We
                     compute our efficiency ratio by dividing noninterest expense by the
                     sum of net interest income and noninterest income. For the year ended December 31, 2009, we spent $0.71 on average to earn each $1.00 of revenue. The following discussion and analysis also identifies significant
                     factors that have affected our financial position and operating
                     results during the periods included in the accompanying financial
                     statements. We encourage you to read this discussion and analysis in
                     conjunction with our financial statements and the other statistical
                     information included in this report. In response to financial conditions affecting the banking system and
                     financial markets and the potential threats to the solvency of
                     investment banks and other financial institutions, the United States
                     government has taken unprecedented actions. On October 3, 2008, President Bush signed into law EESA. Pursuant to the EESA, the
                     Treasury Department has the authority to, among other things,
                     purchase mortgages, mortgage-backed securities, and other financial
                     instruments from financial institutions for the purpose of
                     stabilizing and providing liquidity to the U.S. financial markets. On October 14, 2008, the Treasury Department announced the Capital Purchase Program
                     under the EESA, pursuant to which the Treasury has made senior
                     preferred stock investments in participating financial institutions.
                     As a result of this program, we have received $17.3 million in
                     capital as of February 27, 2009. However, governmental intervention and new regulations under these
                     programs could materially and adversely affect our business,
                     financial condition and results of operations. Effect of Economic Trends The twelve months ended December 31, 2009 continue to reflect the tumultuous economic conditions which have
                     negatively impacted the liquidity and credit quality of financial
                     institutions in the United States. Concerns regarding increased
                     credit losses from the weakening economy have negatively affected
                     capital and earnings of most financial institutions. Financial
                     institutions have experienced significant declines in the value of
                     collateral for real estate loans, heightened credit losses, which
                     have resulted in record levels of non-performing assets, charge-offs
                     and foreclosures. In addition, certain financial institutions failed
                     or merged with other institutions during 2008 and 2009, and two of
                     the government sponsored housing enterprises were placed into
                     conservatorship with the U.S. Government in 2008. Liquidity in the debt markets remains low in spite of efforts by
                     Treasury and the Federal Reserve to inject capital into financial
                     institutions. The federal funds rate set by the Federal Reserve has
                     remained at 0.25% since December 2008, following a decline from 4.25%
                     to 0.25% during 2008 through a series of seven rate reductions. The Treasury Department, the FDIC and other governmental agencies
                     continue to enact rules and regulations to implement the EESA, the
                     TARP, the Financial Stability Plan, the Recovery Act and related
                     economic recovery programs, many of which contain limitations on the
                     ability of financial institutions to take certain actions or to
                     engage in certain activities if the financial institution is a
                     participant in the CPP or related programs. Future regulations, or
                     enforcement of the terms
 30


of programs already in place, may require financial institutions to
                     raise additional capital and result in the conversion of preferred
                     equity issued under TARP or other programs to common equity. There
                     can be no assurance as to the actual impact of the EESA, the FDIC
                     programs or any other governmental program on the financial markets. The weak economic conditions are expected to continue into 2010.
                     Financial institutions likely will continue to experience heightened
                     credit losses and higher levels of non-performing assets, charge-offs
                     and foreclosures. In light of these conditions, financial
                     institutions also face heightened levels of scrutiny from federal and
                     state regulators. These factors negatively influenced, and likely
                     will continue to negatively influence, earning asset yields at a time
                     when the market for deposits is intensely competitive. As a result,
                     financial institutions experienced, and are expected to continue to
                     experience, pressure on credit costs, loan yields, deposit and other
                     borrowing costs, liquidity, and capital. Results of Operations Income Statement Review Summary Net income for the year ended December 31, 2009 was $1.4 million, a 23.4% decrease from $1.9 million for the year ended December 31, 2008. The $433,000 decrease in net income resulted primarily from a $1.2
                     million increase in the provision for loan losses and a $2.7 million
                     increase in noninterest expenses, partially offset by increases of
                     $922,000 in net interest income and $2.2 million in noninterest
                     income and a $281,000 reduction in income tax expense. Our efficiency
                     ratio, excluding real estate owned activity and the prior year
                     impairment charge on securities, was 70.2% for 2009, compared to
                     61.6% in 2008. The deterioration in the efficiency ratio is due
                     primarily to the additional FDIC insurance costs as well as
                     administrative costs associated with our new retail offices and
                     regional headquarters. Net Interest Income Our level of net interest income is determined by the level of
                     earning assets and the management of our net interest margin. For the
                     years ended December 31, 2009 and 2008, our net interest income was $19.3 million and $18.4
                     million, respectively. Our average earning assets increased $27.0
                     million during the twelve months ended December 31, 2009 compared to the average for the same period in 2008, while our
                     interest bearing liabilities increased only $14.1 million. The
                     primary reason that earning assets increased by $12.9 million more
                     than interest bearing liabilities is due to the issuance of preferred
                     stock on February 27, 2009 under the CPP. The increase in average earning assets is primarily
                     related to a $20.8 million increase in our average loans, while the
                     increase in average interest-bearing liabilities is related to an
                     increase in our interest-bearing deposits, specifically, time
                     deposits. 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 shows
                     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 2009, 2008, and 2007. A review of these tables 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" table demonstrates the effect
                     of changing interest rates and changing volume of assets and
                     liabilities on our financial condition during the periods shown. A
                     review of these tables shows that if short-term rates begin to rise,
                     our net interest income is expected to be positively impacted. 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 and interest-bearing accounts. Finally, we have
                     included various tables that provide detail about our investment
                     securities, our loans, our deposits, and borrowings. The following table sets forth information related to our average
                     balance sheet, average yields on assets, and average costs of
                     liabilities (dollars in thousands). We derived these yields or costs
                     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 only $100,000 in interest-bearing deposits at another
                     bank and had no securities purchased with agreements to resell. All
                     investments were owned at an original maturity of over one year.
                     Nonaccrual loans are included in earning assets 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.
 31


Average Balances, Income and Expenses, Yields and RatesFor the Years Ended December 31,2009
                           
                           
                           2008
                           
                           
                           2007Average Balance
                           
                           
                           Income/Expense
                           
                           
                           Yield/Rate
                           
                           
                           Average Balance
                           
                           
                           Income/Expense
                           
                           
                           Yield/Rate
                           
                           
                           Average Balance
                           
                           
                           Income/Expense
                           
                           
                           Yield/RateEarning assets:Federal funds sold
                           
                           $
                           14,375
                           
                           $
                           31
                           
                           
                           0.22
                           %
                           $
                           13,506
                           
                           $
                           261
                           
                           
                           1.93
                           %
                           $
                           10,579
                           
                           $
                           540
                           
                           
                           5.10
                           %Investment securities, taxable
                           
                           
                           94,733
                           
                           
                           4,278
                           
                           
                           4.52
                           %
                           
                           89,616
                           
                           
                           4,750
                           
                           
                           5.30
                           %
                           
                           77,589
                           
                           
                           4,224
                           
                           
                           5.44
                           %Investment securities, nontaxable (1)
                           
                           
                           3,898
                           
                           
                           235
                           
                           
                           6.04
                           %
                           
                           3,746
                           
                           
                           232
                           
                           
                           6.20
                           %
                           
                           3,890
                           
                           
                           232
                           
                           
                           5.97
                           %Loans
                           
                           
                           568,556
                           
                           
                           31,722
                           
                           
                           5.58
                           %
                           
                           547,720
                           
                           
                           35,058
                           
                           
                           6.40
                           %
                           
                           459,245
                           
                           
                           34,612
                           
                           
                           7.54
                           %Total earning assets
                           
                           
                           681,562
                           
                           
                           36,266
                           
                           
                           5.32
                           %
                           
                           654,588
                           
                           
                           40,301
                           
                           
                           6.16
                           %
                           
                           551,303
                           
                           
                           39,608
                           
                           
                           7.18
                           %Nonearning assets
                           
                           
                           38,571
                           
                           
                           
                           
                           
                           
                           
                           
                           28,001
                           
                           
                           
                           
                           
                           
                           
                           
                           23,184Total assets
                           
                           $
                           720,133
                           
                           
                           
                           
                           
                           
                           
                           $
                           682,589
                           
                           
                           
                           
                           
                           
                           
                           $
                           574,487Interest-bearing liabilities:NOW accounts
                           
                           $
                           43,465
                           
                           $
                           301
                           
                           
                           0.69
                           %
                           $
                           38,850
                           
                           $
                           399
                           
                           
                           1.03
                           %
                           $
                           34,338
                           
                           $
                           571
                           
                           
                           1.66
                           %Savings & money market
                           
                           
                           86,506
                           
                           
                           958
                           
                           
                           1.11
                           %
                           
                           89,482
                           
                           
                           1,694
                           
                           
                           1.89
                           %
                           
                           87,883
                           
                           
                           3,088
                           
                           
                           3.51
                           %Time deposits
                           
                           
                           318,255
                           
                           
                           8,737
                           
                           
                           2.75
                           %
                           
                           303,054
                           
                           
                           12,714
                           
                           
                           4.20
                           %
                           
                           235,105
                           
                           
                           12,112
                           
                           
                           5.15
                           %Total interest-bearing deposits
                           
                           
                           448,226
                           
                           
                           9,996
                           
                           
                           2.23
                           %
                           
                           431,386
                           
                           
                           14,807
                           
                           
                           3.43
                           %
                           
                           357,326
                           
                           
                           15,771
                           
                           
                           4.41
                           %Note payable and other debt
                           
                           
                           156,313
                           
                           
                           6,474
                           
                           
                           4.14
                           %
                           
                           159,076
                           
                           
                           6,281
                           
                           
                           3.95
                           %
                           
                           130,909
                           
                           
                           5,999
                           
                           
                           4.58
                           %Junior subordinated debt
                           
                           
                           13,403
                           
                           
                           425
                           
                           
                           3.17
                           %
                           
                           13,403
                           
                           
                           765
                           
                           
                           5.71
                           %
                           
                           13,403
                           
                           
                           1,011
                           
                           
                           7.54
                           %Total interest-bearing liabilities
                           
                           
                           617,942
                           
                           
                           16,895
                           
                           
                           2.73
                           %
                           
                           603,865
                           
                           
                           21,853
                           
                           
                           3.62
                           %
                           
                           501,638
                           
                           
                           22,781
                           
                           
                           4.54
                           %Noninterest-bearing liabilities
                           
                           
                           45,686
                           
                           
                           
                           
                           
                           
                           
                           
                           39,605
                           
                           
                           
                           
                           
                           
                           
                           
                           36,303Shareholders' equity
                           
                           
                           56,505
                           
                           
                           
                           
                           
                           
                           
                           
                           39,119
                           
                           
                           
                           
                           
                           
                           
                           
                           36,546Total liabilities andshareholders' equity
                           
                           $
                           720,133
                           
                           
                           
                           
                           
                           
                           
                           $
                           682,589
                           
                           
                           
                           
                           
                           
                           
                           $
                           574,487Net interest spread
                           
                           
                           
                           
                           
                           
                           
                           
                           2.59
                           %
                           
                           
                           
                           
                           
                           
                           
                           2.54
                           %
                           
                           
                           
                           
                           
                           
                           
                           2.64
                           %Net interest income(tax equivalent)/margin
                           
                           
                           
                           
                           $
                           19,371
                           
                           
                           2.84
                           %
                           
                           
                           
                           $
                           18,448
                           
                           
                           2.82
                           %
                           
                           
                           
                           $
                           16,827
                           
                           
                           3.05
                           %Less: tax-equivalent adjustment (1)
                           
                           
                           
                           
                           
                           (89
                           )
                           
                           
                           
                           
                           
                           
                           
                           (88
                           )
                           
                           
                           
                           
                           
                           
                           
                           (88
                           )Net interest income
                           
                           
                           
                           
                           $
                           19,282
                           
                           
                           
                           
                           
                           
                           
                           $
                           18,360
                           
                           
                           
                           
                           
                           
                           
                           $
                           16,739  (1)
                           
                           
                           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. Our net interest margin is calculated as net interest income divided
                     by average interest-earning assets. Our net interest margin, on a
                     tax-equivalent basis, for the year ended December 31, 2009 was 2.84%, compared to 2.82% for the year ended December 31, 2008 and 3.05% for the year ended December 31, 2007. Despite lower interest income as a result of additional loans being
                     placed on nonaccrual and an increase in our investment portfolio,
                     which traditionally yields lower earnings, our net interest margin
                     has increased throughout 2009 from 2.62% for the fourth quarter of
                     2008 to 2.87% for the fourth quarter of 2009. During the twelve-month
                     periods ended December 31, 2009, 2008 and 2007, interest earning assets exceeded interest bearing
                     liabilities by $63.6 million, $50.7 million, and $49.7 million,
                     respectively. During 2009, interest-earning assets averaged $681.6
                     million, compared to $654.6 million in 2008 and $551.3 million
                     in 2007. Our net interest spread was 2.59% for the year ended December 31, 2009, compared to 2.54% for the year ended December 31, 2008 and 2.64% for the year ended December 31, 2007. 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 5 basis point increase in our net interest spread is primarily
                     due to the fact that more of our rate-sensitive liabilities repriced
                     downward than our rate-sensitive assets during the twelve months
                     ended December 31, 2009. Given the 400 basis point decrease in short-term rates over the
                     past two years, the rates on our new and maturing loans and deposits
                     are much lower than they were in the past. However, in response to
                     the significant decrease in rates, we began instituting interest rate
                     floors on our new and maturing loans and have recently changed our
                     focus to increasing the amount of variable rate loans in our
                     portfolio. We believe that interest rates are at or near their lowest
                     levels and that this change in focus will position us to benefit from
                     future increases in the short-term rates.
 32


During the past 12 months, our loan yield decreased only 82 basis
                     points compared to the twelve months ended December 31, 2008. Offsetting the decrease in our loan yield was a 120 basis point
                     decrease in the cost of our interest-bearing deposits for the year
                     ended December 31, 2009 compared to the year ended December 31, 2008, primarily related to the cost of our time deposits which have
                     renewed at rates much lower than their original rates. In addition,
                     our combined investment and federal funds sold yield decreased by 88
                     basis points for the 2009 period compared to the same period in 2008. The cost of our borrowings, specifically our junior subordinated
                     debt, has declined during the year ended December 31, 2009 compared to the same period in 2008 due to the variable rates of the
                     debt. As of December 31, 2009, all of our FHLB advances were at fixed rates, while all of our
                     other borrowings, including notes payable and junior subordinated
                     debt, had variable rates. The $10.6 million increase in average nonearning assets during the year ended December 31, 2009 compared to the same period in 2008 is due primarily to a $6.3
                     million increase in property and equipment related to the
                     construction of our new regional headquarters facility in Columbia,
                     SC as well as increases of $3.2 million in bank-owned life insurance
                     and $2.6 million in other real estate owned. In addition, the $17.4
                     million increase in average shareholders' equity during the 2009
                     period is primarily related to the $17.3 million received on February 27, 2009 for the issuance of preferred stock under the Treasury's Capital
                     Purchase Program. 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).  Years EndedDecember 31, 2009 vs. 2008
                           
                           
                           December 31, 2008 vs. 2007Increase (Decrease) Due to Change in
                           
                           
                           Increase (Decrease) Due to Change inVolume
                           
                           
                           Rate
                           
                           
                           Rate/Volume
                           
                           
                           Total
                           
                           
                           Volume
                           
                           
                           Rate
                           
                           
                           Rate/Volume
                           
                           
                           TotalInterest incomeLoans
                           
                           $
                           1,334
                           
                           $
                           (4,499
                           )
                           $
                           (171
                           )
                           $
                           (3,336
                           )
                           $
                           6,668
                           
                           $
                           (5,217
                           )
                           $
                           (1,005
                           )
                           $
                           446Investment securities
                           
                           
                           276
                           
                           
                           (706
                           )
                           
                           (40
                           )
                           
                           (470
                           )
                           
                           637
                           
                           
                           (97
                           )
                           
                           (14
                           )
                           
                           526Federal funds sold
                           
                           
                           17
                           
                           
                           (232
                           )
                           
                           (15
                           )
                           
                           (230
                           )
                           
                           149
                           
                           
                           (336
                           )
                           
                           (92
                           )
                           
                           (279
                           )Total interest income
                           
                           
                           1,627
                           
                           
                           (5,437
                           )
                           
                           (226
                           )
                           
                           (4,036
                           )
                           
                           7,454
                           
                           
                           (5,650
                           )
                           
                           (1,111
                           )
                           
                           693Interest expenseDeposits
                           
                           
                           622
                           
                           
                           (5,214
                           )
                           
                           (219
                           )
                           
                           (4,811
                           )
                           
                           3,138
                           
                           
                           (3,422
                           )
                           
                           (680
                           )
                           
                           (964
                           )Note payable and other debt
                           
                           
                           (109
                           )
                           
                           307
                           
                           
                           (5
                           )
                           
                           193
                           
                           
                           1,347
                           
                           
                           (833
                           )
                           
                           (189
                           )
                           
                           325Junior subordinated debt
                           
                           
                           -
                           
                           
                           (340
                           )
                           
                           -
                           
                           
                           (340
                           )
                           
                           (85
                           )
                           
                           (222
                           )
                           
                           18
                           
                           
                           (289
                           )Total interest expense
                           
                           
                           513
                           
                           
                           (5,247
                           )
                           
                           (224
                           )
                           
                           (4,958
                           )
                           
                           4,400
                           
                           
                           (4,477
                           )
                           
                           (851
                           )
                           
                           (928
                           )Net interest income
                           
                           $
                           1,114
                           
                           $
                           (190
                           )
                           $
                           (2
                           )
                           $
                           922
                           
                           $
                           3,054
                           
                           $
                           (1,173
                           )
                           $
                           (260
                           )
                           $
                           1,621 Net interest income, the largest component of our income, was $19.3
                     million, $18.4 million, and $16.7 million, for the years ended December 31, 2009, 2008, and 2007, respectively. The increases in 2009 and 2008
                     related primarily to the net effect of higher levels of both average
                     interest-earning assets and interest-bearing liabilities. Average
                     interest-earning assets increased $27.0 million and $103.3 million
                     during the years ended December 31, 2009 and 2008, respectively, compared to the prior years. During the same
                     periods of 2009 and 2008, average interest-bearing liabilities
                     increased $14.1 million and $102.2 million, respectively, compared to
                     the prior years. The higher average balances resulted in $1.1 million
                     and $3.1 million of additional income related to the impact of higher
                     average interest-earning assets and interest-bearing liabilities
                     during the years ended 2009 and 2008, respectively, compared to the
                     same periods in 2008 and 2007. In addition, lower spreads on the
                     average balances decreased net interest income by $190,000 for the
                     2009 period while lower spreads decreased net interest income by $1.2
                     million in 2008. Interest income for the year ended December 31, 2009 was $36.2 million, consisting of $31.7 million on loans, $4.4
                     million on investments, and $31,000 on federal funds sold. Interest
                     income for the same period ended December 31, 2008 was $40.2 million, consisting of $35.1 million on loans, $4.9
                     million on investments, and $261,000 on federal funds sold. Interest
                     income for 2007 was $39.5 million, consisting of $34.6 million on
                     loans, $4.4 million on investments, and $540,000 on federal funds
                     sold. Interest on loans for the years ended December 31, 2009, 2008 and 2007 represented 87.7%, 87.2% and 87.6%, respectively, of
                     total interest income, while income from investments and federal
                     funds sold represented 12.3%, 12.8% and 12.4% of total interest
                     income for the years ended December 31, 2009, 2008 and 2007, respectively. The high
 33


percentage of interest income from loans related to our strategy to
                     maintain a significant portion of our assets in higher earning loans
                     compared to lower yielding investments. Average loans represented
                     83.4%, 83.7% and 83.3% of average interest-earning assets for the
                     years ended December 31, 2009, 2008 and 2007, respectively. Included in interest income on loans
                     for the years ended December 31, 2009, 2008 and 2007 was $599,000, $727,000 and $720,000, respectively,
                     related to the net amortization of loan fees and capitalized loan
                     origination costs. Interest expense for the year ended December 31, 2009 was $16.9 million, a 22.7% decrease compared to $21.9 million for
                     the year ended December 31, 2008. For the years ended December 31, 2009 and 2008, interest expense consisted of $10.0 million and $14.8
                     million, respectively, related to deposits and $6.9 million and $7.1
                     million, respectively, related to borrowings. Interest expense for
                     the year ended December 31, 2007 was $22.8 million, consisting of $15.8 million related to deposits
                     and $7.0 million related to borrowings. Interest expense on deposits
                     for the years ended December 31, 2009, 2008 and 2007 represented 59.2%, 67.8% and 69.2%, respectively, of
                     total interest expense, while interest expense on borrowings
                     represented 40.8%, 32.2% and 30.8%, respectively, of total interest
                     expense. During the year ended December 31, 2009, average interest-bearing deposits were higher by $16.8 million than
                     for the same period in 2008, while FHLB advances and other borrowings
                     were $2.8 million lower than for the same period in 2008. Average
                     interest-bearing deposits were higher by $74.1 million during the
                     year ended December 31, 2008 than for the same period 2007, while FHLB advances and other
                     borrowings during 2008 were $28.2 million higher than for the same
                     period in 2007. Both the short-term borrowings from the FHLB and the
                     sale of securities under agreements to repurchase provided us with
                     the opportunity to obtain low cost funding with various maturities
                     similar to the maturities on our loans and investments. Provision for Loan Losses We have established an allowance for loan losses through a provision
                     for loan losses charged as an expense on our statements of income. We
                     review our loan portfolio periodically to evaluate our outstanding
                     loans and to measure both the performance of the portfolio and the
                     adequacy of the allowance for loan losses. Please see the discussion
                     below under "Balance Sheet Review Provision and Allowance for Loan
                     Losses" for a description of the factors we consider in determining
                     the amount of the provision we expense each period to maintain this
                     allowance. For the year ended December 31, 2009, we incurred a noncash expense related to the provision for loan
                     losses of $4.3 million, bringing the allowance for loan losses to
                     $7.8 million, or 1.35% of gross loans, as of December 31, 2009. The $4.3 million provision for 2009 related primarily to both the
                     level of charge-offs that occurred during this period and the
                     increase in non-performing loans. During the twelve months ended December 31, 2009, we charged-off $3.7 million in loans and recorded $109,000 of
                     recoveries on loans previously charged-off. The $3.6 million net
                     charge-offs represented 0.63% of the average outstanding loan
                     portfolio for the year ended December 31, 2009. At December 31, 2009 and 2008, the allowance for loan losses represented less than one
                     time the amount of non-performing loans, compared to 1.2 times at December 31, 2007. A significant portion, or 67.8%, of nonperforming loans at December 31, 2009 are secured by real estate. Our nonperforming loans have been
                     written down to approximately 74% of their original nonperforming
                     balance. We have evaluated the underlying collateral on these loans
                     and believe that the collateral on these loans combined with our
                     write-downs on these loans is sufficient to minimize future losses.
                     As a result of this level of coverage on non-performing loans, we
                     believe the provision of $4.3 million for the year ended December 31, 2009 to be adequate. In comparison, for the same periods in 2008 and 2007, we added $3.2
                     million and $2.1 million, respectively, to the provision for loan
                     losses, resulting in an allowance of $7.0 million and $5.8 million at December 31, 2008 and 2007. The allowance for loan losses as a percentage of gross
                     loans was 1.24% and 1.13% at December 31, 2008 and 2007, respectively. We reported net charge-offs of $1.9 million
                     and $1.3 million for the years ended December 31, 2008 and 2007, respectively, including recoveries of $28,000 and $48,000
                     for the same periods in 2008 and 2007. The net charge-offs of $1.9
                     million and $1.3 million during 2008 and 2007, respectively,
                     represented 0.35% and 0.27% of the average outstanding loan
                     portfolios for the respective years.
 34


Noninterest Income The following tables set forth information related to our noninterest
                     income (loss) (dollars in thousands).  Years ended December 31,2009
                           
                           
                           2008
                           
                           
                           2007Loan fee income
                           
                           $
                           431
                           
                           $
                           197
                           
                           $
                           173Service fees on deposit accounts
                           
                           
                           732
                           
                           
                           653
                           
                           
                           431Income from bank owned life insurance
                           
                           
                           605
                           
                           
                           462
                           
                           
                           374Gain on sale of investment securities
                           
                           
                           41
                           
                           
                           33
                           
                           
                           -Other than temporary impairment on investment securities
                           
                           
                           -
                           
                           
                           (1,931
                           )
                           
                           -Real estate owned activity
                           
                           
                           (342
                           )
                           
                           (140
                           )
                           
                           28Other income
                           
                           
                           376
                           
                           
                           326
                           
                           
                           256Total noninterest income (loss)
                           
                           $
                           1,843
                           
                           $
                           (400
                           )
                           $
                           1,262 Noninterest income for the year ended December 31, 2009 was $1.8 million, an increase of $2.2 million, or 560.8% compared to
                     noninterest income (loss) of $400,000 during the same period in 2008.
                     The $2.2 million increase in 2009 was primarily related to an other
                     than temporary impairment charge on investment securities of $1.9
                     million recorded in 2008. In addition, loan fee income increased by
                     $234,000, income from bank owned life insurance increased by
                     $143,000, deposit account fees increased by $79,000, and other income
                     increased by $50,000. Partially offsetting the increases in income
                     was a $202,000 increased loss on real estate owned activity.
                     Noninterest income for the year ended December 31, 2007 was $1.3 million. Loan fee income consists primarily of late charge fees and mortgage
                     origination fees we receive on residential loans funded and closed by
                     a third party. Loan fees were $431,000 and $197,000 for the years
                     ended December 31, 2009 and 2008, respectively. The $234,000 increase relates primarily to
                     an increase in mortgage origination and referral fees of $262,000,
                     partially offset by decreases of $20,000 in late fees and $8,000 in
                     fees related to lines and letters of credit. Mortgage origination and
                     referral fees were $275,000 in 2009 compared to $13,000 in 2008. In
                     addition, we received $100,000 in late charge fees in 2009 compared
                     to $120,000 for the same period in 2008 and $56,000 and $64,000 of
                     fees related to lines and letters of credit for the years ended December 31, 2009 and 2008, respectively. Income from loan fees increased by $24,000 to $197,000 for the year ended December 31, 2008 from $173,000 for the same period in 2007. The increase relates
                     primarily to increases of $22,000 in fees related to lines and
                     letters of credit and $12,000 in late charge fees, partially offset
                     by a decrease of $10,000 in mortgage origination fees. Service fees on deposit accounts consist primarily of service charges
                     on our checking, money market, and savings accounts and the fee
                     income received from client non-sufficient funds ("NSF")
                     transactions. Deposit fees were $732,000 and $653,000 for the years
                     ended December 31, 2009 and 2008, respectively. The $79,000 increase is primarily related to
                     a $68,000 increase in service charges and other deposit related fees
                     and a $17,000 increase in overdraft fees, partially offset by a
                     $6,000 decrease in NSF fees. Other deposit related fees were $263,000
                     and $195,000 for the years ended December 31, 2009 and 2008, respectively, while overdraft fees were $36,000 and
                     $19,000 for the same periods in 2009 and 2008. NSF fee income was
                     $433,000 and $438,000 for the years ended December 31, 2009 and 2008, respectively, representing 59.1% of total service fees on
                     deposits in 2009 compared to 67.1% in 2008. Deposit fees were $653,000 and $431,000 for the years ended December 31, 2008 and 2007, respectively. The $222,000 increase is primarily related
                     to a $131,000 increase in NSF fees and a $106,000 increase in other
                     deposit related fees, partially offset by a decrease of $15,000 in
                     overdraft fees. Deposit related fees were $195,000 and $89,000 for
                     the years ended December 31, 2008 and 2007, respectively. NSF income was $438,000 and $307,000 for the
                     same periods ended December 31, 2008 and 2007, respectively, representing 67.1% of total service fees on
                     deposits in 2008 compared to 71.3% of total service fees on deposits
                     in 2007. We held $14.0 million of bank owned life insurance as of December 31, 2009, compared to $13.4 million as of December 31, 2008. Income derived from this life insurance was $605,000, $462,000, and
                     $374,000 for the years ended December 31, 2009, 2008, and 2007, respectively. During the year ended December 31, 2009, we recorded a $41,000 gain on the sale or call of investment
                     securities. We recorded a $33,000 gain on the sale or call of
                     securities for the year ended December 31, 2008 and an impairment charge of $1.9 million, pre-tax, on our FNMA
                     preferred stock, which was determined to have suffered an
                     other-than-temporary impairment as a result of the Government's
                     decision on September 7, 2008 to place the FNMA under conservatorship.
 35


Real estate owned activity includes income and expenses from property
                     held for sale and other real estate we own. For the years ended December 31, 2009 and 2008, we had net losses of $342,000 and $140,000, respectively,
                     and net income of $28,000 for the year ended December 31, 2007. Included in real estate owned activity for 2009 was rental income
                     of $123,000 and write-downs or losses on the sale of property of
                     $395,000. The remaining $70,000 of expenses relates to costs
                     associated with owning the property such as maintenance and property
                     taxes. During 2008, we received rental income of $74,000 and incurred
                     write-downs or losses on sale of $148,000 and additional maintenance
                     costs of $66,000. Other income consisted primarily of income from fees received on
                     debit card transactions and sale of customer checks, and fees
                     received on wire transfers. Other income was $376,000 and $326,000
                     for the years ended December 31, 2009 and 2008, respectively. The $50,000 increase resulted primarily from
                     a $38,000 increase in debit card transaction fees and a $12,000
                     increase in other fee income. Debit card transaction fees were
                     $268,000 and $230,000 for the years ended December 31, 2009 and 2008, respectively and represented 71.3% and 70.6% of total
                     other income for the 2009 and 2008 periods, respectively. The
                     corresponding transaction costs associated with debit card
                     transactions are included in outside service expense. The debit card
                     transaction costs were $98,000 and $92,000 for the years ended December 31, 2009 and 2008, respectively. The net impact of the fees received and the
                     related cost of the debit card transactions on earnings for the
                     twelve months ended December 31, 2009 and 2008 was $170,000 and $138,000, respectively. Other income was $326,000 and $256,000 for the years ended December 31, 2008 and 2007, respectively. The $70,000 increase resulted primarily from
                     a $50,000 increase in debit card transaction fees and a $20,000
                     increase in other fee income. Debit card transaction fees were
                     $180,000 for the year ended December 31, 2007 and represented 70.4% of total other income for the 2007. The
                     corresponding transaction costs associated with debit card
                     transactions were approximately $75,000 for the year ended December 31, 2007 and are included in data processing and related costs. The net
                     impact of the fees received and the related cost of the debit card
                     transactions on earnings for the twelve months ended December 31, 2007 was $105,000. Noninterest Expenses The following tables set forth information related to our noninterest
                     expenses (dollars in thousands).  Years ended December 31,2009
                           
                           
                           2008
                           
                           
                           2007Compensation and benefits
                           
                           $
                           7,840
                           
                           $
                           6,817
                           
                           $
                           6,019Professional fees
                           
                           
                           650
                           
                           
                           525
                           
                           
                           573Marketing
                           
                           
                           659
                           
                           
                           583
                           
                           
                           499Insurance
                           
                           
                           1,433
                           
                           
                           560
                           
                           
                           450Occupancy
                           
                           
                           1,938
                           
                           
                           1,554
                           
                           
                           1,433Data processing and related costs
                           
                           
                           1,451
                           
                           
                           1,352
                           
                           
                           1,171Telephone
                           
                           
                           266
                           
                           
                           176
                           
                           
                           136Other
                           
                           
                           814
                           
                           
                           754
                           
                           
                           594Total noninterest expenses
                           
                           $
                           15,051
                           
                           $
                           12,321
                           
                           $
                           10,875 We incurred noninterest expenses of $15.1 million for the year ended December 31, 2009 compared to $12.3 million and $10.9 million for the years ended December 31, 2008 and 2007, respectively. Our efficiency ratio was 70.2% for the year ended December 31, 2009 compared to 61.6% and 60.5% for the same periods in 2008 and 2007.
                     The efficiency ratio is computed as noninterest expense as a
                     percentage of noninterest income and net interest income, excluding
                     real estate owned activity and the impairment charge. Increased FDIC
                     insurance premiums and expenses related to the additional two retail
                     offices opened in July 2008 and our new regional headquarters
                     building opened in August 2009 contributed to the elevated efficiency
                     ratio for the 2009 period. For the year ended December 31, 2009, compensation and benefits, occupancy, and data processing and
                     related costs accounted for 74.6% of the total noninterest expenses
                     compared to 78.9% in 2008 and 79.3% in 2007.
 36


The following tables set forth information related to our
                     compensation and benefits (dollars in thousands).  Years ended December 31,2009
                           
                           
                           2008
                           
                           
                           2007Base compensation
                           
                           $
                           5,799
                           
                           $
                           4,960
                           
                           $
                           4,120Incentive compensation
                           
                           
                           702
                           
                           
                           758
                           
                           
                           975Total compensation
                           
                           
                           6,501
                           
                           
                           5,718
                           
                           
                           5,095Benefits
                           
                           
                           1,479
                           
                           
                           1,249
                           
                           
                           1,078Capitalized loan origination costs
                           
                           
                           (140
                           )
                           
                           (150
                           )
                           
                           (154
                           )Total compensation and benefits
                           
                           $
                           7,840
                           
                           $
                           6,817
                           
                           $
                           6,019 Total compensation and benefits expense was $7.8 million, $6.8
                     million and $6.0 million for the years ended December 31, 2009, 2008 and 2007, respectively. Compensation and benefits represented
                     52.1% of our total noninterest expenses for the year ended December 31, 2009, 55.3% for the same period in 2008, and 55.4% for the same period in
                     2007. The $1.0 million increase in compensation and benefits expense
                     in 2009 compared to 2008 is primarily related to an $839,000 increase
                     in base compensation and $230,000 of additional benefits cost,
                     partially offset by a reduction in incentive compensation of $56,000.
                     In addition, loan origination costs, which are required to be
                     capitalized and amortized over the life of the loan as a reduction of
                     loan interest income, decreased $10,000 during the 2009 period. Compensation and benefits expense increased by $798,000 in 2008
                     compared to 2007. The increase is a result of $840,000 additional
                     base compensation and $171,000 of additional benefits cost, partially
                     offset by a reduction in incentive compensation of $217,000. Loan
                     origination costs decreased $4,000 during the 2008 period. The $839,000 increase in base compensation expense for the year ended December 31, 2009, compared to the same period in 2008, related to the cost of 13
                     additional employees, as well as annual salary increases. We hired 6
                     additional employees during the third quarter of 2009 in relation to
                     the opening of our new regional headquarters in Columbia, South
                     Carolina. In addition, we have added positions in mortgage
                     origination, credit, client services and human resources. The
                     $840,000 increase in base compensation expense in 2008 related to the
                     addition of 14 employees, plus the impact of annual salary increases.
                     Ten of the 14 new employees were hired to staff and support our two
                     additional branch office locations while the remaining four employees
                     were hired to further enhance our credit review and administration,
                     finance and information technology departments. Incentive compensation decreased $56,000 and $217,000 for the years ended December 31, 2009 and 2008, respectively compared to the 2008 and 2007 periods. The
                     decreases are due primarily to the fact that certain targeted
                     financial performance goals were not achieved by management,
                     resulting in less incentive compensation for the years 2009 and 2008.
                     For the year ended December 31, 2009, incentive compensation represented 10.8% of total compensation, and
                     13.3% and 19.1% for the years ended December 31, 2008 and 2007, respectively. The incentive compensation expense recorded
                     for the years 2009, 2008, and 2007 represented an accrual of the
                     estimated incentive compensation earned during the respective year. Benefits expense increased $230,000 in the year ended December 31, 2009 compared to the year ended December 31, 2008, and $171,000 in 2008 compared to the year ended December 31, 2007. Benefits expense represented 22.8%, 21.8%, and 21.2% of the total
                     compensation for the years ended December 31, 2009, 2008, and 2007, respectively. The following tables set forth information related to our data
                     processing and related costs (dollars in thousands).  Years ended December 31,2009
                           
                           
                           2008
                           
                           
                           2007Data processing costs
                           
                           $
                           1,087
                           
                           $
                           1,032
                           
                           $
                           842ATM transaction expense
                           
                           
                           98
                           
                           
                           92
                           
                           
                           76Courier expense
                           
                           
                           112
                           
                           
                           104
                           
                           
                           114Other expenses
                           
                           
                           154
                           
                           
                           124
                           
                           
                           139Total data processing and related costs
                           
                           $
                           1,451
                           
                           $
                           1,352
                           
                           $
                           1,171 Total data processing and related costs were $1.5 million, $1.4
                     million and $1.2 million for the years ended December 31, 2009, 2008 and 2007 respectively. During the year ended December 31, 2009, our data processing costs for our core processing system increased
                     by $55,000 to $1.1 million compared to $1.0 million for the same
                     period in 2008. Data processing costs for our core processing system
                     were $842,000 for the year ended December 31, 2007.
 37


We have contracted with an outside computer service company to
                     provide our core data processing services. Data processing costs
                     increased $55,000, or 5.3%, for the year ended December 31, 2009 and $190,000, or 22.6%, for the year ended December 31, 2008 when compared to the same periods in 2008 and 2007, respectively.
                     The increases in costs were primarily related to the higher number of
                     loan and deposit accounts as well as costs incurred in relation to
                     new products offered to our clients. A significant portion of the fee
                     charged by the third party processor is directly related to the
                     number of loan and deposit accounts and the related number of
                     transactions. We receive income from debit card transactions performed by our
                     clients. Since we outsource this service, we are charged related
                     transaction expenses from our merchant service provider. Debit card
                     transaction expense was $98,000 and $92,000 for the years ended December 31, 2009 and 2008, respectively, and $75,000 for the year ended December 31, 2007. Occupancy expense represented 12.9%, 12.6% and 13.2% of total
                     noninterest expenses for the years ended December 31, 2009, 2008, and 2007, respectively. Occupancy expense increased $384,000
                     to $1.9 million for the year ended December 31, 2009 from $1.6 million for the same period in 2008. The increase is
                     primarily due to the costs of depreciation and maintenance associated
                     with our new regional headquarters building in Columbia, South
                     Carolina which opened in August 2009. During 2008, occupancy expense
                     increased $121,000 from $1.4 million for the year ended December 31, 2007, due primarily to the additional depreciation and maintenance
                     expenses associated with our two new retail offices opened in 2008. The remaining $1.2 million increase in general and administrative
                     expenses for the year ended December 31, 2009, compared to the same period in 2008, resulted primarily from
                     increases of $873,000 in insurance expenses, $125,000 in professional
                     fees, $76,000 in marketing expenses, $90,000 in telephone expenses
                     and $60,000 in other expenses. The significant increase in insurance
                     expense is primarily related to a general increase in the assessment
                     rate used to calculate FDIC insurance premiums as well as the special
                     assessment of approximately $300,000 charged by the FDIC. The
                     increase in professional fees relates primarily to increased legal,
                     accounting, and directors fees, while the increases in marketing and
                     telephone expenses are due to increased community support and basic
                     communication costs. In addition, the $60,000 increase in other
                     expense is primarily due to a $115,000 increase in collection
                     expenses, partially offset by decreases of $41,000 in office
                     supplies, $32,000 in deposit account losses, and $23,000 in travel
                     and business meal expenses. Contributing to the increase in noninterest expenses for the year ended December 31, 2008 compared to the same period in 2007 were increases of $110,000 in
                     insurance expenses, $84,000 in marketing expenses, and $200,000 in
                     telephone and other expenses, partially offset by a decrease of
                     $48,000 in professional fees. The increase in marketing expenses
                     relates primarily to our new Greenville and Columbia retail offices,
                     as well as expanding our market awareness in those areas, while the
                     $110,000 increase in insurance costs is related to the growth in
                     deposits and the FDIC deposit insurance assessment based on our
                     deposit balances. In addition, telephone expenses increased with the
                     addition of the two new retail offices and the additional number of
                     employees. A significant portion of the increase in other expenses is
                     due to increased costs of postage and office supplies, business
                     meals, deposit account losses, and collection expenses. The decrease
                     in professional fees is due primarily to the additional costs
                     incurred during 2007 related to the name change of our company. Income tax expense was $345,000, $626,000 and $1.6 million for the years ended December 31, 2009, 2008 and 2007. Our effective tax rate was 19.6% for the year ended December 31, 2009 and 25.3% and 32.3% for the years ended December 31, 2008 and 2007, respectively. During 2009 and 2008, the lower net income
                     combined with additional tax-exempt income from bank owned life
                     insurance, increased the impact that the tax-exempt income had on our
                     net income before taxes. The lower net income before taxes for the
                     years ended December 31, 2009 and 2008 increased the impact that our tax-exempt income had in
                     lowering our effective tax rate from the same periods in the
                     prior years. Balance Sheet Review General At December 31, 2009, we had total assets of $719.3 million, consisting principally of
                     $574.3 million in loans, $94.6 million in investments, $6.5 million
                     in federal funds sold, $5.6 million in cash and due from banks, and
                     $14.0 million in bank owned life insurance. Our liabilities at December 31, 2009 totaled $659.5 million, consisting principally of $494.1 million in
                     deposits, $142.7 million in FHLB advances and related debt, a $4.3
                     million note payable, and $13.4 million of junior subordinated
                     debentures. At December 31, 2009, our shareholders' equity was $59.8 million. At December 31, 2008, we had total assets of $693.0 million, consisting principally of
                     $566.6 million in loans, $85.4 million in investments, $8.8 million
                     in federal funds sold, $4.4 million in cash and due from banks and
                     $13.4 million in bank owned life insurance. Our liabilities at December 31, 2008 totaled $653.2 million, consisting principally of $469.5 million in
                     deposits, $164.7 million in notes payable and other borrowings, and
                     $13.4 million of junior subordinated debentures. At December 31, 2008, our shareholders' equity was $39.8 million.
 38


Federal Funds Sold At December 31, 2009, our $6.5 million in short-term investments in federal funds sold on
                     an overnight basis comprised 0.9% of total assets, compared to $8.8
                     million, or 1.3% of total assets, at December 31, 2008. Investments At December 31, 2009, the $94.6 million in our investment securities portfolio
                     represented approximately 13.2% of our total assets. We held
                     Government sponsored enterprise securities, municipal securities, and
                     mortgage-backed securities with a fair value of $85.7 million and an
                     amortized cost of $84.7 million for an unrealized gain of $1.0
                     million. The amortized costs and the fair value of our investments at December 31, 2009, 2008, and 2007 are shown in the following table (dollars in thousands).  2009
                           
                           
                           2008
                           
                           
                           2007Amortized
                           
                           
                           Fair
                           
                           
                           Amortized
                           
                           
                           Fair
                           
                           
                           Amortized
                           
                           
                           FairCost
                           
                           
                           Value
                           
                           
                           Cost
                           
                           
                           Value
                           
                           
                           Cost
                           
                           
                           ValueAvailable for SaleGovernment sponsored enterprises
                           
                           $
                           11,615
                           
                           $
                           11,540
                           
                           $
                           18,483
                           
                           $
                           18,708
                           
                           $
                           10,992
                           
                           $
                           11,078State and political subdivisions
                           
                           
                           5,267
                           
                           
                           5,309
                           
                           
                           3,790
                           
                           
                           3,772
                           
                           
                           3,793
                           
                           
                           3,736Mortgage-backed securities
                           
                           
                           58,580
                           
                           
                           59,346
                           
                           
                           43,700
                           
                           
                           41,886
                           
                           
                           47,061
                           
                           
                           47,172Preferred stock
                           
                           
                           -
                           
                           
                           -
                           
                           
                           84
                           
                           
                           66
                           
                           
                           2,019
                           
                           
                           2,024Total
                           
                           $
                           75,462
                           
                           $
                           76,195
                           
                           $
                           66,057
                           
                           $
                           64,432
                           
                           $
                           63,865
                           
                           $
                           64,010Held to MaturityMortgage-backed securities
                           
                           $
                           9,225
                           
                           $
                           9,516
                           
                           $
                           12,519
                           
                           $
                           12,618
                           
                           $
                           14,819
                           
                           $
                           14,573 Contractual maturities and yields on our investments at December 31, 2009 are shown in the following table (dollars in thousands). 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. At December 31, 2009, we had no securities with a maturity of less than one year.  One to Five Years
                           
                           
                           Five to Ten Years
                           
                           
                           Over Ten Years
                           
                           
                           TotalAmount
                           
                           
                           Yield
                           
                           
                           Amount
                           
                           
                           Yield
                           
                           
                           Amount
                           
                           
                           Yield
                           
                           
                           Amount
                           
                           
                           YieldAvailable for SaleGovernment sponsored enterprises
                           
                           $
                           -
                           
                           
                           -
                           
                           $
                           4,127
                           
                           
                           3.81
                           %
                           $
                           7,413
                           
                           
                           5.06
                           %
                           $
                           11,540
                           
                           
                           4.62
                           %State and political subdivisions
                           
                           
                           -
                           
                           
                           -
                           
                           
                           2,974
                           
                           
                           3.79
                           %
                           
                           2,335
                           
                           
                           3.86
                           %
                           
                           5,309
                           
                           
                           3.81
                           %Mortgage-backed securities
                           
                           
                           251
                           
                           
                           4.69
                           %
                           
                           2,934
                           
                           
                           3.72
                           %
                           
                           56,161
                           
                           
                           4.72
                           %
                           
                           59,346
                           
                           
                           4.65
                           %Total
                           
                           $
                           251
                           
                           
                           4.69
                           %
                           $
                           10,035
                           
                           
                           3.65
                           %
                           $
                           65,909
                           
                           
                           4.73
                           %
                           $
                           76,195
                           
                           
                           4.59
                           %Held to MaturityMortgage-backed securities
                           
                           $
                           155
                           
                           
                           3.97
                           %
                           $
                           1,830
                           
                           
                           4.35
                           %
                           $
                           7,240
                           
                           
                           4.65
                           %
                           $
                           9,225
                           
                           
                           4.58
                           % At December 31, 2009, the Company had 10 individual investments that were in an
                     unrealized loss position. The unrealized losses on investments in
                     government sponsored enterprises, state and political subdivision,
                     and mortgage-backed securities were attributable to market turmoil
                     and liquidity. The Company believes, based on industry analyst
                     reports and credit ratings that the deterioration in the value of
                     these investments is attributed to changes in market interest rates
                     and not in the credit quality of the issuer and therefore, these
                     losses are not considered other-than-temporary. The Company has the
                     ability and intent to hold these securities until such time as the
                     value recovers or the securities mature. In addition, the Company
                     held one collateralized mortgage obligation ("CMO") that was in an
                     unrealized loss position at December 31, 2009. The Company has the ability and intent to hold all securities
                     within the portfolio until the maturity or until the value recovers;
                     therefore, we do not consider these investments to be
                     other-than-temporarily impaired at December 31, 2009. Our private label CMOs, which are non-agency securities, were priced
                     based on an internally developed cash flow model due to market
                     illiquidity. We noted that this market has had little, if any, new
                     issuance since the credit crisis began. The company determined that
                     most sales are forced and do not reflect the true economic value of
                     these securities. The two major components in the bank's internal
                     model are the prepayment speeds of the securities and the dollar
                     amount of loan defaults compared to the excess collateral amounts in
                     each pool. The prepayment speeds utilized in the model are based on
                     the prior prepayment rates for the specific securities and the
                     anticipated future prepayment speeds for like securities. The default
                     rates are based on both the historical loss rates for each security
                     and an analysis of the current loan delinquency amounts in each
                     portfolio. Anticipated loss amounts are determined based on the
                     various levels of delinquency, with higher percentages being
 39


assigned to loans over 90 days or loans in foreclosure. The
                     anticipated loss amounts are then compared to the dollar amount of
                     the excess collateral included in each pool. Based on the bank's
                     calculations and assumptions, management currently anticipates
                     receiving all of the outstanding principal and the related interest
                     for each security. The valuation change has been recorded as a change
                     in the unrealized gain/loss recognized in other comprehensive income. Other investments at December 31, 2009 consisted primarily of Federal Reserve Bank stock with a cost of
                     $1.5 million, Federal Home Loan Bank stock with a cost of $7.1
                     million, and investments in Greenville First Statutory Trust I and II
                     of $186,000 and $217,000, respectively. At December 31, 2008, we owned Federal Reserve Bank stock with a cost of $1.3 million,
                     Federal Home Loan Bank stock with a cost of $6.7 million, and
                     investments in Greenville First Statutory Trust I and II of $186,000
                     and $217,000, respectively. 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 for the
                     years ended December 31, 2009 and 2008 were $568.6 million and $547.7 million, respectively.
                     Before allowance for loan losses, total loans outstanding at December 31, 2009 and 2008 were $574.3 million and $566.6 million, respectively. The principal component of our loan portfolio is loans secured by
                     real estate mortgages. Most of our real estate loans are secured by
                     residential or commercial property. We do not generally originate
                     traditional long term residential mortgages, but we do issue
                     traditional second mortgage residential real estate loans and home
                     equity lines of credit. We obtain a security interest in real estate
                     whenever possible, in addition to any other available collateral.
                     This collateral is taken to increase the likelihood of the ultimate
                     repayment of the loan. Generally, we limit the loan-to-value ratio on
                     loans we make to 80%. Due to the short time our portfolio has
                     existed, the current mix may not be indicative of the ongoing
                     portfolio mix. We attempt to maintain a relatively diversified loan
                     portfolio to help reduce the risk inherent in concentration in
                     certain types of collateral. The following table summarizes the composition of our loan portfolio
                     for each of the five years ended December 31, 2009 (dollars in thousands). The $30.2 million decrease in commercial
                     construction loans is primarily due to projects being completed and
                     the loan restructured into a permanent loan either with our bank or
                     another financial institution.  2009
                           
                           
                           2008
                           
                           
                           2007
                           
                           
                           2006
                           
                           
                           2005%of
                           
                           
                           
                           
                           
                           %of
                           
                           
                           
                           
                           
                           %of
                           
                           
                           
                           
                           
                           %of
                           
                           
                           
                           
                           
                           %ofAmount
                           
                           
                           Total
                           
                           
                           Amount
                           
                           
                           Total
                           
                           
                           Amount
                           
                           
                           Total
                           
                           
                           Amount
                           
                           
                           Total
                           
                           
                           Amount
                           
                           
                           TotalReal Estate:CommercialOwner Occupied
                           
                           $
                           132,569
                           
                           
                           23.1
                           %
                           $
                           113,370
                           
                           
                           20.0
                           %
                           $
                           114,168
                           
                           
                           22.4
                           %
                           $
                           77,668
                           
                           
                           19.3
                           %
                           $
                           72,222
                           
                           
                           21.3
                           %Non-owner occupied
                           
                           
                           160,460
                           
                           
                           27.9
                           %
                           
                           151,274
                           
                           
                           26.7
                           %
                           
                           147,478
                           
                           
                           29.0
                           %
                           
                           126,008
                           
                           
                           31.3
                           %
                           
                           96,950
                           
                           
                           28.7
                           %Construction
                           
                           
                           22,741
                           
                           
                           4.0
                           %
                           
                           52,981
                           
                           
                           9.4
                           %
                           
                           38,464
                           
                           
                           7.6
                           %
                           
                           20,466
                           
                           
                           5.1
                           %
                           
                           14,661
                           
                           
                           4.3
                           %Total commercial real estate
                           
                           
                           315,770
                           
                           
                           55.0
                           %
                           
                           317,625
                           
                           
                           56.1
                           %
                           
                           300,110
                           
                           
                           59.0
                           %
                           
                           224,142
                           
                           
                           55.7
                           %
                           
                           183,833
                           
                           
                           54.3
                           %ConsumerResidential
                           
                           
                           55,377
                           
                           
                           9.6
                           %
                           
                           60,336
                           
                           
                           10.7
                           %
                           
                           59,815
                           
                           
                           11.7
                           %
                           
                           59,187
                           
                           
                           14.7
                           %
                           
                           50,756
                           
                           
                           15.0
                           %Home equity
                           
                           
                           74,348
                           
                           
                           13.0
                           %
                           
                           62,987
                           
                           
                           11.1
                           %
                           
                           46,806
                           
                           
                           9.2
                           %
                           
                           35,986
                           
                           
                           9.0
                           %
                           
                           37,254
                           
                           
                           11.0
                           %Construction
                           
                           
                           7,940
                           
                           
                           1.4
                           %
                           
                           8,905
                           
                           
                           1.5
                           %
                           
                           7,153
                           
                           
                           1.4
                           %
                           
                           8,259
                           
                           
                           2.0
                           %
                           
                           5,409
                           
                           
                           1.6
                           %Total consumer real estate
                           
                           
                           137,665
                           
                           
                           24.0
                           %
                           
                           132,228
                           
                           
                           23.3
                           %
                           
                           113,774
                           
                           
                           22.3
                           %
                           
                           103,432
                           
                           
                           25.7
                           %
                           
                           93,419
                           
                           
                           27.6
                           %Total real estate
                           
                           
                           453,435
                           
                           
                           79.0
                           %
                           
                           449,853
                           
                           
                           79.4
                           %
                           
                           413,884
                           
                           
                           81.3
                           %
                           
                           327,574
                           
                           
                           81.4
                           %
                           
                           277,252
                           
                           
                           81.9
                           %Commercial business
                           
                           
                           110,539
                           
                           
                           19.3
                           %
                           
                           106,479
                           
                           
                           18.8
                           %
                           
                           86,863
                           
                           
                           17.1
                           %
                           
                           65,891
                           
                           
                           16.4
                           %
                           
                           53,753
                           
                           
                           15.9
                           %Consumer  other
                           
                           
                           11,021
                           
                           
                           1.9
                           %
                           
                           11,194
                           
                           
                           2.0
                           %
                           
                           9,051
                           
                           
                           1.8
                           %
                           
                           9,524
                           
                           
                           2.4
                           %
                           
                           8,211
                           
                           
                           2.4
                           %Deferred origination fees, net
                           
                           
                           (725
                           )
                           
                           (0.2
                           )%
                           
                           (919
                           )
                           
                           (0.2
                           )%
                           
                           (949
                           )
                           
                           (0.2
                           )%
                           
                           (806
                           )
                           
                           (0.2
                           )%
                           
                           (685
                           )
                           
                           (0.2
                           )%Total gross loans, net of deferred fees
                           
                           
                           574,270
                           
                           
                           100.0
                           %
                           
                           566,607
                           
                           
                           100.0
                           %
                           
                           508,849
                           
                           
                           100.0
                           %
                           
                           402,183
                           
                           
                           100.0
                           %
                           
                           338,531
                           
                           
                           100.0
                           %Less  allowance for loan losses
                           
                           
                           (7,760
                           )
                           
                           
                           
                           
                           (7,005
                           )
                           
                           
                           
                           
                           (5,751
                           )
                           
                           
                           
                           
                           (4,949
                           )
                           
                           
                           
                           
                           (4,490
                           )Total loans, net
                           
                           $
                           566,510
                           
                           
                           
                           
                           $
                           559,602
                           
                           
                           
                           
                           $
                           503,098
                           
                           
                           
                           
                           $
                           397,234
                           
                           
                           
                           
                           $
                           334,041
 40


Maturities and Sensitivity of Loans to Changes in Interest Rates The information in the following table is 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. The following table summarizes the loan maturity distribution by type
                     and related interest rate characteristics at December 31, 2009 (dollars in thousands).  One yearor less
                           
                           
                           After onebut withinfive years
                           
                           
                           After fiveyears
                           
                           
                           TotalReal estate  mortgage
                           
                           $
                           79,399
                           
                           $
                           258,009
                           
                           $
                           85,346
                           
                           $
                           422,754Real estate  construction
                           
                           
                           14,405
                           
                           
                           13,071
                           
                           
                           3,205
                           
                           
                           30,681Total real estate
                           
                           
                           93,804
                           
                           
                           271,080
                           
                           
                           88,551
                           
                           
                           453,435Commercial
                           
                           $
                           61,282
                           
                           $
                           47,322
                           
                           $
                           1,935
                           
                           $
                           110,539Consumer  other
                           
                           
                           6,984
                           
                           
                           3,496
                           
                           
                           541
                           
                           
                           11,021Deferred origination fees, net
                           
                           
                           (198
                           )
                           
                           (407
                           )
                           
                           (120
                           )
                           
                           (725
                           )Total gross loan, net of deferred fees
                           
                           $
                           161,872
                           
                           $
                           321,491
                           
                           $
                           90,907
                           
                           $
                           574,270Loans maturing  after one year withFixed interest rates
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           $
                           208,302Floating interest rates
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           $
                           204,096 Provision and Allowance for Loan Losses We have established an allowance for loan losses through a provision
                     for loan losses charged to expense on our statements of income. The
                     allowance for loan losses represents an amount which we believe will
                     be adequate to absorb probable losses on existing loans that may
                     become uncollectible. Our judgment as to the adequacy of the
                     allowance for loan losses is based on a number of assumptions about
                     future events, which we believe to be reasonable, but which may or
                     may not prove to be accurate. Our determination of the allowance for
                     loan losses is based on evaluations of the collectibility of loans,
                     including consideration of factors such as the balance of impaired
                     loans, the quality, mix, and size of our overall loan portfolio,
                     economic conditions that may affect the borrower's ability to repay,
                     the amount and quality of collateral securing the loans, our
                     historical loan loss experience, and a review of specific problem
                     loans. We also consider subjective issues such as changes in the
                     lending policies and procedures, changes in the local/national
                     economy, changes in volume or type of credits, changes in
                     volume/severity of problem loans, quality of loan review and board of
                     director oversight, concentrations of credit, and peer group
                     comparisons. Periodically, we adjust the amount of the allowance
                     based on changing circumstances. We charge recognized losses to the
                     allowance for loan losses and add subsequent recoveries back to the
                     allowance for loan losses. There can be no assurance that charge-offs
                     of loans in future periods will not exceed the allowance for loan
                     losses as estimated at any point in time or that provisions for loan
                     losses will not be significant to a particular accounting period,
                     especially considering the overall weakness in the commercial real
                     estate market in our market areas. At December 31, 2009 and December 31, 2008, the allowance for loan losses was $7.8 million and $7.0 million,
                     respectively, or 1.35% and 1.24% of outstanding loans, respectively.
                     During the years ended December 31, 2009 and 2008, our net charged-off loans were $3.6 million and $1.9
                     million, respectively. The increase in the allowance for loan losses
                     is a result, in large part, of the general conditions of the current
                     economic climate, including, among other things, a rise in
                     unemployment, which affects borrowers' ability to repay, and the
                     decrease in values in the real estate market, which affects the value
                     of collateral securing certain loans with the bank.
 41


The following table summarizes the activity related to our allowance
                     for loan losses for the five years ended December 31, 2009 (dollars in thousands).  December 31,2009
                           
                           
                           2008
                           
                           
                           2007
                           
                           
                           2006
                           
                           
                           2005Balance, beginning of year
                           
                           $
                           7,005
                           
                           $
                           5,751
                           
                           $
                           4,949
                           
                           $
                           4,490
                           
                           $
                           3,717Charge-offs:Commercial
                           
                           
                           (1,640
                           )
                           
                           (647
                           )
                           
                           (74
                           )
                           
                           (65
                           )
                           
                           (27
                           )Real estate-construction
                           
                           
                           (1,351
                           )
                           
                           (1,150
                           )
                           
                           (1,085
                           )
                           
                           (181
                           )
                           
                           -Real estate-mortgage
                           
                           
                           (540
                           )
                           
                           (109
                           )
                           
                           (80
                           )
                           
                           (982
                           )
                           
                           (229
                           )Consumer
                           
                           
                           (133
                           )
                           
                           (29
                           )
                           
                           (57
                           )
                           
                           (78
                           )
                           
                           (34
                           )Total charge-offs
                           
                           
                           (3,664
                           )
                           
                           (1,935
                           )
                           
                           (1,296
                           )
                           
                           (1,306
                           )
                           
                           (290
                           )Recoveries:Commercial
                           
                           
                           92
                           
                           
                           17
                           
                           
                           -
                           
                           
                           8
                           
                           
                           1Real estate-mortgage
                           
                           
                           14
                           
                           
                           11
                           
                           
                           33
                           
                           
                           65
                           
                           
                           60Consumer
                           
                           
                           3
                           
                           
                           -
                           
                           
                           15
                           
                           
                           42
                           
                           
                           2Total recoveries
                           
                           
                           109
                           
                           
                           28
                           
                           
                           48
                           
                           
                           115
                           
                           
                           63Net loans charged-off
                           
                           $
                           (3,555
                           )
                           $
                           (1,907
                           )
                           $
                           (1,248
                           )
                           $
                           (1,191
                           )
                           $
                           (227
                           )Provision for loan losses
                           
                           
                           4,310
                           
                           
                           3,161
                           
                           
                           2,050
                           
                           
                           1,650
                           
                           
                           1,000Balance, end of year
                           
                           $
                           7,760
                           
                           $
                           7,005
                           
                           $
                           5,751
                           
                           $
                           4,949
                           
                           $
                           4,490Allowance for loan losses to gross loans
                           
                           
                           1.35
                           %
                           
                           1.24
                           %
                           
                           1.13
                           %
                           
                           1.23
                           %
                           
                           1.33
                           %Net charge-offs to average loans
                           
                           
                           0.63
                           %
                           
                           0.35
                           %
                           
                           0.27
                           %
                           
                           0.32
                           %
                           
                           0.07
                           % We do not allocate the allowance for loan losses to specific
                     categories of loans. Instead, we evaluate the adequacy of the
                     allowance for loan losses on an overall portfolio basis utilizing our
                     credit grading system which we apply to each loan. We have retained
                     an independent consultant to review the loan files on a test basis to
                     assess the grading of each loan. Nonperforming Assets The following table shows the nonperforming assets, percentages of
                     net charge-offs, and the related percentage of allowance for loan
                     losses for the five years ended December 31, 2009 (dollars in thousands). 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 loan is doubtful. A payment
                     of interest on a loan that is classified as nonaccrual is recognized
                     as a reduction in principal when received.  2009
                           
                           
                           2008
                           
                           
                           2007
                           
                           
                           2006
                           
                           
                           2005Loans on nonaccrual:Mortgage
                           
                           $
                           7,964
                           
                           $
                           6,818
                           
                           $
                           4,316
                           
                           $
                           1,424
                           
                           $
                           419Commercial
                           
                           
                           3,702
                           
                           
                           868
                           
                           
                           75
                           
                           
                           32
                           
                           
                           41Consumer
                           
                           
                           75
                           
                           
                           13
                           
                           
                           45
                           
                           
                           33
                           
                           
                           6Total nonaccrual loans
                           
                           
                           11,741
                           
                           
                           7,699
                           
                           
                           4,436
                           
                           
                           1,489
                           
                           
                           466Total of nonperforming loans
                           
                           
                           11,741
                           
                           
                           7,699
                           
                           
                           4,436
                           
                           
                           1,489
                           
                           
                           466Other nonperforming assets
                           
                           
                           3,704
                           
                           
                           2,116
                           
                           
                           268
                           
                           
                           1,012
                           
                           
                           -Total nonperforming assets
                           
                           $
                           15,445
                           
                           $
                           9,815
                           
                           $
                           4,704
                           
                           $
                           2,501
                           
                           $
                           466Loans over 90 days past due (1)
                           
                           $
                           4,686
                           
                           $
                           7,008
                           
                           $
                           4,582
                           
                           $
                           945
                           
                           $
                           351Nonperforming assets as a percentage of:Total assets
                           
                           
                           2.15
                           %
                           
                           1.42
                           %
                           
                           0.75
                           %
                           
                           0.49
                           %
                           
                           0.12
                           %Gross loans
                           
                           
                           2.69
                           %
                           
                           1.73
                           %
                           
                           0.92
                           %
                           
                           0.62
                           %
                           
                           0.14
                           %(1) Loans over 90 days are included in nonaccrual loans At December 31, 2009, nonperforming assets were $15.5 million, or 2.15% of total assets
                     and 2.69% of gross loans. Comparatively, nonperforming assets were
                     $9.8 million, or 1.42% of total assets and 1.73% of gross loans at December 31, 2008. Nonaccrual loans increased $4.0 million to $11.7 million at December 31, 2009 from $7.7 million at December 31, 2008. This increase is primarily related to consumer real estate and
                     commercial business loans due to the weakening real estate market in
                     our primary market area resulting in an increase in the number of
                     borrowers who have defaulted on their
 42


loans and a reduction in the value of the collateral securing those
                     loans. The amount of foregone interest income on the nonaccrual loans
                     for the years ended December 31, 2009 and 2008 was approximately $638,000 and $365,000, respectively. The
                     amount of interest income recorded in 2009 for loans that were on
                     nonaccrual at December 31, 2009 was approximately $305,000, and approximately $294,000 in 2008. Other nonperforming assets include real estate acquired in settlement
                     of loans. These assets increased $1.6 million to $3.7 million at December 31, 2009 from $2.1 million at December 31, 2008. The balance at December 31, 2009 includes seven commercial properties for $3.6 million and 2 pieces
                     of residential real estate totaling $55,000. We believe that these
                     properties are appropriately valued at the lower of cost or market as
                     of December 31, 2009. At December 31, 2009, impaired loans amounted to approximately $10.9 million for which
                     $5.8 million of these loans have a reserve of approximately $1.1
                     million allocated in the allowance. During 2009, the average recorded
                     investment in impaired loans was approximately $9.8 million. At December 31, 2008, impaired loans amounted to approximately $7.2 million for which
                     $3.7 million of these loans have a reserve of approximately $836,000
                     allocated in the allowance. During 2008, the average recorded
                     investment in impaired loans was approximately $5.7 million. As of December 31, 2009, we were not aware of any individual potential problem loans that
                     were not already categorized as nonaccrual, past due, restructured,
                     or impaired that had borrower credit problems causing us to have
                     serious doubt as to the ability of the borrower to comply with the
                     present loan repayment terms. At December 31, 2009 and 2008, the allowance for loan losses represented less than one
                     time the amount of non-performing loans, compared to 1.3 times at December 31, 2007, respectively. A significant portion, or 67.8%, of nonperforming loans at December 31, 2009 are secured by real estate. Our nonperforming loans have been
                     written down to approximately 74% of their original nonperforming
                     balance. We have evaluated the underlying collateral on these loans
                     and believe that the collateral on these loans is sufficient to
                     minimize future losses. However, the recent downturn in the real
                     estate market has resulted in increased loan delinquencies, defaults
                     and foreclosures, and we believe that these trends are likely to
                     continue. In some cases, this downturn has resulted in a significant
                     impairment to the value of the collateral used to secure these loans
                     and the ability to sell the collateral upon foreclosure. These
                     conditions have adversely affected our loan portfolio. The real
                     estate collateral in each case provides an alternate source of
                     repayment in the event of default by the borrower and may deteriorate
                     in value during the time the credit is extended. If real estate
                     values continue to decline, it is also more likely that we would be
                     required to increase our allowance for loan losses. If during a
                     period of reduced real estate values we are required to liquidate the
                     property collateralizing a loan to satisfy the debt or to increase
                     the allowance for loan losses, this could materially reduce our
                     profitability and adversely affect our financial condition. Included in nonperforming loans at December 31, 2009, were impaired loans of $10.9 million for which a reserve of
                     approximately $1.1 million was allocated in the allowance. During
                     2009, the average recorded investment in impaired loans was $9.8
                     million. At December 31, 2008, impaired loans amounted to $7.2 million for which a reserve of
                     approximately $836,000 was allocated in the allowance. During 2008,
                     the average recorded investment in impaired loans was $5.7 million.
                     The amount of interest income recorded in 2009 and 2008 for impaired
                     loans at December 31, 2009 and 2008 was approximately $205,000 and $282,000, respectively. Deposits and Other Interest-Bearing Liabilities Our primary source of funds for loans and investments is our
                     deposits, advances from the FHLB, and structured repurchase
                     agreements. National and local market trends over the past several
                     years suggest that consumers have moved an increasing percentage of
                     discretionary savings funds into investments such as annuities,
                     stocks, and fixed income mutual funds. Accordingly, it has become
                     more difficult to attract deposits. We have chosen to obtain a
                     portion of our certificates of deposits from areas outside of our
                     market. The deposits obtained outside of our market area generally
                     have lower rates than rates being offered for certificates of
                     deposits in our local market. We also utilize out-of-market deposits
                     in certain instances to obtain longer term deposits than are readily
                     available in our local market. We generally obtain out-of-market time
                     deposits of $100,000 or more through brokers with whom we maintain
                     ongoing relationships. We have adopted guidelines regarding our use
                     of brokered CDs that limit our brokered CDs to 50% of total deposits
                     and dictate that our current interest rate risk profile determines
                     the terms. In addition, we do not obtain time deposits of $100,000 or
                     more through the Internet. These guidelines allow us to take
                     advantage of the attractive terms that wholesale funding can offer
                     while mitigating the inherent related risk. The amount of out-of-market deposits was $147.9 million at December 31, 2009 and $200.9 at December 31, 2008. As our wholesale deposits have matured during 2009, we have
                     successfully replaced them with local depsotis. While wholesale
                     deposits decreased $53.1 million during 2009, our retail deposits
                     have increased $77.6 million. We anticipate being
 43


able to either renew or replace these out-of-market deposits when
                     they mature, although we may not be able to replace them with
                     deposits with the same terms or rates. Our loan-to-deposit ratio was
                     116%, 121%, and 123% at December 31, 2009, 2008, and 2007, respectively. The following table shows the average balance amounts and the average
                     rates paid on deposits held by us for the years ended December 31, 2009, 2008, and 2007 (dollars in thousands).  2009
                           
                           
                           2008
                           
                           
                           2007Amount
                           
                           
                           Rate
                           
                           
                           Amount
                           
                           
                           Rate
                           
                           
                           Amount
                           
                           
                           RateNoninterest bearing demand deposits
                           
                           $
                           36,509
                           
                           
                           -
                           %
                           $
                           33,815
                           
                           
                           -
                           %
                           $
                           30,665
                           
                           
                           -
                           %Interest bearing demand deposits
                           
                           
                           43,465
                           
                           
                           0.69
                           %
                           
                           38,850
                           
                           
                           1.03
                           %
                           
                           34,338
                           
                           
                           1.66
                           %Money market accounts
                           
                           
                           84,342
                           
                           
                           1.13
                           %
                           
                           87,617
                           
                           
                           1.93
                           %
                           
                           86,290
                           
                           
                           3.57
                           %Savings accounts
                           
                           
                           2,164
                           
                           
                           0.16
                           %
                           
                           1,865
                           
                           
                           0.33
                           %
                           
                           1,593
                           
                           
                           0.69
                           %Time deposits less than $100,000
                           
                           
                           50,635
                           
                           
                           2.88
                           %
                           
                           48,639
                           
                           
                           3.92
                           %
                           
                           45,591
                           
                           
                           5.01
                           %Time deposits greater than $100,000
                           
                           
                           267,620
                           
                           
                           2.73
                           %
                           
                           254,415
                           
                           
                           4.25
                           %
                           
                           189,514
                           
                           
                           5.19
                           %Total deposits
                           
                           $
                           484,735
                           
                           
                           2.07
                           %
                           $
                           465,201
                           
                           
                           3.18
                           %
                           $
                           387,991
                           
                           
                           4.06
                           % Core deposits, which exclude time deposits of $100,000 or more and
                     wholesale time deposits, provide a relatively stable funding source
                     for our loan portfolio and other earning assets. Our core deposits
                     were $246.8 million, $205.9 million, and $196.0 million at December 31, 2009, 2008 and 2007, respectively. All of our time deposits are certificates of deposits. The maturity
                     distribution of our time deposits of $100,000 or more at December 31, 2009 and 2008 is as follows (dollars in thousands):  2009
                           
                           
                           2008Three months or less
                           
                           $
                           51,945
                           
                           $
                           85,932Over three through six months
                           
                           
                           32,859
                           
                           
                           65,912Over six through twelve months
                           
                           
                           69,672
                           
                           
                           39,894Over twelve months
                           
                           
                           91,448
                           
                           
                           70,043Total
                           
                           $
                           245,924
                           
                           $
                           261,781 Capital Resources Total shareholders' equity was $59.8 million at December 31, 2009 and $39.8 million at December 31, 2008. The $20.1 million increase between 2009 and 2008 resulted primarily
                     from the $17.3 million issuance of preferred stock as well as net
                     income of $1.4 million earned during 2009 and a $1.6 million
                     unrealized holding gain on securities available for sale. On February 27, 2009, as part of the CPP, the company entered into the CPP Purchase
                     Agreement with the Treasury Department, pursuant to which we sold
                     17,299 shares of our Series T Preferred Stock and the CPP Warrant to
                     purchase 330,554 shares of our common stock for an aggregate purchase
                     price of $17.3 million in cash. The Series T Preferred Stock is
                     entitled to cumulative dividends at a rate of 5% per annum for the
                     first five years, and 9% per annum thereafter. The CPP Warrant has a
                     10-year term and is immediately exercisable upon its issuance, with
                     an exercise price, subject to anti-dilution adjustments equal to
                     $7.85 per share of the common stock. 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), and equity to assets ratio
                     (average equity divided by average total assets) for the three years
                     ended December 31, 2009. Since our inception, we have not paid cash dividends.  2009
                           
                           
                           2008
                           
                           
                           2007Return on average assets
                           
                           
                           0.20
                           %
                           
                           0.27
                           %
                           
                           0.60
                           %Return on average equity
                           
                           
                           2.51
                           %
                           
                           4.73
                           %
                           
                           9.40
                           %Return on average common equity
                           
                           
                           0.64
                           %
                           
                           4.73
                           %
                           
                           9.40
                           %Equity to assets ratio
                           
                           
                           8.32
                           %
                           
                           5.74
                           %
                           
                           6.09
                           %Common equity to assets ratio
                           
                           
                           6.17
                           %
                           
                           5.74
                           %
                           
                           6.09
                           % Our return on average assets was 0.20% for the year ended December 31, 2009 and 0.27% and 0.60% for the years ended December 31, 2008 and 2007, respectively. In addition, our return on average equity
                     decreased to 2.51% from 4.73% for the years ended December 31, 2009 and 2008, respectively, and 9.40% for the same periods in 2007. The
                     increase in the equity to total assets ratio from December 31, 2008 is primarily related to the $17.3 million received in conjunction with
 44


the issuance of preferred stock. In addition, our return on average
                     common equity was 0.64% and our common equity to assets ratio was
                     6.17% for the year ended December 31, 2009. 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
                     loan 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. At both the holding company and bank level, we are subject to various
                     regulatory capital requirements administered by the federal banking
                     agencies. To be considered "adequately capitalized" under these
                     capital guidelines, we must maintain a minimum total risk-based
                     capital of 8%, with at least 4% being Tier 1 capital. In addition, we
                     must maintain a minimum Tier 1 leverage ratio of at least 4%. To be
                     considered "well-capitalized," we must maintain total risk-based
                     capital of at least 10%, Tier 1 capital of at least 6%, and a
                     leverage ratio of at least 5%. In October 2008, President Bush signed in law the EESA in response to
                     the financial crises affecting the banking system. The Treasury
                     Department and banking regulators are implementing a number of
                     programs under this legislation to address capital and liquidity
                     issues in the banking system. Under the CPP, we received $17.3
                     million through issuance of Series T Preferred Stock and the CPP
                     Warrant for common stock to the Treasury Department. The Series T
                     Preferred Stock issuance and the related CPP Warrant both qualify for
                     Tier 1 capital and added approximately 300 basis points to that
                     measure. The fair value allocation of the $17.3 million between the
                     shares of Series T Preferred Stock and the CPP Warrant resulted in
                     $15.9 million allocated to the shares of Series T Preferred Stock and
                     $1.4 million allocated to the CPP Warrant. See discussion of
                     shareholders' equity above for additional details. The following table sets forth the holding company's and the bank's
                     various capital ratios at December 31, 2009, 2008, and 2007. For all periods, the bank was considered "well
                     capitalized" and the holding company met or exceeded its applicable
                     regulatory capital requirements.  2009
                           
                           
                           2008
                           
                           
                           2007Holding
                           
                           
                           
                           
                           
                           Holding
                           
                           
                           
                           
                           
                           HoldingCompany
                           
                           
                           Bank
                           
                           
                           Company
                           
                           
                           Bank
                           
                           
                           Company
                           
                           
                           BankTotal risk-based capital
                           
                           
                           13.3
                           %
                           
                           12.8
                           %
                           
                           10.4
                           %
                           
                           12.8
                           %
                           
                           11.1
                           %
                           
                           12.4
                           %Tier 1 risk-based capital
                           
                           
                           12.0
                           %
                           
                           11.6
                           %
                           
                           9.2
                           %
                           
                           11.6
                           %
                           
                           10.0
                           %
                           
                           11.3
                           %Leverage capital
                           
                           
                           10.0
                           %
                           
                           9.6
                           %
                           
                           7.7
                           %
                           
                           9.8
                           %
                           
                           8.3
                           %
                           
                           9.5
                           % 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 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 December 31, 2009, unfunded commitments to extend credit were approximately $90.5
                     million, of which $10.6 million is at fixed rates and $79.9 million
                     is at variable rates. At December 31, 2008, unfunded commitments to extend credit were $89.0 million, of which
                     approximately $13.8 million was at fixed rates and $75.1 million was
                     at variable rates. A significant portion of the unfunded commitments
                     related to consumer equity lines of credit. Based on historical
                     experience, we anticipate that a significant portion of these lines
                     of credit will not be funded. We evaluate each client's credit
                     worthiness on a case-by-case basis. The amount of collateral
                     obtained, if deemed necessary by us upon
 45


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. At December 31, 2009 and 2008, respectively, there was a $5.5 million and $4.8 million
                     commitment under letters of credit. The credit risk and collateral
                     involved in issuing letters of credit is essentially the same as that
                     involved in extending loan facilities to clients. 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 document, 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. Market Risk and Interest Rate Sensitivity 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 and maturities of our assets and
                     liabilities utilizing a process we call asset/liability management.
                     The essential purposes of asset/liability management are to ensure
                     adequate liquidity and to maintain an appropriate balance between
                     interest sensitive assets and liabilities in order to minimize
                     potentially adverse impacts on earnings from changes in market
                     interest rates. Our asset/liability management committee ("ALCO")
                     monitors and considers methods of managing exposure to interest rate
                     risk. We have both an internal ALCO consisting of senior management
                     that meets at various times during each month and a board ALCO that
                     meets monthly. The ALCOs are responsible for maintaining the level of
                     interest rate sensitivity of our interest sensitive assets and
                     liabilities within board-approved limits. Our interest rate risk exposure is managed principally by measuring
                     our interest sensitivity "gap," which is the positive or negative
                     dollar difference between assets and liabilities that are subject to
                     interest rate repricing within a given period of time. Interest rate
                     sensitivity can be managed by repricing assets or liabilities,
                     selling securities available for sale, replacing an asset or
                     liability at maturity, or adjusting the interest rate during the life
                     of an asset or liability. Managing the amount of assets and
                     liabilities repricing in this same time interval helps to hedge the
                     risk and minimize the impact on net interest income of rising or
                     falling interest rates. We generally would benefit from increasing
                     market rates of interest when we have an asset-sensitive gap position
                     and generally would benefit from decreasing market rates of interest
                     when we are liability-sensitive. The following table sets forth information regarding our rate
                     sensitivity, as of December 31, 2009, at each of the time intervals (dollars in thousands).  Withinthreemonths
                           
                           
                           After three butWithin twelvemonths
                           
                           
                           After one butWithin fiveyears
                           
                           
                           AfterFiveyears
                           
                           
                           TotalInterest-earning assets:Federal funds sold
                           
                           $
                           6,462
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           6,462Investment securities
                           
                           
                           4,308
                           
                           
                           11,466
                           
                           
                           34,164
                           
                           
                           35,482
                           
                           
                           85,420Loans
                           
                           
                           297,982
                           
                           
                           36,595
                           
                           
                           175,521
                           
                           
                           52,622
                           
                           
                           562,720Total earning assets
                           
                           $
                           308,752
                           
                           $
                           48,061
                           
                           $
                           209,685
                           
                           $
                           88,104
                           
                           $
                           654,602Interest-bearing liabilities:Money market and NOW
                           
                           $
                           136,776
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           136,776Regular savings
                           
                           
                           2,375
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           2,375Time deposits
                           
                           
                           65,093
                           
                           
                           154,740
                           
                           
                           98,923
                           
                           
                           -
                           
                           
                           318,756FHLB advances and related debt
                           
                           
                           79,350
                           
                           
                           22,000
                           
                           
                           30,600
                           
                           
                           15,000
                           
                           
                           146,950Junior subordinated debentures
                           
                           
                           13,403
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           13,403Total interest-bearing liabilities
                           
                           $
                           296,997
                           
                           $
                           176,740
                           
                           $
                           129,523
                           
                           $
                           15,000
                           
                           $
                           618,260Period gap
                           
                           $
                           11,755
                           
                           $
                           (128,679
                           )
                           $
                           80,162
                           
                           $
                           73,104Cumulative Gap
                           
                           
                           11,755
                           
                           
                           (116,924
                           )
                           
                           (36,762
                           )
                           
                           36,342Ratio of cumulative gap to total earning assets
                           
                           
                           1.8
                           %
                           
                           (17.9
                           %)
                           
                           (5.6
                           %)
                           
                           5.6
                           %
 46


The table above indicates that we were liability sensitive during the
                     year ended December 31, 2009 since we have more liabilities than assets repricing in the next
                     twelve months.  However, our gap analysis is not a precise indicator
                     of our interest sensitivity position. The analysis presents only a
                     static view of the timing of maturities and repricing opportunities,
                     without taking into consideration that changes in interest rates do
                     not affect all assets and liabilities equally. For example, rates
                     paid on a substantial portion of core deposits may change
                     contractually within a relatively short time frame, but those rates
                     are viewed by us as significantly less interest-sensitive than
                     market-based rates such as those paid on noncore deposits. We
                     periodically utilize more complex interest rate models than indicated
                     above, and based on those results we believe that our net interest
                     income will be positively impacted by an anticipated rise in interest
                     rates. Our variable rate loans and a majority of our deposits reprice
                     over a 12-month period. Approximately 51% and 43% of our loans were
                     variable rate loans at December 31, 2009 and 2008, respectively. The ratio of cumulative gap to total earning
                     assets after twelve months was (17.9%) because $116.9 million more
                     liabilities will reprice in a twelve month period than assets.   Net
                     interest income may be affected by other significant factors in a
                     given interest rate environment, including changes in the volume and
                     mix of interest-earning assets and interest-bearing liabilities. At December 31, 2009, 76.6% of our interest-bearing liabilities were either variable rate
                     or had a maturity of less than one year. Of the $297.0 million of
                     interest-bearing liabilities set to reprice within three months,
                     46.9% are transaction, money market or savings accounts which are
                     already at or near their lowest rates and provide little opportunity
                     for benefit should market rates continue to decline or stay constant.
                     However, certificates of deposit that are currently maturing or
                     renewing are repricing at lower rates. We expect to benefit as these
                     deposits reprice, even if market rates increase slightly. At December 31, 2009, we had $116.9 million more liabilities than assets that reprice
                     within the next twelve months. Included in our FHLB advances and
                     related debt are a number of borrowings with callable features as of December 31, 2009. We believe that the optionality on many of these borrowings will
                     not be exercised until interest rates increase significantly. In
                     addition, we believe that the interest rates that we pay on the
                     majority of our interest-bearing transaction accounts would only be
                     impacted by a portion of any change in market rates. This key
                     assumption is utilized in our overall evaluation of our level of
                     interest sensitivity. Liquidity Risk Liquidity represents the ability of a company to convert assets into
                     cash or cash equivalents without significant loss, and the ability to
                     raise additional funds by increasing liabilities. 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 December 31, 2009 and 2008, our liquid assets amounted to $12.1 million and $13.2
                     million, or 1.7% and 1.9% of total assets, respectively. Our
                     investment securities at December 31, 2009 and 2008 amounted to $94.6 million and $85.4 million, or 13.2% and
                     12.3% of total assets, respectively. Investment securities
                     traditionally provide a secondary source of liquidity since they can
                     be converted into cash in a timely manner. However, a substantial
                     portion of these securities are pledged against outstanding debt.
                     Therefore, the related debt would need to be repaid prior to the
                     securities being sold in order for these securities to be converted
                     to cash. 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, 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
                     four federal funds purchased lines of credit with correspondent banks
                     totaling $45.5 million for which there were no borrowings against the
                     lines at December 31, 2009. We are also a member of the Federal Home Loan Bank of Atlanta (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 December 31, 2009 was $4.0 million, based on the bank's $7.1 million investment in
                     FHLB stock, as well as 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. We have a lease on our new headquarters and main office with a
                     remaining term of eight years. The lease provides for annual lease
                     rate escalations based on cost of living adjustments.
 47


We believe that our existing stable base of core deposits, borrowings
                     from the FHLB, short-term repurchase agreements, and proceeds we
                     received from our secondary offering will enable us to successfully
                     meet our long-term liquidity needs. As a result of the Treasury's Capital Purchase Program, we received
                     $17.3 million of capital on February 27, 2009 in exchange for 17,299 shares of preferred stock. This additional
                     capital will allow us to remain well-capitalized and provide
                     additional liquidity on our balance sheet. Contractual Obligations We utilize a variety of short-term and long-term borrowings to
                     supplement our supply of lendable funds, to assist in meeting deposit
                     withdrawal requirements, and to fund growth of interest-earning
                     assets in excess of traditional deposit growth. Certificates of
                     deposit, structured repurchase agreements, FHLB advances, and junior
                     subordinate debentures serve as our primary sources of such funds. Obligations under noncancelable operating lease agreements are
                     payable over several years with the longest obligation expiring in
                     2025. We do not feel that any existing noncancelable operating lease
                     agreements are likely to materially impact the company's financial
                     condition or results of operations in an adverse way. Contractual
                     obligations relative to these agreements are noted in the table
                     below. Option periods that we have not yet exercised are not included
                     in this analysis as they do not represent contractual obligations
                     until exercised. The following table provides payments due by period for obligations
                     under long-term borrowings and operating lease obligations as of December 31, 2009 (dollars in thousands).  Payments Due by PeriodWithinOne Year
                           
                           
                           Over One to TwoYears
                           
                           
                           Over Twoto ThreeYears
                           
                           
                           Over Threeto FiveYears
                           
                           
                           AfterFiveYears
                           
                           
                           TotalCertificates of deposit
                           
                           $
                           219,833
                           
                           $
                           47,030
                           
                           $
                           45,754
                           
                           $
                           6,139
                           
                           $
                           -
                           
                           $
                           318,756FHLB advances and related debt
                           
                           
                           101,350
                           
                           
                           23,600
                           
                           
                           -
                           
                           
                           7,000
                           
                           
                           15,000
                           
                           
                           146,950Junior subordinated debentures
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           13,403
                           
                           
                           13,403Operating lease obligations
                           
                           
                           1,715
                           
                           
                           1,726
                           
                           
                           1,740
                           
                           
                           1,759
                           
                           
                           4,506
                           
                           
                           11,446Total
                           
                           $
                           322,898
                           
                           $
                           72,356
                           
                           $
                           47,494
                           
                           $
                           14,898
                           
                           $
                           32,909
                           
                           $
                           490,555 Accounting, Reporting, and Regulatory Matters The following is a summary of recent authoritative pronouncements
                     that could impact the accounting, reporting, and/or disclosure of
                     financial information by the Company. In June 2009, the Financial Accounting Standards Board ("FASB")
                     issued guidance which restructured generally accepted accounting
                     principles ("GAAP") and simplified access to all authoritative
                     literature by providing a single source of authoritative
                     nongovernmental GAAP. The guidance is presented in a topically
                     organized structure referred to as the FASB Accounting Standards
                     Codification ("ASC"). The new structure is effective for interim or
                     annual periods ending after September 15, 2009. All existing accounting standards have been superseded and all
                     other accounting literature not included is considered
                     non-authoritative. The FASB issued new accounting guidance on accounting for transfers
                     of financial assets in June 2009. The guidance limits the
                     circumstances in which a financial asset should be derecognized when
                     the transferor has not transferred the entire financial asset by
                     taking into consideration the transferor's continuing involvement.
                     The standard requires that a transferor recognize and initially
                     measure at fair value all assets obtained (including a transferor's
                     beneficial interest) and liabilities incurred as a result of a
                     transfer of financial assets accounted for as a sale. The concept of
                     a qualifying special-purpose entity is no longer applicable. The
                     standard is effective for the first annual reporting period that
                     begins after November 15, 2009, for interim periods within the first annual reporting period, and
                     for interim and annual reporting periods thereafter. Earlier
                     application is prohibited. The Company does not expect the guidance
                     to have any impact on the Company's financial statements. The ASC was
                     amended in December, 2009, to include this guidance. Guidance was issued in June 2009 requiring a company to analyze
                     whether its interest in a variable interest entity ("VIE") gives it a
                     controlling financial interest that should be included in
                     consolidated financial statements. A company must assess whether it
                     has an implicit financial responsibility to ensure that the VIE
                     operates as designed when determining whether it has the power to
                     direct the activities of the VIE that significantly impact its
                     economic performance, making it the primary beneficiary. Ongoing
                     reassessments of whether a company is the primary beneficiary are
                     also required by the standard. This
 48


guidance amends the criteria to qualify as a primary beneficiary as
                     well as how to determine the existence of a VIE. The standard also
                     eliminates certain exceptions that were previously available. This
                     guidance is effective as of the beginning of each reporting entity's
                     first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and
                     for interim and annual reporting periods thereafter. Earlier
                     application is prohibited. Comparative disclosures will be required
                     for periods after the effective date. The Company does not expect the
                     guidance to have any impact on the Company's financial position. An
                     update was issued in December, 2009, to include this guidance in
                     the ASC. In October 2009, updated guidance was issued to provide for
                     accounting and reporting for own-share lending arrangements issued in
                     contemplation of a convertible debt issuance. At the date of
                     issuance, a share-lending arrangement entered into on an entity's own
                     shares should be measured at fair value in accordance with prior
                     guidance and recognized as an issuance cost, with an offset to
                     additional paid-in capital. Loaned shares are excluded from basic and
                     diluted earnings per share unless default of the share-lending
                     arrangement occurs. The amendment also requires several disclosures
                     including a description and the terms of the arrangement and the
                     reason for entering into the arrangement. The effective dates of the
                     amendment are dependent upon the date the share-lending arrangement
                     was entered into and include retrospective application for
                     arrangements outstanding as of the beginning of fiscal years
                     beginning on or after December 15, 2009. The Company has no plans to issue convertible debt and, therefore,
                     does not expect the update to have an impact on its financial
                     statements. In January 2010, guidance was issued to alleviate diversity in the
                     accounting for distributions to shareholders that allow the
                     shareholder to elect to receive their entire distribution in cash or
                     shares but with a limit on the aggregate amount of cash to be paid.
                     The amendment states that the stock portion of a distribution to
                     shareholders that allows them to elect to receive cash or shares with
                     a potential limitation on the total amount of cash that all
                     shareholders can elect to receive in the aggregate is considered a
                     share issuance. The amendment is effective for interim and annual
                     periods ending on or after December 15, 2009 and had no impact on the Company's financial statements. Also in January 2010, an amendment was issued to clarify the scope of
                     subsidiaries for consolidation purposes. The amendment provides that
                     the decrease in ownership guidance should apply to (1) a subsidiary
                     or group of assets that is a business or nonprofit activity, (2) a
                     subsidiary that is a business or nonprofit activity that is
                     transferred to an equity method investee or joint venture, and (3) an
                     exchange of a group of assets that constitutes a business or
                     nonprofit activity for a noncontrolling interest in an entity. The
                     guidance does not apply to a decrease in ownership in transactions
                     related to sales of in substance real estate or conveyances of oil
                     and gas mineral rights. The update is effective for the interim or
                     annual reporting periods ending on or after December 15, 2009 and had no impact on the Company's financial statements. Other accounting standards that have been issued or proposed by the
                     FASB or other standards-setting bodies are not expected to have a
                     significant impact on the Company's financial position, results of
                     operations and cash flows. Item 7A. Quantitative and Qualitative Disclosures about Market Risk See Item 7. Management's Discussion and Analysis of Financial
                     Condition and Results of Operations  Market Risk and Interest Rate
                     Sensitivity and  Liquidity Risk.
 49


Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2009, 2008 and 2007   Consolidated Balance Sheets
                           
                           
                           51Consolidated Statements of Income
                           
                           
                           52Consolidated Statements of Shareholders' Equity and Comprehensive Income
                           
                           
                           53Consolidated Statements of Cash Flows
                           
                           
                           55Notes to Consolidated Financial Statements
                           
                           
                           56Report of Independent Registered Public Accounting Firm
                           
                           
                           81
 50


SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETS (in thousands, except share data)  December 31,2009
                           
                           
                           2008AssetsCash and cash equivalents:Cash and due from banks
                           
                           $
                           5,620
                           
                           $
                           4,360Federal funds sold
                           
                           
                           6,462
                           
                           
                           8,800Total cash and cash equivalents
                           
                           
                           12,082
                           
                           
                           13,160Investment securities:Investment securities available for sale
                           
                           
                           76,195
                           
                           
                           64,432Investment securities held to maturity (fair value $9,516 and $12,618)
                           
                           
                           9,225
                           
                           
                           12,519Other investments, at cost
                           
                           
                           9,213
                           
                           
                           8,461Total investment securities
                           
                           
                           94,633
                           
                           
                           85,412Loans
                           
                           
                           574,270
                           
                           
                           566,607Less allowance for loan losses
                           
                           
                           (7,760
                           )
                           
                           (7,005
                           )Loans, net
                           
                           
                           566,510
                           
                           
                           559,602Bank owned life insurance
                           
                           
                           13,974
                           
                           
                           13,369Property and equipment, net
                           
                           
                           16,410
                           
                           
                           11,701Deferred income taxes
                           
                           
                           3,486
                           
                           
                           3,864Other assets
                           
                           
                           12,202
                           
                           
                           5,871Total assets
                           
                           $
                           719,297
                           
                           $
                           692,979LiabilitiesDeposits
                           
                           $
                           494,084
                           
                           $
                           469,537Federal Home Loan Bank advances and related debt
                           
                           
                           142,700
                           
                           
                           149,675Note payable
                           
                           
                           4,250
                           
                           
                           15,000Junior subordinated debentures
                           
                           
                           13,403
                           
                           
                           13,403Other liabilities
                           
                           
                           5,019
                           
                           
                           5,578Total liabilities
                           
                           
                           659,456
                           
                           
                           653,193Shareholders' equity:Preferred stock, par value $.01 per share, 10,000,000 shares authorized,17,299 shares issued and outstanding
                           
                           
                           15,432
                           
                           
                           -Common stock, par value $.01 per share, 10,000,000 shares authorized,
                              3,094,481 and 3,044,863 shares issued and outstanding at December 31, 2009 and 2008, respectively
                           
                           
                           31
                           
                           
                           30Nonvested restricted stock
                           
                           
                           (14
                           )
                           
                           (27
                           )Additional paid-in capital
                           
                           
                           34,097
                           
                           
                           31,850Accumulated other comprehensive income (loss)
                           
                           
                           484
                           
                           
                           (1,079
                           )Retained earnings
                           
                           
                           9,811
                           
                           
                           9,012Total shareholders' equity
                           
                           
                           59,841
                           
                           
                           39,786Total liabilities and shareholders' equity
                           
                           $
                           719,297
                           
                           $
                           692,979 See notes to consolidated financial statements that are an integral
                     part of these consolidated statements.
 51


SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data)  For the years ended December 31,2009
                           
                           
                           2008
                           
                           
                           2007Interest incomeLoans
                           
                           $
                           31,722
                           
                           $
                           35,058
                           
                           $
                           34,612Investment securities
                           
                           
                           4,424
                           
                           
                           4,894
                           
                           
                           4,368Federal funds sold
                           
                           
                           31
                           
                           
                           261
                           
                           
                           540Total interest income
                           
                           
                           36,177
                           
                           
                           40,213
                           
                           
                           39,520Interest expenseDeposits
                           
                           
                           9,996
                           
                           
                           14,807
                           
                           
                           15,771Borrowings
                           
                           
                           6,899
                           
                           
                           7,046
                           
                           
                           7,010Total interest expense
                           
                           
                           16,895
                           
                           
                           21,853
                           
                           
                           22,781Net interest income
                           
                           
                           19,282
                           
                           
                           18,360
                           
                           
                           16,739Provision for loan losses
                           
                           
                           4,310
                           
                           
                           3,161
                           
                           
                           2,050Net interest income after provision for loan losses
                           
                           
                           14,972
                           
                           
                           15,199
                           
                           
                           14,689Noninterest income (loss)Loan fee income
                           
                           
                           431
                           
                           
                           197
                           
                           
                           173Service fees on deposit accounts
                           
                           
                           732
                           
                           
                           653
                           
                           
                           431Income from bank owned life insurance
                           
                           
                           605
                           
                           
                           462
                           
                           
                           374Gain on sale of investment securities
                           
                           
                           41
                           
                           
                           33
                           
                           
                           -Other than temporary impairment on investment securities
                           
                           
                           -
                           
                           
                           (1,931
                           )
                           
                           -Real estate owned activity
                           
                           
                           (342
                           )
                           
                           (140
                           )
                           
                           28Other income
                           
                           
                           376
                           
                           
                           326
                           
                           
                           256Total noninterest income (loss)
                           
                           
                           1,843
                           
                           
                           (400
                           )
                           
                           1,262Noninterest expensesCompensation and benefits
                           
                           
                           7,840
                           
                           
                           6,817
                           
                           
                           6,019Professional fees
                           
                           
                           650
                           
                           
                           525
                           
                           
                           573Marketing
                           
                           
                           659
                           
                           
                           583
                           
                           
                           499Insurance
                           
                           
                           1,433
                           
                           
                           560
                           
                           
                           450Occupancy
                           
                           
                           1,938
                           
                           
                           1,554
                           
                           
                           1,433Data processing and related costs
                           
                           
                           1,451
                           
                           
                           1,352
                           
                           
                           1,171Telephone
                           
                           
                           266
                           
                           
                           176
                           
                           
                           136Other
                           
                           
                           814
                           
                           
                           754
                           
                           
                           594Noninterest expenses
                           
                           
                           15,051
                           
                           
                           12,321
                           
                           
                           10,875Income before income tax expense
                           
                           
                           1,764
                           
                           
                           2,478
                           
                           
                           5,076Income tax expense
                           
                           
                           345
                           
                           
                           626
                           
                           
                           1,641Net income
                           
                           
                           1,419
                           
                           
                           1,852
                           
                           
                           3,435Preferred stock dividends
                           
                           
                           730
                           
                           
                           -
                           
                           
                           -Dividend accretion
                           
                           
                           424
                           
                           
                           -
                           
                           
                           -Net income available to common shareholders
                           
                           $
                           265
                           
                           $
                           1,852
                           
                           $
                           3,435Earnings per common shareBasic
                           
                           $
                           0.09
                           
                           $
                           0.62
                           
                           $
                           1.17Diluted
                           
                           $
                           0.09
                           
                           $
                           0.58
                           
                           $
                           1.06Weighted average common shares outstandingBasic
                           
                           
                           3,054,907
                           
                           
                           2,997,906
                           
                           
                           2,942,369Diluted
                           
                           
                           3,080,786
                           
                           
                           3,167,402
                           
                           
                           3,234,145 See notes to consolidated financial statements that are an integral
                     part of these consolidated statements.
 52


SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 (in thousands, except share data)  Common stock
                           
                           
                           Preferredstock
                           
                           
                           Nonvestedrestrictedstock
                           
                           
                           Additionalpaid-incapital
                           
                           
                           Accumulatedothercomprehensiveincome (loss)
                           
                           
                           RetainedEarnings
                           
                           
                           TotalShares
                           
                           
                           AmountDecember 31, 2006
                           
                           
                           2,933,868
                           
                           $
                           29
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           30,846
                           
                           $
                           (16
                           )
                           $
                           3,725
                           
                           $
                           34,584Net income
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           3,435
                           
                           
                           3,435Comprehensive income, net of tax -Unrealized holding gain on securities available for sale
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           112
                           
                           
                           -
                           
                           
                           112Total comprehensive income
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           3,547Proceeds from exercise of stock options and warrants
                           
                           
                           10,088
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           63
                           
                           
                           -
                           
                           
                           -
                           
                           
                           63Issuance of restricted stock
                           
                           
                           2,500
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (54
                           )
                           
                           54
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -Amortization of deferred compensation on restricted stock-
                           
                           
                           -
                           
                           
                           -
                           
                           
                           13
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           13Compensation expense related to stock options, net of tax
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           19
                           
                           
                           -
                           
                           
                           -
                           
                           
                           19Tax benefit related to exercise of stock options
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           52
                           
                           
                           -
                           
                           
                           -
                           
                           
                           52December 31, 2007
                           
                           
                           2,946,456
                           
                           $
                           29
                           
                           $
                           -
                           
                           $
                           (41
                           )
                           $
                           31,034
                           
                           $
                           96
                           
                           $
                           7,160
                           
                           $
                           38,278Net income
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1,852
                           
                           
                           1,852Comprehensive income, net of tax -Unrealized holding loss on securities available for sale-
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (2,409
                           )
                           
                           -
                           
                           
                           (2,409
                           )Reclassification adjustment included in net income, net of taxRealized gain on securities
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (22
                           )
                           
                           -
                           
                           
                           (22
                           )Other than temporary impairment
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1,256
                           
                           
                           -
                           
                           
                           1,256Total comprehensive income
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           677Proceeds from exercise of stock options and warrants
                           
                           
                           98,407
                           
                           
                           1
                           
                           
                           -
                           
                           
                           -
                           
                           
                           602
                           
                           
                           -
                           
                           
                           -
                           
                           
                           603Amortization of deferred compensation on restricted stock-
                           
                           
                           -
                           
                           
                           -
                           
                           
                           14
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           14Compensation expense related to stock options, net of tax
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           56
                           
                           
                           -
                           
                           
                           -
                           
                           
                           56Tax benefit related to exercise of stock options
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           158
                           
                           
                           -
                           
                           
                           -
                           
                           
                           158December 31, 2008
                           
                           
                           3,044,863
                           
                           $
                           30
                           
                           $
                           -
                           
                           $
                           (27
                           )
                           $
                           31,850
                           
                           $
                           (1,079
                           )
                           $
                           9,012
                           
                           $
                           39,786
 53


Common stock
                           
                           
                           Preferredstock
                           
                           
                           Nonvestedrestrictedstock
                           
                           
                           Additionalpaid-incapital
                           
                           
                           Accumulatedothercomprehensiveincome (loss)
                           
                           
                           RetainedEarnings
                           
                           
                           TotalShares
                           
                           
                           AmountDecember 31, 2008
                           
                           
                           3,044,863
                           
                           $
                           30
                           
                           $
                           -
                           
                           $
                           (27
                           )
                           $
                           31,850
                           
                           $
                           (1,079
                           )
                           $
                           9,012
                           
                           $
                           39,786Net income
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1,419
                           
                           
                           1,419Comprehensive income, net of tax -Unrealized holding gain on securities available for sale-
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1,590
                           
                           
                           -
                           
                           
                           1,590Reclassification adjustment included in net income, net of tax
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (27
                           )
                           
                           -
                           
                           
                           (27
                           )Total comprehensive income
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           2,982Preferred stock transactions:Proceeds from issuance of 17,299 shares of preferred stock
                           
                           
                           -
                           
                           
                           -
                           
                           
                           15,856
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           15,856Proceeds from issuance of common stock warrants
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1,418
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1,418Cash dividends on Series T preferred stock
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (620
                           )
                           
                           (620
                           )Dividend accretion
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (424
                           )
                           
                           -
                           
                           
                           424
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -Proceeds from exercise of stock warrants
                           
                           
                           49,618
                           
                           
                           1
                           
                           
                           -
                           
                           
                           -
                           
                           
                           300
                           
                           
                           -
                           
                           
                           -
                           
                           
                           301Amortization of deferred compensation on restricted stock-
                           
                           
                           -
                           
                           
                           -
                           
                           
                           13
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           13Compensation expense related to stock options
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           105
                           
                           
                           -
                           
                           
                           -
                           
                           
                           105December 31, 2009
                           
                           
                           3,094,481
                           
                           $
                           31
                           
                           $
                           15,432
                           
                           $
                           (14
                           )
                           $
                           34,097
                           
                           $
                           484
                           
                           $
                           9,811
                           
                           $
                           59,841 See notes to consolidated financial statements that are an integral
                     part of these consolidated statements.
 54


SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)  For the years ended December 31,2009
                           
                           
                           2008
                           
                           
                           2007Operating activitiesNet income
                           
                           $
                           1,419
                           
                           $
                           1,852
                           
                           $
                           3,435Adjustments to reconcile net income to cash provided by(used for) operating activities:Provision for loan losses
                           
                           
                           4,310
                           
                           
                           3,161
                           
                           
                           2,050Depreciation and other amortization
                           
                           
                           731
                           
                           
                           541
                           
                           
                           483Accretion and amortization of securities discounts and premiums, net
                           
                           
                           449
                           
                           
                           114
                           
                           
                           86Loss on sale of real estate owned
                           
                           
                           203
                           
                           
                           38
                           
                           
                           194Write-down of real estate owned
                           
                           
                           302
                           
                           
                           110
                           
                           
                           50Gain on sale of property held for sale
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (319
                           )Gain on sale of investment securities
                           
                           
                           (41
                           )
                           
                           (33
                           )
                           
                           -Other than temporary impairment on investment securities
                           
                           
                           -
                           
                           
                           1,931
                           
                           
                           -Compensation expense related to stock options and restricted stock grants
                           
                           
                           118
                           
                           
                           70
                           
                           
                           32Increase in cash surrender value of bank owned life insurance
                           
                           
                           (605
                           )
                           
                           (462
                           )
                           
                           (374
                           )Increase in deferred tax asset
                           
                           
                           (417
                           )
                           
                           (1,317
                           )
                           
                           (44
                           )Decrease (increase) in other assets, net
                           
                           
                           (3,049
                           )
                           
                           280
                           
                           
                           (322
                           )Increase (decrease) in other liabilities, net
                           
                           
                           (559
                           )
                           
                           628
                           
                           
                           (2,297
                           )Net cash provided by operating activities
                           
                           
                           2,861
                           
                           
                           6,913
                           
                           
                           2,974Investing activitiesIncrease (decrease) in cash realized from:Origination of loans, net
                           
                           
                           (15,770
                           )
                           
                           (61,708
                           )
                           
                           (107,915
                           )Purchase of property and equipment
                           
                           
                           (5,433
                           )
                           
                           (6,851
                           )
                           
                           (1,388
                           )Purchase of investment securities:Available for sale
                           
                           
                           (44,773
                           )
                           
                           (32,725
                           )
                           
                           (23,102
                           )Other investments
                           
                           
                           (894
                           )
                           
                           (909
                           )
                           
                           (3,283
                           )Payment and maturity of investment securities:Available for sale
                           
                           
                           27,363
                           
                           
                           28,557
                           
                           
                           9,457Held to maturity
                           
                           
                           3,261
                           
                           
                           2,265
                           
                           
                           2,189Other investments
                           
                           
                           141
                           
                           
                           1,125
                           
                           
                           1,665Proceeds from sale of investment securities
                           
                           
                           7,630
                           
                           
                           -
                           
                           
                           -Purchase of life insurance policies
                           
                           
                           -
                           
                           
                           (4,000
                           )
                           
                           (390
                           )Proceeds from sale of property held for sale
                           
                           
                           -
                           
                           
                           -
                           
                           
                           2,285Proceeds from sale of real estate acquired in settlement of loans
                           
                           
                           759
                           
                           
                           47
                           
                           
                           501Net cash used for investing activities
                           
                           
                           (27,716
                           )
                           
                           (74,199
                           )
                           
                           (119,981
                           )Financing activitiesIncrease in deposits, net
                           
                           
                           24,547
                           
                           
                           56,717
                           
                           
                           67,316Increase (decrease) in note payable
                           
                           
                           (10,750
                           )
                           
                           6,980
                           
                           
                           8,020Increase (decrease) in Federal Home Loan Bank advances and related debt
                           
                           
                           (6,975
                           )
                           
                           (825
                           )
                           
                           42,000Proceeds from the issuance of preferred stock
                           
                           
                           15,856
                           
                           
                           -
                           
                           
                           -Proceeds from the issuance of stock warrant
                           
                           
                           1,418
                           
                           
                           -
                           
                           
                           -Cash dividend on preferred stock
                           
                           
                           (620
                           )
                           
                           -
                           
                           
                           -Proceeds from the exercise of stock options and warrants
                           
                           
                           301
                           
                           
                           603
                           
                           
                           63Net cash provided by financing activities
                           
                           
                           23,777
                           
                           
                           63,475
                           
                           
                           117,399Net increase (decrease) in cash and cash equivalents
                           
                           
                           (1,078
                           )
                           
                           (3,811
                           )
                           
                           392Cash and cash equivalents, beginning of year
                           
                           
                           13,160
                           
                           
                           16,971
                           
                           
                           16,579Cash and cash equivalents, end of year
                           
                           $
                           12,082
                           
                           $
                           13,160
                           
                           $
                           16,971Supplemental informationCash paid forInterest
                           
                           $
                           17,119
                           
                           $
                           22,345
                           
                           $
                           22,320Income taxes
                           
                           $
                           605
                           
                           $
                           1,892
                           
                           $
                           1,781Schedule of non-cash transactionsTransfer of property and equipment to property held for sale
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           1,966Foreclosure of real estate
                           
                           $
                           4,552
                           
                           $
                           2,044
                           
                           $
                           -Unrealized (gain) loss on securities, net of income taxes
                           
                           $
                           1,563
                           
                           $
                           1,175
                           
                           $
                           (112
                           ) See notes to consolidated financial statements that are an integral
                     part of these consolidated statements.
 55


NOTE 1. Summary of Significant Accounting Policies and Activities Southern First Bancshares, Inc., (the "Company") is a South Carolina corporation that owns all of the
                     capital stock of Southern First Bank, N.A. (the "Bank") and all of
                     the stock of Greenville First Statutory Trust I and II (collectively,
                     the "Trusts" ). On July 2, 2007, the Company and Bank changed their names to Southern First
                     Bancshares, Inc. and Southern First Bank, N.A., respectively. The
                     Bank is a national bank organized under the laws of the United States
                     and located in Greenville County, South Carolina. The Bank is
                     primarily engaged in the business of accepting demand deposits and
                     savings deposits insured by the Federal Deposit Insurance
                     Corporation, and providing commercial, consumer and mortgage loans to
                     the general public. The Trusts are special purpose subsidiaries
                     organized for the sole purpose of issuing trust preferred securities. On October 26, 1999, the Company sold 1,100,000 shares of its common stock at $10 per share and on November 30, 1999 sold 50,000 additional shares for a total of 1,150,000 shares
                     (1,897,493 after adjustment of 3 for 2 stock split and subsequent
                     stock dividend). This offering raised approximately $10.6 million,
                     net of underwriting discounts, commissions and offering expenses. On June 26, 2003, Trust I offered and sold $6.0 million of floating rate securities.
                     The Company received the proceeds from the issuance of these
                     securities and has reflected the obligation resulting from the
                     receipt of the proceeds as junior subordinate debentures in the
                     balance sheets. The Company invested $186,000 in the Trust. On November 17, 2003, shareholders of record as of November 3, 2003, received one additional share of stock for every two shares of
                     stock owned prior to the 3 for 2 stock split. All fractional shares
                     were paid in cash. On June 20, 2006, the company's Board of Directors approved a 10 percent stock
                     dividend to the company's shareholders. The record date was July 24, 2006 and the distribution date was August 14, 2006. All fractional shares were paid in cash. On September 24, 2004, the Company sold 800,000 shares of its common stock and on October 15, 2004 sold 120,000 additional shares for a total of 920,000 shares
                     (1,012,000 after adjustment for subsequent stock dividend). All
                     shares were sold at $17.875 per share. The offering raised
                     approximately $14.9 million, net of underwriting discounts,
                     commissions and offering expenses. On December 22, 2005, Trust II offered and sold $7.0 million of floating rate securities.
                     The Company received the proceeds from the issuance of these
                     securities and has reflected the obligation resulting from the
                     receipt of the proceeds as junior subordinate debentures in the
                     balance sheets. The Company invested $217,000 in the Trust. On February 27, 2009, the Company sold 17,299 shares of its Fixed Rate Cumulative
                     Perpetual Preferred Stock, Series T and a warrant to purchase 330,554
                     shares of the Company's common stock to Treasury under the Capital
                     Purchase Program for an aggregate purchase price of $17.3 million. The following is a description of the more significant accounting and
                     reporting policies that the Company follows in preparing and
                     presenting consolidated financial statements. Basis of Presentation The accompanying consolidated financial statements include the
                     accounts of the Company and its wholly owned subsidiary, Southern
                     First Bank, N.A. In consolidation, all significant intercompany
                     transactions have been eliminated. The accounting and reporting
                     policies conform to accounting principles generally accepted in the
                     United States of America. In accordance with guidance issued by the
                     Financial Accounting Standards Board ("FASB"), the operations of the
                     Trusts have not been consolidated in these financial statements. Accounting Estimates The preparation of consolidated financial statements in conformity
                     with accounting principles generally accepted in the United States of
                     America 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. Risks 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
 56


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. 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 it to changes with respect
                     to valuation of assets, amount of required loan 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 and
                     Midlands regions of South Carolina for various personal and
                     commercial purposes. The Bank's loan portfolio has a concentration of
                     real estate loans. As of December 31, 2009 and 2008, real estate loans represented 79.0% and 79.4%,
                     respectively, of total loans. However, borrowers' ability to repay
                     their loans is not dependent upon any specific economic sector. Accounting Standards Codification In June 2009, the Financial Accounting Standards Board ("FASB")
                     issued guidance which restructured generally accepted accounting
                     principles ("GAAP") and simplified access to all authoritative
                     literature by providing a single source of authoritative
                     nongovernmental GAAP. The guidance is presented in a topically
                     organized structure referred to as the FASB Accounting Standards
                     Codification ("ASC"). The new structure is effective for interim or
                     annual periods ending after September 15, 2009. All existing accounting standards have been superseded and all
                     other accounting literature not included is considered
                     non-authoritative. 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. Management
                     performed an evaluation to determine whether or not there have been
                     any subsequent events since the balance sheet date and no subsequent
                     events occurred requiring accrual or disclosure. 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. Cash and Cash Equivalents For purposes of the Consolidated Statements of Cash Flows, cash and
                     due from banks and federal funds sold are included in "cash and cash
                     equivalents." Generally, federal funds are sold for one-day periods.
                     The Company places it deposits and correspondent accounts with and
                     sells its federal funds to high quality institutions. Management
                     believes credit risk associated with correspondent accounts is not
                     significant. Investments in Debt and Equity Securities We classify our investment securities as held to maturity securities,
                     trading securities and available for sale securities as applicable. Debt securities are designated as held to maturity if we have the
                     intent and the ability to hold the securities to maturity. Held to
                     maturity securities are carried at amortized cost, adjusted for the
                     amortization of any related premiums or the accretion of any related
                     discounts into interest income using a methodology which approximates
                     a level yield of interest over the estimated remaining period until
                     maturity. Unrealized losses on held to maturity securities,
                     reflecting a decline in value judged by us to be other than
                     temporary, are charged to income in the Consolidated Statements
                     of Income. Debt and equity securities that are purchased and held principally
                     for the purpose of selling in the near term are reported as trading
                     securities. Trading securities are carried at fair value with
                     unrealized holding gains and losses included in earnings. We classify debt and equity securities as available for sale when at
                     the time of purchase we determine that such securities may be sold at
                     a future date or if we do not have the intent or ability to hold such
                     securities to maturity. Securities designated as available for sale
                     are recorded at fair value. Changes in the fair value of debt and
                     equity securities available for sale are included in shareholders'
                     equity as unrealized gains or losses, net of the related tax effect.
                     Unrealized losses on available
 57


for sale securities, reflecting a decline in value judged to be other
                     than temporary, are charged to income in the Consolidated Statements
                     of Income. Realized gains or losses on available for sale securities
                     are computed on the specific identification basis. Other Investments The Bank, as a member institution, is required to own stock
                     investments in the Federal Home Loan Bank of Atlanta ("FHLB") and the
                     Federal Reserve Bank. These stocks are generally pledged against any
                     borrowings from these institutions. No ready market exists for these
                     stocks and they have no quoted market value. However, redemption of
                     these stocks has historically been at par value. Other investments
                     also include a $403,000 investment in the Trusts. Fair Value Determination and Other-Than-Temporary Impairment Analysis Many debt and equity securities have experienced significant and
                     often extended declines in value due to current economic conditions
                     and issuer-specific concerns. These declines have focused more
                     attention on the processes for determining whether such declines
                     indicate that the securities are "other-than-temporarily impaired".
                     Management evaluates numerous factors to assess whether or not it is
                     probable that all amounts due according to contractual terms will be
                     collected to determine if any other-than-temporary impairment exists.
                     The process of evaluating other-than-temporary impairment is
                     inherently judgmental, involving the weighing of positive and
                     negative factors and evidence that may be objective or subjective. Loans, Interest and Fee Income on Loans Loans are stated at the principal balance outstanding. Unamortized
                     net loan fees and the allowance for possible loan losses are deducted
                     from total loans on the balance sheets. Interest income is recognized
                     over the term of the loan based on the principal amount outstanding.
                     The net of loan origination fees received and direct costs incurred
                     in the origination of loans is deferred and amortized to interest
                     income over the contractual life of the loans adjusted for actual
                     principal prepayments using a method approximating the interest
                     method. Loans are generally placed on non-accrual status when
                     principal or interest becomes ninety days past due, or when payment
                     in full is not anticipated. When a loan is placed on non-accrual
                     status, interest accrued but not received is generally reversed
                     against interest income. Cash receipts on non-accrual loans are not
                     recorded as interest income, but are used to reduce the loan's
                     principal balance. Allowance for Loan Losses The allowance for loan losses is established as losses are estimated
                     to have occurred through a provision for loan losses charged to
                     earnings. Loan losses are charged against the allowance when
                     management believes the uncollectibility of a loan balance is
                     confirmed. Subsequent recoveries, if any, are credited to the
                     allowance. The allowance for loan losses is evaluated on a regular basis by
                     management and is based upon management's periodic review of the
                     collectibility of the loans in light of historical experience, the
                     nature and volume of the loan portfolio, adverse situations that may
                     affect the borrower's ability to repay, estimated value of any
                     underlying collateral and prevailing economic conditions. This
                     evaluation is inherently subjective as it requires estimates that are
                     susceptible to significant revision as more information becomes
                     available. The allowance consists of specific, general and unallocated
                     components. The specific component relates to loans that are
                     classified as either doubtful or loss. Loans classified as
                     substandard or special mention are individually evaluated and a
                     portion of the general reserve is allocated as appropriate. In
                     addition, the general component covers non-classified loans and is
                     based on historical loss experience adjusted for qualitative factors.
                     An unallocated component may be maintained to cover uncertainties
                     such as changes in the national and local economy, concentrations of
                     credit, expansion into new markets and other factors that could
                     affect management's estimate of probable losses. The unallocated
                     component of the allowance reflects the margin of imprecision
                     inherent in the underlying assumptions used in the methodologies for
                     estimating specific and general losses in the portfolio. For loans
                     that are also classified as impaired, an allowance is established
                     when the discounted cash flows (or collateral value or observable
                     market price) of the impaired loan are lower than the carrying value
                     of that loan. A loan is considered impaired when, based on current information and
                     events, it is probable that the Company will be unable to collect the
                     scheduled payments of principal or interest when due according to the
                     contractual terms of the loan agreement. Factors considered by
                     management in determining impairment include payment status,
                     collateral value, and the probability of collecting scheduled
                     principal and interest payments when due. Loans that experience
                     insignificant payment delays and payment shortfalls generally are not
                     classified as impaired. Management determines the significance of
                     payment
 58


delays and payment shortfalls on a case-by-case basis, taking into
                     consideration all of the circumstances surrounding the loan and the
                     borrower, including the length of the delay, the reasons for the
                     delay, the borrower's prior payment record, and the amount of the
                     shortfall in relation to the principal and interest owed. Impairment
                     is measured on a loan by loan basis for commercial and construction
                     loans by either the present value of expected future cash flows
                     discounted at the loan's effective interest rate, the loan's
                     obtainable market price, or the fair value of the collateral if the
                     loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively
                     evaluated for impairment. Accordingly, the Company does not
                     separately identify individual consumer and residential loans for
                     impairment disclosures, unless such loans are the subject of a
                     restructuring agreement. Non-performing Assets Non-performing assets include real estate acquired through
                     foreclosure or deed taken in lieu of foreclosure, loans on
                     non-accrual status and loans past due 90 days or more and still
                     accruing interest. Loans are placed on non-accrual status when, in
                     the opinion of management, the collection of additional interest is
                     uncertain. Thereafter no interest is taken into income until such
                     time as the borrower demonstrates the ability to pay both principal
                     and interest. Real Estate Acquired in Settlement of Loans Real estate acquired through foreclosure is initially recorded at the
                     lower of cost or estimated fair value. Subsequent to the date of
                     acquisition, it is carried at the lower of cost or fair value,
                     adjusted for net selling costs. Fair values of real estate owned are
                     reviewed regularly and writedowns are recorded when it is determined
                     that the carrying value of real estate exceeds the fair value less
                     estimated costs to sell. Costs relating to the development and
                     improvement of such property are capitalized, whereas those costs
                     relating to holding the property are expensed. Property Held for Sale Property held for sale is included in property and equipment on the
                     consolidated balance sheets and is stated at the lower of cost
                     or market. Property and Equipment Property and equipment are stated at cost. Major repairs are charged
                     to operations, while major improvements are capitalized. Depreciation
                     is computed using the straight-line method over the estimated useful
                     lives of the related assets. Upon retirement, sale, or other
                     disposition of property and equipment, the cost and accumulated
                     depreciation are eliminated from the accounts, and gain or loss is
                     included in income from operations. Construction in progress is stated at cost, which includes the cost
                     of construction and other direct costs attributable to the
                     construction. No provision for depreciation is made on construction
                     in progress until such time as the relevant assets are completed and
                     put into use. Bank Owned Life Insurance Policies Bank owned life insurance policies represent the cash value of
                     policies on certain officers of the Bank. Securities Sold Under Agreements to Repurchase The Bank enters into sales of securities under agreements to
                     repurchase (reverse repurchase agreements). Repurchase agreements are
                     treated as financing, with the obligation to repurchase securities
                     sold being reflected as a liability and the securities underlying the
                     agreements remaining as assets in the Consolidated Balance Sheets. Comprehensive Income Comprehensive income consists of net income and net unrealized gains
                     (losses) on securities and is presented in the statements of
                     shareholders' equity and comprehensive income. The statement requires
                     only additional disclosures in the consolidated financial statements;
                     it does not affect our results of operations.
 59


Advertising and Public Relations Expense Advertising, promotional and other business development costs are
                     generally expensed as incurred. External costs incurred in producing
                     media advertising are expensed the first time the advertising takes
                     place. External costs relating to direct mailing costs are expensed
                     in the period in which the direct mailings are sent. Income Taxes The financial statements have been prepared on the accrual basis.
                     When income and expenses are recognized in different periods for
                     financial reporting purposes versus for the purposes of computing
                     income taxes currently payable, deferred taxes are provided on such
                     temporary differences. Deferred tax assets and liabilities are
                     recognized for the expected future tax consequences of events that
                     have been recognized in the consolidated financial statements or tax
                     returns. Deferred tax assets and liabilities are measured using the
                     enacted tax rates expected to apply to taxable income in the years in
                     which those temporary differences are expected to be realized or
                     settled. The Company believes that its income tax filing positions
                     taken or expected to be taken in an its tax returns will more likely
                     than not be sustained upon audit by the taxing authorities and does
                     not anticipate any adjustments that will result in a material adverse
                     impact on the Company's financial condition, results of operations,
                     or cash flow. Therefore, no reserves for uncertain income tax
                     positions have been recorded pursuant to FIN 48. Stock-Based Compensation The Company has a stock-based employee compensation plan.
                     Compensation cost is recognized for all stock options granted and for
                     any outstanding unvested awards as if the fair value method had been
                     applied to those awards as of the date of grant. Statement of Cash Flows For purposes of reporting cash flows, cash and cash equivalents are
                     defined as those amounts included in the balance sheet captions "Cash
                     and due from banks" and "Federal funds sold." Cash and cash
                     equivalents have an original maturity of three months or less. Earnings Per Common Share The following schedule reconciles the numerators and denominators of
                     the basic and diluted earnings per share computations for the years
                     ended December 31, 2009, 2008 and 2007 (dollars in thousands, except share data). Dilutive
                     common shares arise from the potentially dilutive effect of the
                     Company's stock options and warrants that are outstanding. The
                     assumed conversion of stock options and warrants can create a
                     difference between basic and dilutive net income per common share. At December 31, 2009, 2008 and 2007, 442,079, 87,600 and 59,750 options, respectively,
                     were anti-dilutive in the calculation of earnings per share as their
                     exercise price exceeded the fair market value.  2009
                           
                           
                           2008
                           
                           
                           2007Numerator:Net income
                           
                           $
                           1,419
                           
                           $
                           1,852
                           
                           $
                           3,435Less: Preferred stock dividends
                           
                           
                           730
                           
                           
                           -
                           
                           
                           -Dividend accretion (1)
                           
                           
                           424
                           
                           
                           -
                           
                           
                           -Net income available to common shareholders
                           
                           $
                           265
                           
                           $
                           1,852
                           
                           $
                           3,435Denominator:Weighted-average common shares outstanding - basic
                           
                           
                           3,054,907
                           
                           
                           2,997,906
                           
                           
                           2,942,369Common stock equivalents
                           
                           
                           25,879
                           
                           
                           169,496
                           
                           
                           291,776Weighted-average common shares outstanding - diluted
                           
                           
                           3,080,786
                           
                           
                           3,167,402
                           
                           
                           3,234,145Earnings per common share:Basic
                           
                           $
                           0.09
                           
                           $
                           0.62
                           
                           $
                           1.17Diluted
                           
                           $
                           0.09
                           
                           $
                           0.58
                           
                           $
                           1.06  (1) Preferred stock dividend required to be accreted over estimated
                     life of warrant issued in conjunction with preferred stock.
 60


Recently Issued Accounting Pronouncements The following is a summary of recent authoritative pronouncements
                     that could impact the accounting, reporting, and/or disclosure of
                     financial information by the Company. In June 2009, the Financial Accounting Standards Board ("FASB")
                     issued guidance which restructured generally accepted accounting
                     principles ("GAAP") and simplified access to all authoritative
                     literature by providing a single source of authoritative
                     nongovernmental GAAP. The guidance is presented in a topically
                     organized structure referred to as the FASB Accounting Standards
                     Codification ("ASC"). The new structure is effective for interim or
                     annual periods ending after September 15, 2009. All existing accounting standards have been superseded and all
                     other accounting literature not included is considered
                     non-authoritative. The FASB issued new accounting guidance on accounting for transfers
                     of financial assets in June 2009. The guidance limits the
                     circumstances in which a financial asset should be derecognized when
                     the transferor has not transferred the entire financial asset by
                     taking into consideration the transferor's continuing involvement.
                     The standard requires that a transferor recognize and initially
                     measure at fair value all assets obtained (including a transferor's
                     beneficial interest) and liabilities incurred as a result of a
                     transfer of financial assets accounted for as a sale. The concept of
                     a qualifying special-purpose entity is no longer applicable. The
                     standard is effective for the first annual reporting period that
                     begins after November 15, 2009, for interim periods within the first annual reporting period, and
                     for interim and annual reporting periods thereafter. Earlier
                     application is prohibited. The Company does not expect the guidance
                     to have any impact on the Company's financial statements. The ASC was
                     amended in December, 2009, to include this guidance. Guidance was issued in June 2009 requiring a company to analyze
                     whether its interest in a variable interest entity ("VIE") gives it a
                     controlling financial interest that should be included in
                     consolidated financial statements. A company must assess whether it
                     has an implicit financial responsibility to ensure that the VIE
                     operates as designed when determining whether it has the power to
                     direct the activities of the VIE that significantly impact its
                     economic performance, making it the primary beneficiary. Ongoing
                     reassessments of whether a company is the primary beneficiary are
                     also required by the standard. This guidance amends the criteria to
                     qualify as a primary beneficiary as well as how to determine the
                     existence of a VIE. The standard also eliminates certain exceptions
                     that were previously available. This guidance is effective as of the
                     beginning of each reporting entity's first annual reporting period
                     that begins after November 15, 2009, for interim periods within that first annual reporting period, and
                     for interim and annual reporting periods thereafter. Earlier
                     application is prohibited. Comparative disclosures will be required
                     for periods after the effective date. The Company does not expect the
                     guidance to have any impact on the Company's financial position. An
                     update was issued in December, 2009, to include this guidance in
                     the ASC. In October 2009, updated guidance was issued to provide for
                     accounting and reporting for own-share lending arrangements issued in
                     contemplation of a convertible debt issuance. At the date of
                     issuance, a share-lending arrangement entered into on an entity's own
                     shares should be measured at fair value in accordance with prior
                     guidance and recognized as an issuance cost, with an offset to
                     additional paid-in capital. Loaned shares are excluded from basic and
                     diluted earnings per share unless default of the share-lending
                     arrangement occurs. The amendment also requires several disclosures
                     including a description and the terms of the arrangement and the
                     reason for entering into the arrangement. The effective dates of the
                     amendment are dependent upon the date the share-lending arrangement
                     was entered into and include retrospective application for
                     arrangements outstanding as of the beginning of fiscal years
                     beginning on or after December 15, 2009. The Company has no plans to issue convertible debt and, therefore,
                     does not expect the update to have an impact on its financial
                     statements. In January 2010, guidance was issued to alleviate diversity in the
                     accounting for distributions to shareholders that allow the
                     shareholder to elect to receive their entire distribution in cash or
                     shares but with a limit on the aggregate amount of cash to be paid.
                     The amendment states that the stock portion of a distribution to
                     shareholders that allows them to elect to receive cash or shares with
                     a potential limitation on the total amount of cash that all
                     shareholders can elect to receive in the aggregate is considered a
                     share issuance. The amendment is effective for interim and annual
                     periods ending on or after December 15, 2009 and had no impact on the Company's financial statements. Also in January 2010, an amendment was issued to clarify the scope of
                     subsidiaries for consolidation purposes. The amendment provides that
                     the decrease in ownership guidance should apply to (1) a subsidiary
                     or group of assets that is a business or nonprofit activity, (2) a
                     subsidiary that is a business or nonprofit activity that is
                     transferred to an equity method investee or joint venture, and (3) an
                     exchange of a group of assets that constitutes a business or
                     nonprofit activity for a noncontrolling interest in an entity. The
                     guidance does not apply to a decrease in ownership in transactions
                     related to sales of in substance real estate or conveyances of oil
                     and gas mineral rights. The update is effective for the interim or
                     annual reporting periods ending on or after December 15, 2009 and had no impact on the Company's financial statements.
 61


Other accounting standards that have been issued or proposed by the
                     FASB or other standards-setting bodies are not expected to have a
                     significant impact on the Company's financial position, results of
                     operations and cash flows. NOTE 2. Restrictions on Cash and Due From Banks The Bank is required to maintain average cash reserve balances,
                     computed by applying prescribed percentages to its various types of
                     deposits, either at the Bank or on deposit with the Federal Reserve
                     Bank. At December 31, 2009 and 2008, the Bank had $3.0 million and $3.3 million, respectively
                     on deposit with the Federal Reserve Bank to meet this requirement. NOTE 3. Federal Funds Sold The Bank's cash reserves in excess of the required amounts to be held
                     by the Federal Reserve Bank (Note 2) may be lent to other banks on a
                     daily basis. At December 31, 2009 and 2008 federal funds sold amounted to $6.5 million and $8.8
                     million, respectively. Management limits its credit risk by placing
                     its deposits and federal funds with institutions that maintain high
                     credit standards. NOTE 4. Investment Securities The amortized costs and fair value of investment securities available
                     for sale and held to maturity are as follows (dollars in thousands):  December 31, 2009Amortized
                           
                           
                           Gross Unrealized
                           
                           
                           FairCost
                           
                           
                           Gains
                           
                           
                           Losses
                           
                           
                           ValueAvailable for saleGovernment sponsored enterprises
                           
                           $
                           11,615
                           
                           $
                           1
                           
                           $
                           76
                           
                           $
                           11,540State and political subdivisions
                           
                           
                           5,267
                           
                           
                           46
                           
                           
                           4
                           
                           
                           5,30916,882
                           
                           
                           47
                           
                           
                           80
                           
                           
                           16,849Mortgage-backed securitiesFHLMC
                           
                           
                           13,540
                           
                           
                           362
                           
                           
                           15
                           
                           
                           13,887FNMA
                           
                           
                           32,910
                           
                           
                           807
                           
                           
                           150
                           
                           
                           33,567GNMA
                           
                           
                           5,122
                           
                           
                           112
                           
                           
                           -
                           
                           
                           5,234Collateralized Mortgage Obligations
                           
                           
                           7,008
                           
                           
                           -
                           
                           
                           350
                           
                           
                           6,65858,580
                           
                           
                           1,281
                           
                           
                           515
                           
                           
                           59,346Total
                           
                           $
                           75,462
                           
                           $
                           1,328
                           
                           $
                           595
                           
                           $
                           76,195Held to maturityMortgage-backed securitiesFHLMC
                           
                           $
                           1,830
                           
                           $
                           76
                           
                           $
                           -
                           
                           $
                           1,906FNMA
                           
                           
                           7,395
                           
                           
                           215
                           
                           
                           -
                           
                           
                           7,610$
                           9,225
                           
                           $
                           291
                           
                           $
                           -
                           
                           $
                           9,516Available for saleGovernment sponsored enterprises
                           
                           $
                           18,483
                           
                           $
                           238
                           
                           $
                           13
                           
                           $
                           18,708State and political subdivisions
                           
                           
                           3,790
                           
                           
                           23
                           
                           
                           41
                           
                           
                           3,772Preferred Stock
                           
                           
                           84
                           
                           
                           -
                           
                           
                           18
                           
                           
                           6622,357
                           
                           
                           261
                           
                           
                           72
                           
                           
                           22,546Mortgage-backed securitiesFHLMC
                           
                           
                           7,797
                           
                           
                           192
                           
                           
                           -
                           
                           
                           7,989FNMA
                           
                           
                           23,100
                           
                           
                           479
                           
                           
                           -
                           
                           
                           23,579GNMA
                           
                           
                           4,981
                           
                           
                           124
                           
                           
                           -
                           
                           
                           5,105Collateralized Mortgage Obligations
                           
                           
                           7,822
                           
                           
                           -
                           
                           
                           2,609
                           
                           
                           5,21343,700
                           
                           
                           795
                           
                           
                           2,609
                           
                           
                           41,886Total
                           
                           $
                           66,057
                           
                           $
                           1,056
                           
                           $
                           2,681
                           
                           $
                           64,432
 62


December 31, 2009Amortized
                        
                        
                        Gross Unrealized
                        
                        
                        FairCost
                        
                        
                        Gains
                        
                        
                        Losses
                        
                        
                        ValueHeld to maturityMortgage-backed securitiesFHLMC
                        
                        $
                        2,333
                        
                        $
                        34
                        
                        $
                        -
                        
                        $
                        2,367FNMA
                        
                        
                        10,186
                        
                        
                        70
                        
                        
                        5
                        
                        
                        10,251$
                        12,519
                        
                        $
                        104
                        
                        $
                        5
                        
                        $
                        12,618 The amortized costs and fair values of investment securities
                     available for sale at December 31, 2009 and 2008, by contractual maturity, are shown below (dollars in
                     thousands). Expected maturities may differ from contractual
                     maturities because issuers have the right to prepay the obligations.  December 31, 2009
                           
                           
                           December 31, 2008Amortized Cost
                           
                           
                           FairValue
                           
                           
                           AmortizedCost
                           
                           
                           FairValueAvailable for saleDue after one through five years
                           
                           $
                           242
                           
                           $
                           251
                           
                           $
                           409
                           
                           $
                           414Due after five through ten years
                           
                           
                           9,968
                           
                           
                           10,035
                           
                           
                           16,365
                           
                           
                           16,721Due after ten years
                           
                           
                           65,252
                           
                           
                           65,909
                           
                           
                           49,283
                           
                           
                           47,297$
                           75,462
                           
                           $
                           76,195
                           
                           $
                           66,057
                           
                           $
                           64,432Held to maturityDue after one through five years
                           
                           $
                           155
                           
                           $
                           159
                           
                           $
                           238
                           
                           $
                           240Due after five through ten years
                           
                           
                           1,830
                           
                           
                           1,906
                           
                           
                           2,333
                           
                           
                           2,367Due after ten years
                           
                           
                           7,240
                           
                           
                           7,451
                           
                           
                           9,948
                           
                           
                           10,011$
                           9,225
                           
                           $
                           9,516
                           
                           $
                           12,519
                           
                           $
                           12,618 The tables below summarize gross unrealized losses on investment
                     securities and the fair market value of the related securities,
                     aggregated by investment category and length of time that individual
                     securities have been in a continuous unrealized loss position, at December 31, 2009 and 2008 (dollars in thousands).  Less than 12 months
                           
                           
                           12 months or longer
                           
                           
                           Total#
                           
                           
                           Fairvalue
                           
                           
                           Unrealizedlosses
                           
                           
                           #
                           
                           
                           Fairvalue
                           
                           
                           Unrealizedlosses
                           
                           
                           #
                           
                           
                           Fairvalue
                           
                           
                           UnrealizedlossesAs of December 31, 2009Available for saleGovernment sponsored enterprises
                           
                           
                           2
                           
                           $
                           8,908
                           
                           $
                           76
                           
                           
                           -
                           
                           $
                           -
                           
                           $
                           -
                           
                           
                           2
                           
                           $
                           8,908
                           
                           $
                           76State and political subdivisions
                           
                           
                           2
                           
                           
                           855
                           
                           
                           4
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           2
                           
                           
                           855
                           
                           
                           4Mortgage-backedFHLMC
                           
                           
                           1
                           
                           
                           2,028
                           
                           
                           15
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1
                           
                           
                           2,028
                           
                           
                           15FNMA
                           
                           
                           4
                           
                           
                           17,467
                           
                           
                           150
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           4
                           
                           
                           17,467
                           
                           
                           150Collateral mortgage obligations
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1
                           
                           
                           3,095
                           
                           
                           350
                           
                           
                           1
                           
                           
                           3,095
                           
                           
                           3509
                           
                           $
                           29,258
                           
                           $
                           245
                           
                           
                           1
                           
                           $
                           3,095
                           
                           $
                           350
                           
                           
                           10
                           
                           $
                           32,353
                           
                           $
                           595As of December 31, 2008Available for saleGovernment sponsored enterprises
                           
                           
                           -
                           
                           $
                           -
                           
                           $
                           -
                           
                           
                           1
                           
                           $
                           7,470
                           
                           $
                           13
                           
                           
                           1
                           
                           $
                           7,470
                           
                           $
                           13State and political subdivisions
                           
                           
                           4
                           
                           
                           2.463
                           
                           
                           41
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           4
                           
                           
                           2,463
                           
                           
                           41Preferred Stock
                           
                           
                           1
                           
                           
                           66
                           
                           
                           18
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1
                           
                           
                           66
                           
                           
                           18Mortgage-backedCollateral mortgage obligations
                           
                           
                           1
                           
                           
                           2,628
                           
                           
                           1,108
                           
                           
                           1
                           
                           
                           2,585
                           
                           
                           1,501
                           
                           
                           2
                           
                           
                           5,213
                           
                           
                           2,6096
                           
                           $
                           5,157
                           
                           $
                           1,167
                           
                           
                           2
                           
                           $
                           10,055
                           
                           $
                           1,514
                           
                           
                           8
                           
                           $
                           15,212
                           
                           $
                           2,681Held to maturityMortgage-backed
                           
                           
                           1
                           
                           $
                           2,811
                           
                           $
                           2
                           
                           
                           1
                           
                           $
                           285
                           
                           $
                           3
                           
                           
                           2
                           
                           $
                           3,096
                           
                           $
                           5
 63


At December 31, 2009, the Company had 10 individual investments that were in an
                     unrealized loss position. The unrealized losses on investments in
                     government sponsored enterprises, state and political subdivision,
                     and mortgage-backed securities summarized above were attributable to
                     market turmoil and liquidity. The Company believes, based on industry
                     analyst reports and credit ratings that the deterioration in the
                     value of these investments is attributed to changes in market
                     interest rates and not in the credit quality of the issuer and
                     therefore, these losses are not considered other-than-temporary. The
                     Company has the ability and intent to hold these securities until
                     such time as the value recovers or the securities mature. In
                     addition, the Company held one collateralized mortgage obligation
                     ("CMO") that was in an unrealized loss position at December 31, 2009. The Company has the ability and intent to hold all securities
                     within the portfolio until the maturity or until the value recovers;
                     therefore, we do not consider these investments to be
                     other-than-temporarily impaired at December 31, 2009. Our private label CMOs, which are non-agency securities, were priced
                     based on an internally developed cash flow model due to market
                     illiquidity. We noted that this market has had little, if any, new
                     issuance since the credit crisis began. The Company determined that
                     most sales are forced and do not reflect the true economic value of
                     these securities. The two major components in the Bank's internal
                     model are the prepayment speeds of the securities and the dollar
                     amount of loan defaults compared to the excess collateral amounts in
                     each pool. The prepayment speeds utilized in the model are based on
                     the prior prepayment rates for the specific securities and the
                     anticipated future prepayment speeds for like securities. The default
                     rates are based on both the historical loss rates for each security
                     and an analysis of the current loan delinquency amounts in each
                     portfolio. Anticipated loss amounts are determined based on the
                     various levels of delinquency, with higher percentages being assigned
                     to loans over 90 days or loans in foreclosure. The anticipated loss
                     amounts are then compared to the dollar amount of the excess
                     collateral included in each pool. Based on the Bank's calculations
                     and assumptions, management currently anticipates receiving all of
                     the outstanding principal and the related interest for each security.
                     The valuation change has been recorded as a change in the unrealized
                     gain/loss recognized in other comprehensive income. Other investments totaled approximately $9.2 million and $8.5 million at December 31, 2009 and 2008, respectively. Other investments at December 31, 2009, consisted primarily of Federal Reserve Bank stock with a cost of
                     $1.5 million, FHLB stock with a cost of $7.1 million, and investments
                     in the Trusts of $403,000. At December 31, 2008, the company owned Federal Reserve Bank stock with a cost of $1.3
                     million, Federal Home Loan Bank stock with a cost of $6.7 million,
                     and an investment in the Trusts of $403,000. All of the FHLB stock is
                     used to collateralize advances with the FHLB. During the second half of 2008, the Company determined that our
                     Federal National Mortgage Association ("FNMA") preferred stock
                     suffered an other-than-temporary impairment as a result of the
                     Government's decision on September 7, 2008 to place the FNMA and Federal Home Loan Mortgage Corporation
                     ("FHLMC") under conservatorship. Consequently, the Company recorded a
                     pre-tax charge to earnings of $1.9 million to write down to fair
                     value. During 2009, the Company sold the FNMA preferred stock and
                     realized a gain of $35,000. In addition to the FNMA preferred stock sold during 2009, the Company
                     sold 3 securities for $7.5 million in a restructuring transaction and
                     subsequently prepaid an outstanding repurchase agreement for a net
                     realized gain of $6,000. During 2008, we sold 4 securities for a
                     total gain of $33,000. At December 31, 2009, $27.1 million of securities were pledged to the FHLB as collateral
                     for outstanding borrowings and $22.1 million were pledged as
                     collateral for repurchase agreements from brokers. In addition,
                     approximately $410,000 was pledged to secure client deposits. At December 31, 2008, $32.7 million of securities were pledged to the FHLB as collateral
                     for outstanding borrowings and $29.9 million were pledged as
                     collateral for repurchase agreements from brokers. In addition,
                     approximately $293,000 was pledged to secure client deposits. NOTE 5. Loans The Company makes loans to individuals and small businesses for
                     various personal and commercial purposes primarily in the Upstate and
                     Midlands regions of South Carolina. The Company's loan portfolio is
                     not concentrated in loans to any single borrower or a relatively
                     small number of borrowers. The Company focuses its lending activities
                     primarily on the professional markets in Greenville and Columbia,
                     including doctors, dentists, and small business owners. The principal
                     component of the loan portfolio is loans secured by real estate
                     mortgages which account for 79.0% of total loans at December 31, 2009. Commercial loans comprise 69.6% of total real estate loans and
                     consumer loans account for 30.4%. Commercial loans are further
                     categorized into owner occupied which represents 23.1% of total loans
                     and non-owner occupied of 27.9%. Commercial construction loans
                     represent only 4.0% of the total loan portfolio. In addition to monitoring potential concentrations of loans to
                     particular borrowers or groups of borrowers, industries and
                     geographic regions, management monitors exposure to credit risk from
                     concentrations of lending products and practices such as loans that
                     subject borrowers to substantial payment increases (e.g. principal
                     deferral periods, loans with initial
 64


interest-only periods, etc.), and loans with high loan-to-value ratios. As of December 31, 2009, approximately $69.1 million, or 12.0% of our loans had
                     loan-to-value ratios which exceeded regulatory supervisory limits, of
                     which 88 loans totaling approximately $18.4 million had loan-to-value
                     ratios of 100% or more. Additionally, there are industry practices
                     that could subject the Company to increased credit risk should
                     economic conditions change over the course of a loan's life. For
                     example, the Company makes variable rate loans and fixed rate
                     principal-amortizing loans with maturities prior to the loan being
                     fully paid (i.e. balloon payment loans). The various types of loans
                     are individually underwritten and monitored to manage the associated
                     risks. The composition of net loans by major loan categories is as follows
                     (dollars in thousands):  December 31,2009
                           
                           
                           2008Real estate:CommercialOwner occupied
                           
                           $
                           132,569
                           
                           $
                           113,370Non-owner occupied
                           
                           
                           160,460
                           
                           
                           151,274Construction
                           
                           
                           22,741
                           
                           
                           52,981315,770
                           
                           
                           317,625Consumer:Residential
                           
                           
                           55,377
                           
                           
                           60,336Home equity
                           
                           
                           74,348
                           
                           
                           62,987Construction
                           
                           
                           7,940
                           
                           
                           8,905137,665
                           
                           
                           132,228Total real estate loans
                           
                           
                           453,435
                           
                           
                           449,853Commercial business
                           
                           
                           110,539
                           
                           
                           106,479Consumer  other
                           
                           
                           11,021
                           
                           
                           11,194Deferred origination fees, net
                           
                           
                           (725
                           )
                           
                           (919
                           )Gross loans
                           
                           
                           574,270
                           
                           
                           566,607Less allowance for loan losses
                           
                           
                           (7,760
                           )
                           
                           (7,005
                           )Loans, net
                           
                           $
                           566,510
                           
                           $
                           559,602 The composition of gross loans by rate type is as follows (dollars in
                     thousands):  December 31,2009
                           
                           
                           2008Variable rate loans
                           
                           $
                           284,178
                           
                           $
                           243,065Fixed rate loans
                           
                           
                           290,092
                           
                           
                           323,542$
                           574,270
                           
                           $
                           566,607 At December 31, 2009 and 2008, there was $11.7 million and $7.7 million, respectively of
                     loans classified as non-accruing loans. Foregone interest income on
                     the non-accrual loans in 2009 was approximately $638,000 and
                     approximately $365,000 in 2008. The amount of interest income
                     recorded in 2009 for loans that were on nonaccrual at December 31, 2009 was approximately $305,000, and was approximately $294,000 in 2008. At December 31, 2009, approximately $127.5 million of the Bank's mortgage loans were
                     pledged as collateral for advances from the Federal Home Loan Bank of
                     Atlanta, as set forth in Note 8. The allowance for loan losses is available to absorb future loan
                     charge-offs. The allowance is increased by provisions charged to
                     operating income and by recoveries of loans that were previously
                     written-off. The allowance is decreased by the aggregate loan
                     balances, if any, that were deemed uncollectible during the year.
 65


Activity within the allowance for loan losses account follows
                     (dollars in thousands):  For the years ended December 31,2009
                           
                           
                           2008
                           
                           
                           2007Balance, beginning of year
                           
                           $
                           7,005
                           
                           $
                           5,751
                           
                           $
                           4,949Recoveries of loans previously charged-off
                           
                           
                           109
                           
                           
                           28
                           
                           
                           48Provision for loan losses
                           
                           
                           4,310
                           
                           
                           3,161
                           
                           
                           2,050Loans charged-off
                           
                           
                           (3,664
                           )
                           
                           (1,935
                           )
                           
                           (1,296
                           )Balance, end of year
                           
                           $
                           7,760
                           
                           $
                           7,005
                           
                           $
                           5,751 At December 31, 2009, impaired loans amounted to approximately $10.9 million for which
                     $5.8 million of these loans have a reserve of approximately $1.1
                     million allocated in the allowance. During 2009, the average recorded
                     investment in impaired loans was approximately $9.8 million. At December 31, 2008, impaired loans amounted to approximately $7.2 million for which
                     $3.7 million of these loans have a reserve of approximately $836,000
                     allocated in the allowance. During 2008, the average recorded
                     investment in impaired loans was approximately $5.7 million. NOTE 6. Property and Equipment Property and equipment are stated at cost less accumulated
                     depreciation. Components of property and equipment included in the
                     consolidated balance sheets are as follows (dollars in thousands):  December 31,2009
                           
                           
                           2008Land
                           
                           $
                           2,668
                           
                           $
                           2,668Buildings
                           
                           
                           10,783
                           
                           
                           3,728Leasehold Improvements
                           
                           
                           1,118
                           
                           
                           1,147Furniture and equipment
                           
                           
                           3,820
                           
                           
                           2,790Software
                           
                           
                           217
                           
                           
                           193Construction in process
                           
                           
                           -
                           
                           
                           2,68018,606
                           
                           
                           13,206Accumulated depreciation
                           
                           
                           (2,196
                           )
                           
                           (1,505
                           )Total property and equipment
                           
                           $
                           16,410
                           
                           $
                           11,701 At December 31, 2008, construction in process related to costs incurred on property and
                     construction for our Columbia, South Carolina regional office site
                     which opened in August 2009. During the years ended December 31, 2009 and 2008, we capitalized interest of $62,000 and $39,000,
                     respectively, related to the construction of the Columbia regional
                     office. Depreciation and amortization expense for the years ended December 31, 2009, 2008 and 2007 was $724,000, $541,000 and $483,000, respectively.
                     Depreciation is charged to operations utilizing a straight-line
                     method over the estimated useful lives of the assets. The estimated
                     useful lives for the principal items follow:  Type of Asset
                           
                           
                           Life in YearsSoftware
                           
                           
                           3Furniture and equipment
                           
                           
                           5 to 7Leasehold improvements
                           
                           
                           5 to 15Buildings
                           
                           
                           40 NOTE 7. Other Real Estate Owned The following summarizes the activity in other real estate owned
                     (dollars in thousands):  December 31,2009
                           
                           
                           2008Balance, beginning of year
                           
                           $
                           2,116
                           
                           $
                           268Additions
                           
                           
                           4,552
                           
                           
                           2,043Sales
                           
                           
                           (962
                           )
                           
                           (85
                           )Write-downs
                           
                           
                           (302
                           )
                           
                           (110
                           )Transfer to property held for investment
                           
                           
                           (1,700
                           )
                           
                           -Balance, end of year
                           
                           $
                           3,704
                           
                           $
                           2,116
 66


NOTE 8. Deposits The following is a detail of the deposit accounts (dollars in thousands):  December 31,2009
                           
                           
                           2008Non-interest bearing
                           
                           $
                           36,177
                           
                           $
                           34,739Interest bearing:NOW accounts
                           
                           
                           48,975
                           
                           
                           41,771Money market accounts
                           
                           
                           87,801
                           
                           
                           80,837Savings
                           
                           
                           2,375
                           
                           
                           1,918Time, less than $100,000
                           
                           
                           72,832
                           
                           
                           48,491Time, $100,000 and over
                           
                           
                           245,924
                           
                           
                           261,781Total deposits
                           
                           $
                           494,084
                           
                           $
                           469,537 At December 31, 2009 and 2008, the Bank had approximately $147.9 million and $200.9
                     million of time deposits that were obtained outside of the Bank's
                     primary market. Interest expense on time deposits greater than
                     $100,000 was $7.3 million, $8.3 million, and $9.8 million for the
                     years ended December 31, 2009, 2008, and 2007, respectively. At December 31, 2009 the scheduled maturities of certificates of deposit are as follows
                     (dollars in thousands):  2010
                           
                           $
                           219,8342011
                           
                           
                           47,0302012
                           
                           
                           45,7542013
                           
                           
                           2,1032014 and after
                           
                           
                           4,035$
                           318,756 NOTE 9. Federal Home Loan Bank Advances and Related Debt At December 31, 2009, the Bank had $142.7 million in FHLB advances and related debt. Of
                     the $142.7 million, FHLB advances represented $123.5 million and
                     securities sold under structured agreements to repurchase represented
                     $19.2 million. The FHLB advances are secured with approximately $127.5 million of
                     mortgage loans and $7.1 million of stock in the FHLB. Listed below is
                     a summary of the terms and maturities of the advances (dollars in
                     thousands):  Amount
                           
                           
                           Rate
                           
                           
                           Maturity
                           
                           
                           Repricing Date$20,000
                           
                           
                           4.58%
                           
                           
                           May 5, 2010
                           
                           
                           -20,000
                           
                           
                           4.90%
                           
                           
                           September 7, 2011
                           
                           
                           -7,500
                           
                           
                           4.27%
                           
                           
                           May 10, 2012
                           
                           
                           February 10, 201010,000
                           
                           
                           4.42%
                           
                           
                           May 10, 2012
                           
                           
                           February 10, 20107,500
                           
                           
                           4.39%
                           
                           
                           May 12, 2014
                           
                           
                           May 12, 20107,000
                           
                           
                           4.21%
                           
                           
                           May 14, 2014
                           
                           
                           May 14, 20105,000
                           
                           
                           4.07%
                           
                           
                           October 11, 2016
                           
                           
                           January 11, 20107,500
                           
                           
                           4.38%
                           
                           
                           February 13, 2017
                           
                           
                           February 13, 20109,000
                           
                           
                           4.49%
                           
                           
                           July 11, 2017
                           
                           
                           January 11, 20105,000
                           
                           
                           4.25%
                           
                           
                           July 24, 2017
                           
                           
                           January 24, 201010,000
                           
                           
                           4.47%
                           
                           
                           February 15, 2019
                           
                           
                           February 17, 201015,000
                           
                           
                           4.75%
                           
                           
                           April 22, 2019
                           
                           
                           April 22, 2010$
                           123,500 As listed above, many of the Bank's advances may reprice during 2010
                     at the option of the FHLB.
 67


At December 31, 2009 the Bank had four structured debt agreements secured by $22.1
                     million of various investment securities. Listed below is a summary
                     of the terms and maturities of these structured agreements to
                     repurchase (dollars in thousands):  Amount
                           
                           
                           Rate
                           
                           
                           Maturity
                           
                           
                           Repricing Date$ 10,000
                           
                           
                           3.63%
                           
                           
                           September 18, 2017
                           
                           
                           -2,000
                           
                           
                           3.65%
                           
                           
                           December 17, 2017
                           
                           
                           December 17, 20103,600
                           
                           
                           2.75%
                           
                           
                           March 14, 2018
                           
                           
                           March 14, 20113,600
                           
                           
                           2.55%
                           
                           
                           September 15, 2018
                           
                           
                           March 15, 2010$
                           19,200 At December 31, 2008, the Bank had $149.7 million in FHLB advances and related debt. Of
                     the $149.7 million, FHLB advances represented $123.5 million and
                     securities sold under structured agreements to repurchase represented
                     $26.2 million. The FHLB advances are secured with approximately $128.4 million of
                     mortgage loans and $6.7 million of stock in the FHLB. Listed below is
                     a summary of the terms and maturities of the advances (dollars in
                     thousands):  Amount
                           
                           
                           Rate
                           
                           
                           Maturity
                           
                           
                           Repricing Date$20,000
                           
                           
                           4.58%
                           
                           
                           May 5, 2010
                           
                           
                           -20,000
                           
                           
                           4.90%
                           
                           
                           September 7, 2011
                           
                           
                           -7,500
                           
                           
                           4.27%
                           
                           
                           May 10, 2012
                           
                           
                           February 10, 200910,000
                           
                           
                           4.42%
                           
                           
                           May 10, 2012
                           
                           
                           February 10, 20097,500
                           
                           
                           4.39%
                           
                           
                           May 12, 2014
                           
                           
                           May 12, 20097,000
                           
                           
                           4.21%
                           
                           
                           May 14, 2014
                           
                           
                           May 14, 20095,000
                           
                           
                           4.07%
                           
                           
                           October 11, 2016
                           
                           
                           January 11, 20097,500
                           
                           
                           4.38%
                           
                           
                           February 13, 2017
                           
                           
                           February 13, 20099,000
                           
                           
                           4.49%
                           
                           
                           July 11, 2017
                           
                           
                           January 11, 20095,000
                           
                           
                           4.25%
                           
                           
                           July 24, 2017
                           
                           
                           January 24, 200910,000
                           
                           
                           4.47%
                           
                           
                           February 15, 2019
                           
                           
                           February 17,200915,000
                           
                           
                           3.56%
                           
                           
                           April 22, 2019
                           
                           
                           April 22, 2009$
                           123,500 At December 31, 2008 the Bank had five structured debt agreements secured by $29.9
                     million of various investment securities. Listed below is a summary
                     of the terms and maturities of these structured agreements to
                     repurchase (dollars in thousands):  Amount
                           
                           
                           Rate
                           
                           
                           Maturity
                           
                           
                           Repricing Date$10,000
                           
                           
                           3.63 %
                           
                           
                           September 18, 2017
                           
                           
                           -2,000
                           
                           
                           3.65 %
                           
                           
                           December 17, 2017
                           
                           
                           December 17. 20106,975
                           
                           
                           2.19 %
                           
                           
                           January 25, 2018
                           
                           
                           January 25, 20093,600
                           
                           
                           2.75 %
                           
                           
                           March 14, 2018
                           
                           
                           March 14, 20113,600
                           
                           
                           2.55 %
                           
                           
                           September 15, 2018
                           
                           
                           March 15, 2009$
                           26,175 NOTE 10. Note Payable The Company had a $4.3 million term note with Silverton Bridge Bank,
                     N.A. ("Silverton") at December 31, 2009. This note replaced the $15.0 million revolving line of credit which
                     was outstanding at December 31, 2008. The current note matures on April 30, 2014 and bears interest at the prime rate plus 0.5% with a floor rate of
                     4.0%. The Company has pledged all of the stock of the Bank as
                     collateral for this note. The loan agreement contains various
                     financial covenants related to net income and asset quality. NOTE 11. Junior Subordinated Debentures On June 26, 2003, Greenville First Statutory Trust I, (a non-consolidated subsidiary)
                     issued $6.0 million floating rate trust preferred securities with a
                     maturity of June 26, 2033. The rate is adjusted quarterly and was 3.35% at December 31, 2009. The Company received from the Trust the $6.0 million proceeds from
                     the issuance of the securities and the $186,000 initial proceeds from
                     the capital investment in the Trust, and accordingly has shown the
                     funds due to the Trust as $6.2 million
 68


junior subordinated debentures. The debenture issuance cost, net of
                     accumulated amortization, totaled $63,000 at December 31, 2009 and is included in other assets on the consolidated balance sheet.
                     Amortization of debt issuance costs totaled $18,000 for each of the
                     years ended December 31, 2009, 2008 and 2007, respectively, and are included in borrowings interest expense. On December 22, 2005, Greenville First Statutory Trust II, (a non-consolidated
                     subsidiary) issued $7.0 million floating rate trust preferred
                     securities with a maturity of December 22, 2035. The rate is adjusted quarterly and was 1.69% at December 31, 2009. The Company received from the Trust the $7.0 million proceeds from
                     the issuance of the securities and the $217,000 initial proceeds from
                     the capital investment in the Trust, and accordingly has shown the
                     funds due to the Trust as $7.2 million junior subordinated debentures. The current regulatory rules allow certain amounts of junior
                     subordinated debentures to be included in the calculation of
                     regulatory capital. NOTE 12. Unused Lines of Credit At December 31, 2009, the Bank had four unused lines of credit to purchase federal funds
                     that totaled $45.5 million. The lines of credit are available on a
                     one to seven day basis for general corporate purposes of the Bank.
                     The lender has reserved the right to withdraw the line at their
                     option. The Bank has an additional line of credit with the Federal
                     Home Loan Bank to borrow funds, subject to a pledge of qualified
                     collateral. The Bank has collateral that would support approximately
                     $4.0 million in additional borrowings at December 31, 2009. NOTE 13. Commitments and Contingencies The Company has entered into a three year employment agreement with
                     its chief executive officer and a two year employment agreement with
                     its president and two executive vice presidents. These agreements
                     include a) an incentive program, b) a stock option plan, c) a
                     one-year non-compete agreement upon termination and d) a severance
                     payment equal to one year of compensation. The total estimated
                     aggregate commitment is approximately $893,000. The Company has entered into an agreement with a data processor which
                     expires in 2014 to provide item processing, electronic banking
                     services and general ledger processing. Components of this contract
                     include monthly charges of approximately $89,000. At December 31, 2009, the Company occupied land and banking office space under leases
                     expiring on various dates through 2028. The estimated future minimum
                     lease payments under these noncancelable operating leases are
                     summarized as follows (dollars in thousands):  For the years ended December 31,2010
                           
                           $
                           1,7152011
                           
                           
                           1,7262012
                           
                           
                           1,7402013
                           
                           
                           1,7592014
                           
                           
                           1,774Thereafter
                           
                           
                           2,732$
                           11,446 Lease expense for the years ended December 31, 2009, 2008, and 2007, totaled $710,000, $663,000, and $622,000, respectively. The Bank may be subject to litigation and claims in the normal course
                     of business. As of December 31, 2009, management believes there is no material litigation pending.
 69


NOTE 14. Income Taxes The components of income tax expense were as follows (dollars in thousands):  For the years ended December 31,2009
                           
                           
                           2008
                           
                           
                           2007Current income taxes:Federal
                           
                           $
                           (85
                           )
                           $
                           2,144
                           
                           $
                           1,049State
                           
                           
                           9
                           
                           
                           71
                           
                           
                           176Total current tax expense
                           
                           
                           (76
                           )
                           
                           2,215
                           
                           
                           1,225Deferred income tax expense (benefit) and change in valuation allowance
                           
                           
                           421
                           
                           
                           (1,589
                           )
                           
                           416Income tax expense
                           
                           $
                           345
                           
                           $
                           626
                           
                           $
                           1,641 The following is a summary of the items that caused recorded income
                     taxes to differ from taxes computed using the statutory tax rate
                     (dollars in thousands):  For the years ended December 31,2009
                           
                           
                           2008
                           
                           
                           2007Tax expense at statutory rate
                           
                           $
                           600
                           
                           $
                           843
                           
                           $
                           1,726Effect of state income taxes
                           
                           
                           6
                           
                           
                           47
                           
                           
                           116Exempt income and other
                           
                           
                           (261
                           )
                           
                           (264
                           )
                           
                           (201
                           )Income tax expense
                           
                           $
                           345
                           
                           $
                           626
                           
                           $
                           1,641 The components of the deferred tax assets and liabilities are as
                     follows (dollars in thousands):  December 31,2009
                           
                           
                           2008Deferred tax assets:Allowance for loan losses
                           
                           $
                           2,509
                           
                           $
                           2,156Net deferred loan fees
                           
                           
                           246
                           
                           
                           312Deferred compensation
                           
                           
                           232
                           
                           
                           135Other than temporary impairment charge
                           
                           
                           -
                           
                           
                           657Unrealized loss on securities available for sale
                           
                           
                           -
                           
                           
                           547Sale of real estate owned
                           
                           
                           88
                           
                           
                           54Other
                           
                           
                           1,272
                           
                           
                           2564,347
                           
                           
                           4,117Deferred tax liabilities:Property and equipment
                           
                           $
                           526
                           
                           $
                           169Unrealized gain on securities available for sale
                           
                           
                           249
                           
                           
                           -Other
                           
                           
                           86
                           
                           
                           84861
                           
                           
                           253Net deferred tax asset
                           
                           $
                           3,486
                           
                           $
                           3,864 The Company has analyzed the tax positions taken or expected to be
                     taken in its tax returns and concluded it has no liability related to
                     uncertain tax positions. NOTE 15. Related Party Transactions Certain directors, executive officers, and companies with which they
                     are affiliated, are clients of and have banking transactions with the
                     Bank in the ordinary course of business. These loans were made on
                     substantially the same terms, including interest rates and
                     collateral, as those prevailing at the time for comparable
                     arms-length transactions.
 70


A summary of loan transactions with directors, including their
                     affiliates and executive officers is as follows (dollars in
                     thousands):  For the years ended December 31,2009
                           
                           
                           2008Balance, beginning of year
                           
                           $
                           17,254
                           
                           $
                           19,986New loans
                           
                           
                           13,932
                           
                           
                           23,526Less loan payments
                           
                           
                           (13,417
                           )
                           
                           (26,258
                           )Balance, end of year
                           
                           $
                           17,769
                           
                           $
                           17,254 Deposits by officers and directors and their related interests at December 31, 2009 and 2008, were $3.0 million and $3.4 million, respectively. The Bank purchases various signage for its retail offices from a
                     local vendor for which one of the Bank's directors acted as chairman
                     of the board. The Bank paid approximately $19,000 and $71,000 to the
                     company for the years ended December 31, 2009 and 2008, respectively. The Bank is of the opinion that the cost of
                     signage represents market costs that could have been obtained in
                     similar "arms length" transactions. The Bank also has a land lease with a director on the property for a
                     branch office, with monthly payments of $4,804. In addition, the Bank
                     had various consulting agreements with the director for development,
                     administration and advisory services related to the purchase of
                     property and construction of current and future branch office sites.
                     Beginning in 2006, the Bank also contracted with the director on an
                     annual basis to provide property management services for each of its
                     branch offices. The Bank paid the director approximately $33,000,
                     $20,000, and $19,000 for these services during 2009, 2008, and 2007,
                     respectively. In January 2008, the Bank entered into a commitment with a company
                     partially owned by one of the Bank's directors. The Bank committed to
                     pay the company a development fee up to $567,500 in three annual
                     installments related to the development and construction of the
                     Company's regional headquarters in Cayce, South Carolina. The Bank
                     paid the first and second installments of approximately $189,000 in
                     January 2009 and 2008, respectively. The third installment of
                     approximately $189,000 was paid in January 2010. The Bank is of the opinion that the lease payments and consulting
                     fees represent market costs that could have been obtained in similar
                     "arms length" transactions. NOTE 16. Financial Instruments With Off-Balance Sheet Risk In the ordinary course of business, and to meet the financing needs
                     of its customers, the Company is a party to various financial
                     instruments with off balance sheet risk. These financial instruments,
                     which include commitments to extend credit and standby letters of
                     credit, involve, to varying degrees, elements of credit and interest
                     rate risk in excess of the amounts recognized in the balance sheets.
                     The contract amount of those instruments reflects the extent of
                     involvement the Company has in particular classes of financial
                     instruments. The Company's exposure to credit loss in the event of nonperformance
                     by the other party to the financial instrument for commitments to
                     extend credit and standby letters of credit is represented by the
                     contractual amounts of those instruments. The Company uses the same
                     credit policies in making commitments and conditional obligations as
                     it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as
                     long as there is no violation of 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 December 31, 2009, unfunded commitments to extend credit were approximately $90.5
                     million, of which $10.6 million is at fixed rates and $79.9 million
                     is at variable rates. At December 31, 2008, unfunded commitments to extend credit were approximately $89.0
                     million, of which $13.8 million is at fixed rates and $75.1 million
                     is at variable rates. The Company evaluates each customer's
                     credit-worthiness on a case-by-case basis. The amount of collateral
                     obtained, if deemed necessary by the Company upon extension of
                     credit, is based on management's credit evaluation of the borrower.
                     Collateral varies but may include accounts receivable, inventory,
                     property, plant and equipment, and commercial and residential
                     real estate. At December 31, 2009 and 2008, there was a $5.5 million and $4.8 million, respectively,
                     commitment under letters of credit. The credit risk involved in
                     issuing letters of credit is essentially the same as that involved in
                     extending loan facilities to customers. Collateral varies but may
                     include accounts receivable, inventory, equipment, marketable
                     securities and
 71


property. Since most of the letters of credit are expected to expire
                     without being drawn upon, they do not necessarily represent future
                     cash requirements. The fair value of off balance sheet lending
                     commitments are based on fees currently charged to enter into similar
                     agreements, taking into account the remaining terms of the agreements
                     and the counterparties credit standing. The total fair value of such
                     instruments is not material. NOTE 17. Employee Benefit Plan On January 1, 2000, the Company adopted the Southern First Bancshares, Inc. Profit
                     Sharing and 401(k) Plan for the benefit of all eligible employees.
                     The Plan was amended in 2006 to provide a Roth 401(k) feature to the
                     Plan. The Company contributes to the Plan annually upon approval by
                     the Board of Directors. Contributions made to the Plan in 2009, 2008,
                     and 2007 amounted to $148,500, $152,000, and $130,000, respectively. The Company also provides a nonqualified deferred compensation plan
                     for 14 executive officers in the form of a Supplemental Executive
                     Retirement Plan (SERP). The plan provides retirement income for these
                     officers. As of December 31, 2009, the Company had an accrued benefit obligation of $692,000. The
                     Company incurred expenses related to this plan of $295,000, $189,000,
                     and $152,000 in 2009, 2008, and 2007, respectively. NOTE 18. Warrants and Stock Options and Grant Plans Upon completion of the 1999 stock offering, the Company issued
                     warrants to each of its organizers to purchase up to an additional
                     213,593 shares (adjusted for 3 for 2 stock split in 2004 and the
                     stock dividend in 2006) of common stock at $6.06 per share. These
                     warrants vested over a three-year period, are currently exercisable,
                     and expired on January 10, 2010. There were 73,493 warrants outstanding at December 31, 2009 and 123,110 warrants outstanding at December 31, 2008. Prior to expiration on January 10, 2010, 30,825 of the 73,493 warrants outstanding at December 31, 2009 were exercised. On March 21, 2000, the Company adopted a stock option plan for the benefit of the
                     directors, officers and employees. The Board may grant up to 436,424
                     options at an option price per share not less than the fair market
                     value on the date of grant. The options expire 10 years from the
                     grant date. Under the terms of Plan no further awards may be granted, effective
                     March 2010; however, the Plan will remain in effect until all awards
                     granted have vested of been forfeited. A summary of the status of the stock option plan and changes for the
                     years ended December 31, are presented below:  2009
                           
                           
                           2008
                           
                           
                           2007Shares
                           
                           
                           Weightedaverageexerciseprice
                           
                           
                           AggregateIntrinsicValue
                           
                           
                           Shares
                           
                           
                           Weightedaverageexerciseprice
                           
                           
                           AggregateIntrinsicValue
                           
                           
                           Shares
                           
                           
                           Weightedaverageexerciseprice
                           
                           
                           AggregateIntrinsicValueOutstanding at beginning of year
                           
                           
                           278,665
                           
                           $
                           9.36
                           
                           
                           
                           
                           
                           268,140
                           
                           $
                           8.76
                           
                           
                           
                           
                           
                           270,227
                           
                           $
                           8.57Granted
                           
                           
                           60,500
                           
                           
                           6.77
                           
                           
                           
                           
                           
                           29,500
                           
                           
                           13.50
                           
                           
                           
                           
                           
                           3,000
                           
                           
                           21.48Exercised
                           
                           
                           -
                           
                           
                           -
                           
                           
                           
                           
                           
                           17,325
                           
                           
                           6.47
                           
                           
                           
                           
                           
                           5,087
                           
                           
                           6.41Forfeited or expired
                           
                           
                           -
                           
                           
                           -
                           
                           
                           
                           
                           
                           1,650
                           
                           
                           16.36
                           
                           
                           
                           
                           
                           -
                           
                           
                           -Outstanding at end of year
                           
                           
                           339,165
                           
                           $
                           8.89
                           
                           
                           121,786
                           
                           
                           278,665
                           
                           $
                           9.36
                           
                           
                           934,117
                           
                           
                           268,140
                           
                           $
                           8.76
                           
                           
                           3,092,305Options exercisable at year-end
                           
                           
                           252,540
                           
                           
                           
                           
                           
                           121,786
                           
                           
                           265,977
                           
                           
                           
                           
                           
                           934,117
                           
                           
                           262,727
                           
                           
                           
                           
                           
                           3,092,305Shares available for grant
                           
                           
                           53,199
                           
                           
                           
                           
                           
                           
                           
                           
                           113,699
                           
                           
                           
                           
                           
                           
                           
                           
                           143,199 The fair value of the option grant is estimated on the date of grant
                     using the Black-Scholes option-pricing model. The following
                     assumptions were used for grants: expected volatility of 26.76% for
                     2009 and 2008, and 10.00% for 2007; risk-free interest rate of 2.59%
                     for 2009, 3.72% for 2008, and 4.60% for 2007; 10 year life expectancy
                     of the options, and; assumed dividend rate of zero. The aggregate intrinsic value in the table above represents the total
                     pre-tax intrinsic value (the difference between the Company's closing
                     stock price on the last trading day of 2009 and the exercise price,
                     multiplied by the number of in-the-money options) that would have
                     been received by the option holders had all option holders exercised
                     their options on December 31, 2009. This amount changes based on the fair market value of the Company's stock. On March 21, 2006, the Company adopted a restricted stock plan for the benefit of the
                     directors, officers and employees. At December 31, 2009 and 2008, 11,000 shares (adjusted for the stock dividend in 2006) of
                     stock were authorized under
 72


the restricted stock plan, of which 8,500 shares were available to be
                     granted. During the year ended December 31, 2007, the Company awarded 2,500 shares with a weighted average fair value
                     of $21.63 and a vesting period of 4 years. There were no shares
                     awarded during 2009 or 2008. Shares of restricted stock granted to employees under the Restricted
                     Stock Plan are subject to restrictions as to continuous employment
                     for a specified time period following the date of grant. During this
                     period, the holder is entitled to full voting rights and dividends. A summary of the status of the Company's nonvested restricted stock
                     and changes for the years ended December 31, 2009 and 2008 is as follows:  2009
                           
                           
                           2008Restricted Shares
                           
                           
                           WeightedAverageGrant-DateFair Value
                           
                           
                           Restricted Shares
                           
                           
                           WeightedAverageGrant-DateFair ValueNonvested at beginning of year
                           
                           
                           1,875
                           
                           $
                           21.63
                           
                           
                           2,500
                           
                           $
                           21.63Granted
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -Vested
                           
                           
                           625
                           
                           
                           -
                           
                           
                           625
                           
                           
                           -Forfeited
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -Nonvested at end of year
                           
                           
                           1,250
                           
                           $
                           21.63
                           
                           
                           1,875
                           
                           $
                           21.63 NOTE 19. Dividends There are no current plans to initiate payment of cash dividends on
                     the Company's common stock and our future dividend policy will depend
                     on the Bank's and the Company's earnings, capital requirements,
                     financial condition and other factors considered relevant by the
                     Company's Board of Directors. The Bank is restricted in its ability
                     to pay cash dividends under the national banking laws and regulations
                     of the Office of the Comptroller of the Currency ("OCC"). Generally,
                     these restrictions require the Bank to pay cash dividends derived
                     solely from net profits. Moreover, OCC prior approval is required if
                     cash dividends declared in any calendar year exceed the Bank's net
                     profit for that year combined with its retained net profits for the
                     preceding two years. Also, the payment of cash dividends on the Company's common stock by
                     the Company in the future will be subject to certain other legal and
                     regulatory limitations (including the requirement that the company's
                     capital be maintained at certain minimum levels) and will be subject
                     to ongoing review by banking regulators. As long as shares of our
                     Series T Preferred Stock are outstanding, no dividends may be paid on
                     our common stock unless all dividends on the Series T Preferred Stock
                     have been paid in full. The Series T Preferred Stock is entitled to
                     cumulative dividends at a rate of 5% per annum for the first five
                     years until 2014, and 9% per annum thereafter. Prior to February 27, 2012, so long as the Treasury owns shares of the Series T Preferred
                     Stock, we are not permitted to increase cash dividends on our common
                     stock without the Treasury's consent. There is no assurance that, in
                     the future, we will have funds available to pay cash dividends, or,
                     even if funds are available, that it will pay dividends in any
                     particular amount or at any particular times, or that it will pay
                     dividends at all. NOTE 20. Regulatory Matters The Company and the Bank are subject to various regulatory capital
                     requirements administered by the federal banking agencies. Failure to
                     meet minimum capital requirements can initiate certain mandatory and
                     possible additional discretionary actions by regulators that, if
                     undertaken, could have a direct material effect on the Company and
                     Bank's financial statements. Under capital adequacy guidelines and
                     the regulatory framework for prompt corrective action, the Bank must
                     meet specific capital guidelines that involve quantitative measures
                     of the assets, liabilities, and certain off balance sheet items as
                     calculated under regulatory accounting practices. The Bank's capital
                     amounts and classification are also subject to qualitative judgments
                     by the regulators about components, risk weightings, and other
                     factors. Quantitative measures established by regulation to ensure capital
                     adequacy require the Company and Bank to maintain minimum amounts and
                     ratios (set forth in the table below) of Total and Tier 1 capital to
                     risk-weighted assets, and of Tier 1 capital to average assets. Total
                     capital includes Tier 1 and Tier 2 capital. Tier 2 capital consists
                     of the allowance for loan losses subject to certain limitations.
                     Management believes, as of December 31, 2009, that the Company and Bank exceed all well capitalized requirements
                     to which they are subject. As of June 2, 2008, the most recent notification of the Office of the Comptroller of
                     the Currency categorized the Bank as well capitalized under the
                     regulatory framework for prompt corrective action. There are no
                     conditions or events, since
 73


that notification that management believes have changed the Bank's
                     category. The Company's and Bank's actual capital amounts and ratios
                     and minimum regulatory amounts and ratios are presented as follows
                     (dollars in thousands):  Actual
                           
                           
                           For capitaladequacy purposesMinimum
                           
                           
                           To be well capitalizedunder prompt correctiveaction provisionsMinimumAmount
                           
                           
                           Ratio
                           
                           
                           Amount
                           
                           
                           Ratio
                           
                           
                           Amount
                           
                           
                           RatioAs of December 31, 2009The CompanyTotal Capital (to risk weighted assets)
                           
                           $
                           79,893
                           
                           
                           13.3
                           %
                           $
                           48,215
                           
                           
                           8.0
                           %
                           $
                           N/A
                           
                           
                           N/ATier 1 Capital (to risk weighted assets)
                           
                           
                           72,357
                           
                           
                           12.0
                           
                           
                           24,107
                           
                           
                           4.0
                           
                           
                           N/A
                           
                           
                           N/ATier 1 Capital (to average assets)
                           
                           
                           72,357
                           
                           
                           10.0
                           
                           
                           29,028
                           
                           
                           4.0
                           
                           
                           N/A
                           
                           
                           N/AThe BankTotal Capital (to risk weighted assets)
                           
                           $
                           77,393
                           
                           
                           12.8
                           %
                           $
                           48,215
                           
                           
                           8.0
                           %
                           $
                           60,268
                           
                           
                           10.0
                           %Tier 1 Capital (to risk weighted assets)
                           
                           
                           69,857
                           
                           
                           11.6
                           
                           
                           24,107
                           
                           
                           4.0
                           
                           
                           36,161
                           
                           
                           6.0Tier 1 Capital (to average assets)
                           
                           
                           69,857
                           
                           
                           9.6
                           
                           
                           29,028
                           
                           
                           4.0
                           
                           
                           36,285
                           
                           
                           5.0As of December 31, 2008The CompanyTotal Capital (to risk weighted assets)
                           
                           $
                           60,854
                           
                           
                           10.4
                           %
                           $
                           46,894
                           
                           
                           8.0
                           %
                           $
                           N/A
                           
                           
                           N/ATier 1 Capital (to risk weighted assets)
                           
                           
                           53,847
                           
                           
                           9.2
                           
                           
                           23,447
                           
                           
                           4.0
                           
                           
                           N/A
                           
                           
                           N/ATier 1 Capital (to average assets)
                           
                           
                           53,847
                           
                           
                           7.7
                           
                           
                           27,821
                           
                           
                           4.0
                           
                           
                           N/A
                           
                           
                           N/AThe BankTotal Capital (to risk weighted assets)
                           
                           $
                           75,004
                           
                           
                           12.8
                           %
                           $
                           46,894
                           
                           
                           8.0
                           %
                           $
                           58,617
                           
                           
                           10.0
                           %Tier 1 Capital (to risk weighted assets)
                           
                           
                           67,997
                           
                           
                           11.6
                           
                           
                           23,447
                           
                           
                           4.0
                           
                           
                           35,170
                           
                           
                           6.0Tier 1 Capital (to average assets)
                           
                           
                           58,236
                           
                           
                           9.8
                           
                           
                           27,821
                           
                           
                           4.0
                           
                           
                           34,776
                           
                           
                           5.0
 74


NOTE 21. Selected Condensed Quarterly Financial Data (Unaudited) Following is a summary of operations by quarter (dollars in thousands):  2009
                           
                           
                           Quarters endedMarch 31
                           
                           
                           June 30
                           
                           
                           September 30
                           
                           
                           December 31Interest income
                           
                           $
                           8,895
                           
                           $
                           9,081
                           
                           $
                           9,115
                           
                           $
                           9,086Interest expense
                           
                           
                           4,434
                           
                           
                           4,162
                           
                           
                           4,165
                           
                           
                           4,134Net interest income
                           
                           
                           4,461
                           
                           
                           4,919
                           
                           
                           4,950
                           
                           
                           4,952Provision for loan losses
                           
                           
                           750
                           
                           
                           975
                           
                           
                           1,085
                           
                           
                           1,500Noninterest income (loss)
                           
                           
                           414
                           
                           
                           519
                           
                           
                           533
                           
                           
                           377Noninterest expenses
                           
                           
                           3,429
                           
                           
                           3,964
                           
                           
                           3,865
                           
                           
                           3,793Income (loss) before income tax expense
                           
                           
                           696
                           
                           
                           499
                           
                           
                           533
                           
                           
                           36Income tax expense (benefit)
                           
                           
                           209
                           
                           
                           144
                           
                           
                           109
                           
                           
                           (117
                           )Net income
                           
                           $
                           487
                           
                           $
                           355
                           
                           $
                           424
                           
                           $
                           153Earnings (loss) per common shareBasic
                           
                           $
                           0.12
                           
                           $
                           0.00
                           
                           $
                           0.03
                           
                           $
                           (0.06
                           )Diluted
                           
                           $
                           0.12
                           
                           $
                           0.00
                           
                           $
                           0.03
                           
                           $
                           (0.06
                           )Weighted average common shares outstandingBasic
                           
                           
                           3,044,863
                           
                           
                           3,044,863
                           
                           
                           3,048,959
                           
                           
                           3,036,780Diluted
                           
                           
                           3,053,933
                           
                           
                           3,045,741
                           
                           
                           3,109,708
                           
                           
                           3,143,7682008
                           
                           
                           Quarters endedMarch 31
                           
                           
                           June 30
                           
                           
                           September 30
                           
                           
                           December 31Interest income
                           
                           $
                           10,342
                           
                           $
                           10,304
                           
                           $
                           10,059
                           
                           $
                           9,508Interest expense
                           
                           
                           5,948
                           
                           
                           5,525
                           
                           
                           5,216
                           
                           
                           5,164Net interest income
                           
                           
                           4,394
                           
                           
                           4,779
                           
                           
                           4,843
                           
                           
                           4,344Provision for loan losses
                           
                           
                           600
                           
                           
                           700
                           
                           
                           650
                           
                           
                           1,211Noninterest income (loss)
                           
                           
                           311
                           
                           
                           375
                           
                           
                           (1,427
                           )
                           
                           341Noninterest expenses
                           
                           
                           2,986
                           
                           
                           3,186
                           
                           
                           3,040
                           
                           
                           3,109Income (loss) before income tax expense
                           
                           
                           1,119
                           
                           
                           1,268
                           
                           
                           (274
                           )
                           
                           365Income tax expense (benefit)
                           
                           
                           372
                           
                           
                           406
                           
                           
                           (148
                           )
                           
                           (4
                           )Net income (loss)
                           
                           $
                           747
                           
                           $
                           862
                           
                           $
                           (126
                           )
                           $
                           369Earnings (loss) per common shareBasic
                           
                           $
                           0.25
                           
                           $
                           0.29
                           
                           $
                           (0.04
                           )
                           $
                           0.12Diluted
                           
                           $
                           0.23
                           
                           $
                           0.27
                           
                           $
                           (0.04
                           )
                           $
                           0.12Weighted average common shares outstandingBasic
                           
                           
                           2,964,951
                           
                           
                           2,987,686
                           
                           
                           3,002,205
                           
                           
                           3,036,780Diluted
                           
                           
                           3,185,827
                           
                           
                           3,185,084
                           
                           
                           3,154,912
                           
                           
                           3,143,768
 75


NOTE 22. Fair Value Accounting As of June 30, 2009, the Company adopted FASB ASC 820, "Fair Value Measurement and
                     Disclosures," "Determining Fair Value When the Volume and Level of
                     Activity for the Asset or Liability Have Significantly Decreased and
                     Identifying Transactions That Are Not Orderly." FASB ASC 820, "Fair
                     Value Measurement and Disclosures," is intended to determine the fair
                     value when there is no active market or where the inputs being used
                     represent distressed sales. 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 1Quoted prices in active markets for identical assets or liabilities.
                              Level 1 assets and liabilities include certain debt and equity
                              securities and derivative contracts that are traded in an active
                              exchange market.Level 2Observable 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, certain derivative contracts
                              and impaired loans.Level 3Unobservable 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.Following is a description of valuation methodologies used for assets
                              recorded at fair value. Investment Securities Securities available for sale are valued on a recurring basis at
                     quoted market prices where available.  If quoted market prices are
                     not available, fair values are based on quoted market prices of
                     comparable securities.  Level 1 securities include those traded on an
                     active exchange, such as the New York Stock Exchange or U.S. Treasury
                     securities that are traded by dealers or brokers in active
                     over-the-counter markets and money market funds.  Level 2 securities
                     include mortgage-backed securities and debentures issued by
                     government sponsored entities, municipal bonds and corporate debt
                     securities.  In certain cases where there is limited activity or less
                     transparency around inputs to valuations, securities are classified
                     as Level 3 within the valuation hierarchy. Securities held to
                     maturity are valued at quoted market prices or dealer quotes similar
                     to securities available for sale.  The carrying value of Other
                     Investments, such as Federal Reserve Bank and Federal Home Loan Bank
                     stock, approximates fair value based on their redemption provisions. Loans The Company does not record loans at fair value on a recurring basis.
                     However, from time to time, a loan may be considered impaired and an
                     allowance for loan losses may be established.  Loans for which it is
                     probable that payment of interest and principal will not be made in
                     accordance with the contractual terms of the loan agreement are
                     considered impaired. Once a loan is identified as individually
                     impaired, management measures impairment in accordance with FASB ASC
                     310, "Receivables." The fair value of impaired loans is estimated
                     using one of several methods, including collateral value, market
                     value of similar debt, enterprise value, liquidation value and
                     discounted cash flows.  Those impaired loans not requiring an
                     allowance represent loans for which the fair value of the expected
                     repayments or collateral exceed the recorded investments in such
                     loans.  At December 31, 2009, substantially all of the impaired loans were evaluated based on the
                     fair value of the collateral. In accordance with FASB ASC 820, "Fair
                     Value Measurement and Disclosures," impaired
 76


loans where an allowance is established based on the fair value of
                     collateral require classification in the fair value hierarchy.  When
                     the fair value of the collateral is based on an observable market
                     price or a current appraised value, the Company considers the
                     impaired loan as nonrecurring Level 2. When an appraised value is not
                     available or management determines the fair value of the collateral
                     is further impaired below the appraised value and there is no
                     observable market price, the Company considers the impaired loan as
                     nonrecurring Level 3. Other Real Estate Owned ("OREO") OREO, consisting of properties obtained through foreclosure or in
                     satisfaction of loans, is reported at the lower of cost or fair
                     value, determined on the basis of current appraisals, comparable
                     sales, and other estimates of value obtained principally from
                     independent sources, adjusted for estimated selling costs (Level 2).
                     At the time of foreclosure, any excess of the loan balance over the
                     fair value of the real estate held as collateral is treated as a
                     charge against the allowance for loan losses. Gains or losses on sale
                     and generally any subsequent adjustments to the value are recorded as
                     a component of OREO expense.  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 (dollars in
                     thousands).  Quoted market pricein active markets(Level 1)
                           
                           
                           Significant otherobservable inputs(Level 2)
                           
                           
                           Significantunobservable inputs(Level 3)As of December 31, 2009:Securities available for sale:Government sponsored enterprises
                           
                           $
                           -
                           
                           $
                           11,540
                           
                           $
                           -State and political subdivisions
                           
                           
                           -
                           
                           
                           5,309
                           
                           
                           -Mortgage-backed securities
                           
                           
                           -
                           
                           
                           52,688
                           
                           
                           6,658Other investments
                           
                           
                           -
                           
                           
                           -
                           
                           
                           9,213Total
                           
                           $
                           -
                           
                           $
                           69,537
                           
                           $
                           15,871  Quoted marketprice in active markets (Level 1)
                           
                           
                           Significant other observable inputs (Level 2)
                           
                           
                           Significant unobservable inputs (Level 3)As of December 31, 2008:Securities available for sale:Government sponsored enterprises
                           
                           $
                           -
                           
                           $
                           18,708
                           
                           $
                           -State and political subdivisions
                           
                           
                           -
                           
                           
                           3,772
                           
                           
                           -Mortgage-backed securities
                           
                           
                           -
                           
                           
                           36,673
                           
                           
                           5,213Preferred stock
                           
                           
                           66
                           
                           
                           -
                           
                           
                           -Other investments
                           
                           
                           -
                           
                           
                           -
                           
                           
                           8,461Total
                           
                           $
                           66
                           
                           $
                           59,153
                           
                           $
                           13,674 The Company has no liabilities carried at fair value or measured at
                     fair value on a recurring or nonrecurring basis. The table below presents a reconciliation for the period of January 1, 2009 to December 31, 2009, for all Level 3 assets that are measured at fair value on a
                     recurring basis (dollars in thousands).  Collateralized mortgage obligations
                           
                           
                           Other investmentsBeginning balance
                           
                           $
                           5,213
                           
                           $
                           8,461Total realized and unrealized gains or losses:Included in earnings
                           
                           
                           -
                           
                           
                           -Included in other comprehensive income
                           
                           
                           2,259
                           
                           
                           -Purchases, sales and principal reductions
                           
                           
                           (814
                           )
                           
                           752Transfers in and/or out of Level 3
                           
                           
                           -
                           
                           
                           -Ending Balance
                           
                           $
                           6,658
                           
                           $
                           9,213
 77


Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis The Company is predominantly an asset based lender with real estate
                     serving as collateral on approximately 79.0% of loans. Loans which
                     are deemed to be impaired and real estate acquired in settlement of
                     loans are valued on a nonrecurring basis at the lower of cost or
                     market value of the underlying real estate collateral. Such market
                     values are generally obtained using independent appraisals, which the
                     Company considers to be level 2 inputs. The table below presents the
                     recorded amount of assets and liabilities measured at fair value on a
                     nonrecurring basis as of December 31, 2009 (dollars in thousands).  Quoted market price in active markets(Level 1)
                           
                           
                           Significant otherobservable inputs(Level 2)
                           
                           
                           Significantunobservable inputs(Level 3)Impaired loans
                           
                           $
                           -
                           
                           $
                           10,911
                           
                           $
                           -Other real estate owned
                           
                           
                           -
                           
                           
                           3,704
                           
                           
                           - 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
                     contractual obligations which require 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. Following is a description of valuation methodologies used to
                     estimate fair value for certain other financial instruments. Fair value approximates carrying value for the following financial
                     instruments due to the short-term nature of the instrument: cash and
                     due from banks, federal funds sold, federal funds purchased, and
                     securities sold under agreement to repurchase. Bank Owned Life Insurance - The cash surrender value of bank owned life insurance policies
                     held by the Bank approximates fair values of the policies. Deposit Liabilities - Fair value for demand deposit accounts and interest-bearing
                     accounts with no fixed maturity date is equal to the carrying value.
                     The fair value of certificate of deposit accounts are estimated by
                     discounting cash flows from expected maturities using current
                     interest rates on similar instruments. FHLB Advances and Other Borrowings- Fair value for FHLB advances and other borrowings are estimated by
                     discounting cash flows from expected maturities using current
                     interest rates on similar instruments. The Company has used management's best estimate of fair value based
                     on the above assumptions. Thus, the fair values presented may not be
                     the amounts that could be realized in an immediate sale or settlement
                     of the instrument. In addition, any income taxes or other expenses,
                     which would be incurred in an actual sale or settlement, are not
                     taken into consideration in the fair value presented. The estimated fair values of the Company's financial instruments at December 31, 2009 and December 31, 2008 are as follows (dollars in thousands):  December 31, 2009
                           
                           
                           December 31, 2008CarryingAmount
                           
                           
                           FairValue
                           
                           
                           CarryingAmount
                           
                           
                           FairValueFinancial Assets:Cash and cash equivalents
                           
                           $
                           12,082
                           
                           $
                           12,082
                           
                           $
                           13,160
                           
                           $
                           13,160Investment securities available for sale
                           
                           
                           76,195
                           
                           
                           80,775
                           
                           
                           64,432
                           
                           
                           64,432Investment securities held to maturity
                           
                           
                           9,225
                           
                           
                           9,516
                           
                           
                           12,519
                           
                           
                           12,618Other investments
                           
                           
                           9,213
                           
                           
                           9,213
                           
                           
                           8,461
                           
                           
                           8,461Loans, net
                           
                           
                           566,510
                           
                           
                           575,396
                           
                           
                           559,602
                           
                           
                           564,573Bank owned life insurance
                           
                           
                           13,974
                           
                           
                           13,974
                           
                           
                           13,369
                           
                           
                           13,369Financial Liabilities:Deposits
                           
                           
                           494,084
                           
                           
                           461,744
                           
                           
                           469,537
                           
                           
                           447,427Federal Home Loan Bank advances and related debt
                           
                           
                           142,700
                           
                           
                           163,818
                           
                           
                           149,675
                           
                           
                           151,394Note payable
                           
                           
                           4,250
                           
                           
                           4,603
                           
                           
                           15,000
                           
                           
                           14,412Junior subordinated debentures
                           
                           
                           13,403
                           
                           
                           4,139
                           
                           
                           13,403
                           
                           
                           6,125
 78


NOTE 23. Parent Company Financial Information Following is condensed financial information of Southern First
                     Bancshares, Inc. (parent company only, dollars in thousands): Condensed Balance Sheets  December 31,2009
                           
                           
                           2008AssetsCash and cash equivalents
                           
                           $
                           5,824
                           
                           $
                           223Investment in subsidiaries
                           
                           
                           70,744
                           
                           
                           67,339Other assets
                           
                           
                           978
                           
                           
                           739Total assets
                           
                           $
                           77,546
                           
                           $
                           68,301Liabilities and Shareholders' EquityAccounts payable and accrued expenses
                           
                           $
                           52
                           
                           $
                           112Notes Payable
                           
                           
                           4,250
                           
                           
                           15,000Junior subordinated debentures
                           
                           
                           13,403
                           
                           
                           13,403Shareholders' equity
                           
                           
                           59,841
                           
                           
                           39,786Total liabilities and shareholders' equity
                           
                           $
                           77,546
                           
                           $
                           68,301   Condensed Statements of Income  For the years ended December 31,2009
                           
                           
                           2008
                           
                           
                           2007RevenuesInterest income
                           
                           $
                           122
                           
                           $
                           7
                           
                           $
                           29Gain on sale of property held for sale
                           
                           
                           -
                           
                           
                           -
                           
                           
                           319Total revenue
                           
                           
                           122
                           
                           
                           7
                           
                           
                           348ExpensesInterest expense
                           
                           
                           645
                           
                           
                           1,140
                           
                           
                           1,016Depreciation
                           
                           
                           -
                           
                           
                           -
                           
                           
                           5Other expenses
                           
                           
                           119
                           
                           
                           70
                           
                           
                           38Total expenses
                           
                           
                           764
                           
                           
                           1,210
                           
                           
                           1,059Income tax benefit
                           
                           
                           218
                           
                           
                           409
                           
                           
                           235Loss before equity in undistributed net income of subsidiaries
                           
                           
                           (424
                           )
                           
                           (794
                           )
                           
                           (476
                           )Equity in undistributed net income of subsidiaries
                           
                           
                           1,843
                           
                           
                           2,646
                           
                           
                           3,911Net income
                           
                           $
                           1,419
                           
                           $
                           1,852
                           
                           $
                           3,435
 79


Condensed Statements of Cash Flows  For the years ended December 31,2009
                           
                           
                           2008
                           
                           
                           2007Operating activitiesNet income
                           
                           $
                           1,419
                           
                           $
                           1,852
                           
                           $
                           3,435Adjustments to reconcile net income to net cash provided by(used for) operating activitiesEquity in undistributed net income of subsidiaries
                           
                           
                           (1,843
                           )
                           
                           (2,646
                           )
                           
                           (3,911
                           )Depreciation
                           
                           
                           -
                           
                           
                           -
                           
                           
                           5Gain on sale of property held for sale
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (319
                           )Compensation expense related to stock options and restricted stock grants
                           
                           
                           118
                           
                           
                           70
                           
                           
                           32Decrease (increase) in other assets
                           
                           
                           (239
                           )
                           
                           (385
                           )
                           
                           (237
                           )Increase (decrease) in accounts payable and accrued expenses
                           
                           
                           (59
                           )
                           
                           95
                           
                           
                           (8
                           )Net cash used for operating activities
                           
                           
                           (604
                           )
                           
                           (1,014
                           )
                           
                           (1,003
                           )Investing activitiesProceeds from sale of property held for sale
                           
                           
                           -
                           
                           
                           -
                           
                           
                           2,285Investment in subsidiaries
                           
                           
                           -
                           
                           
                           (6,975
                           )
                           
                           (10,000
                           )Net cash used for investing activities
                           
                           
                           -
                           
                           
                           (6,975
                           )
                           
                           (7,715
                           )Financing activitiesIncrease (decrease) in note payable
                           
                           
                           (10,750
                           )
                           
                           6,980
                           
                           
                           8,020Proceeds from the issuance of preferred stock
                           
                           
                           15,856
                           
                           
                           -
                           
                           
                           -Proceeds from the issuance of stock warrant
                           
                           
                           1,418
                           
                           
                           -
                           
                           
                           -Cash dividend on preferred stock
                           
                           
                           (620
                           )
                           
                           -
                           
                           
                           -Proceeds from the exercise of stock options and warrants
                           
                           
                           301
                           
                           
                           603
                           
                           
                           63Net cash provided by financing activities
                           
                           
                           6,205
                           
                           
                           7,583
                           
                           
                           8,083Net increase (decrease) in cash and cash equivalents
                           
                           
                           5,601
                           
                           
                           (406
                           )
                           
                           (635
                           )Cash and cash equivalents, beginning of year
                           
                           
                           223
                           
                           
                           629
                           
                           
                           1,264Cash and cash equivalents, end of year
                           
                           $
                           5,824
                           
                           $
                           223
                           
                           $
                           629
 80


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of DirectorsSouthern First Bancshares, Inc. and SubsidiaryGreenville, South Carolina We have audited the accompanying consolidated balance sheets of Southern First Bancshares, Inc.(formerly known as Greenville First Bancshares, Inc.) and Subsidiary as of December 31, 2009 and 2008, and the related consolidated statements of income,
                     shareholders' equity and comprehensive income, and cash flows for
                     each of the three years in the period ended December 31, 2009. These consolidated financial statements are the responsibility of
                     the Company's management. Our responsibility is to express an opinion
                     on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the
                     Public Company Accounting Oversight Board (United States). Those
                     standards require that we plan and perform the audit to obtain
                     reasonable assurance about whether the financial statements are free
                     of material misstatement. An audit includes examining, on a test
                     basis, evidence supporting the amounts and disclosures in the
                     financial statements. An audit also includes assessing the accounting
                     principles used and significant estimates made by management, as well
                     as evaluating the overall financial statement presentation. We
                     believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to
                     above present fairly, in all material respects, the financial
                     position of
                     Southern First Bancshares, Inc. and Subsidiary as of December 31, 2009 and 2008 and the results of their operations and their cash flows
                     for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. We were not engaged to examine management's assessment of the effectiveness of Southern First Bancshares, Inc. and Subsidiary's internal control over financial reporting as of December 31, 2009 included in the accompanying Management's Annual Report on Internal
                     Control Over Financial Reporting and, accordingly, we do not express
                     an opinion thereon. d26188-davissig.jpg Greenville, South CarolinaMarch 2, 2010
 81


Item 9. Changes in and Disagreements with Accountants on Accounting
                           and Financial Disclosure None. Item 9A(T). Controls and Procedures Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, we carried out an
                     evaluation, under the supervision and with the participation of our
                     management, including our Chief Executive Officer and Chief Financial
                     Officer, of the effectiveness of our disclosure controls and
                     procedures as defined in Exchange Act Rule 13a-15(e). Based upon that
                     evaluation, our Chief Executive Officer and Chief Financial Officer
                     have concluded that our current disclosure controls and procedures
                     are effective as of December 31, 2009. There have been no significant changes in our internal controls
                     over financial reporting during the fourth fiscal quarter ended December 31, 2009 that have materially affected, or are reasonably likely to
                     materially affect, our internal controls over financial reporting. The design of any system of controls and procedures is based in part
                     upon certain assumptions about the likelihood of future events. There
                     can be no assurance that any design will succeed in achieving its
                     stated goals under all potential future conditions, regardless of
                     how remote. Management's Annual Report on Internal Controls Over Financial Reporting Management is responsible for establishing and maintaining adequate
                     internal control over financial reporting, as such term is defined in
                     the
                     Exchange Act Rules 13a-15(f). A system of internal control over financial reporting is a process
                     designed 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. Under the supervision and with the participation of management,
                     including the principal executive officer and the principal financial
                     officer, the Company's management has evaluated the effectiveness of
                     its internal control over financial reporting as of December 31, 2009 based on the criteria established in a report entitled "Internal Control - Integrated Framework issued by the Committee of
                        Sponsoring Organizations of the Treadway Commission" and the interpretive guidance issued by the Commission in Release
                     No. 34-55929. Based on this evaluation, the Company's management has
                     evaluated and concluded that the Company's internal control over
                     financial reporting was effective as of December 31, 2009. The Company is continuously seeking to improve the efficiency and
                     effectiveness of its operations and of its internal controls. This
                     results in modifications to its processes throughout the Company.
                     However, there has been no change in its internal control over
                     financial reporting that occurred during the Company's most recent
                     fiscal quarter that has materially affected, or is reasonably likely
                     to materially affect, the Company's internal control over financial
                     reporting. This annual report does not include an attestation report of the
                     company's registered public accounting firm regarding internal
                     control over financial reporting. Management's report was not subject
                     to attestation by the company's registered public accounting firm
                     pursuant to temporary rules of the Securities and Exchange Commission
                     that permit the company to provide only management's report in this
                     annual report. Item 9B. Other Information There was no information required to be disclosed by the company in a
                     report on Form 8-K during the fourth quarter of 2009 that was not so
                     disclosed.
 82


PART III Item 10. Directors, Executive Officers and Corporate Governance. In response to this Item, this information is contained in our Proxy
                     Statement for the Annual Meeting of Shareholders to be held on May 18, 2010 and is incorporated herein by reference. Item 11. Executive Compensation. In response to this Item, this information is contained in our Proxy
                     Statement for the Annual Meeting of Shareholders to be held on May 18, 2010 and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters. In response to this Item, the information required by Item 201(d) is
                     contained in Item 5 of this report. The other information required by
                     this item is contained in our Proxy Statement for the Annual Meeting
                     of Shareholders to be held on May 18, 2010 and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. The information is contained in our Proxy Statement for the Annual
                     Meeting of Shareholders to be held on May 18, 2010 is incorporated herein by reference. Item 14. Principal Accounting Fees and Services. In response to this Item, this information is contained in our Proxy
                     Statement for the Annual Meeting of Shareholders to be held on May 18, 2010 and is incorporated herein by reference. Item 15. Exhibits, Financial Statement Schedules   (a)(1)   Financial Statements The following consolidated financial statements are located in Item 8
                     of this report. Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2009 and 2008 Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007 Consolidated Statements of Changes in Shareholders' Equity and
                     Comprehensive Income for the years ended December 31, 2009, 2008 and 2007 Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007 Notes to the Consolidated Financial Statements (2)   Financial Statement Schedules These schedules have been omitted because they are not required, are
                     not applicable or have been included in our consolidated financial
                     statements. (3)   Exhibits The following exhibits are required to be filed with this Report on
                     Form 10-K by Item 601 of Regulation S-K.  3.1
                           
                           
                           Articles of Incorporation, as amended (incorporated by reference to
                              Exhibit 3.1 of the Company's Registration Statement on Form SB-2,
                              File No. 333-83851).3.2
                           
                           
                           Articles of Amendment to the Articles of Incorporation establishing
                              the terms of the Series T Preferred Stock (incorporated by reference
                              to Exhibit 3.1 of the Company's Current Report on Form 8-K filed on March 3, 2009).3.3
                           
                           
                           Amended and Restated Bylaws dated March 18, 2008 (incorporated by reference to Exhibit 3.4 of the Company's Form 10-K filed March 24, 2008).
 83


4.1
                        
                        
                        See Exhibits 3.1, 3.2 and 3.3 for provisions in Southern First
                           Bancshares's Articles of Incorporation and Bylaws defining the rights
                           of holders of the common stock and the Series T Preferred Stock.4.2
                        
                        
                        Form of certificate of common stock (incorporated by reference to
                           Exhibit 4.2 of the Company's Registration Statement on Form SB-2,
                           File No. 333-83851).4.3
                        
                        
                        Form of Series T Preferred Stock Certificate (incorporated by
                           reference to Exhibit 4.2 of the Company's Form 8-K filed March 3, 2009).*10.1
                        
                        
                        Lease Agreement between Greenville First Bank and Halton Properties,
                           LLC, Formerly Cothran Properties, LLC (incorporated by reference to
                           Exhibit 10.2 of the Company's Form 10-KSB filed on March 28, 2000).10.2
                        
                        
                        Data Processing Services Agreement dated June 28, 1999 between Greenville First Bancshares and the Intercept Group
                           (incorporated by reference to Exhibit 10.3 of the Company's
                           Registration Statement on Form SB-2, File No. 333-83851).10.3
                        
                        
                        Form of Stock Warrant Agreement (incorporated by reference to Exhibit
                           10.4 of the Company's Registration Statement on Form SB-2, File No.
                           333-83851).*10.4
                        
                        
                        2000 Greenville First Bancshares, Inc. Stock Incentive Plan and Form
                           of Option Agreement (incorporated by reference to Exhibit 10.7 to the
                           Company's Form 10-QSB for the period ended March 31, 2000).*10.5
                        
                        
                        Sublease Agreement between Greenville First Bank, N.A. and Augusta
                           Road Holdings, LLC dated February 26, 2004 (incorporated by reference to Exhibit 10.6 of the Company's Form
                           10-QSB for the period ended June 30, 2004).10.6
                        
                        
                        Bonaventure I Office Lease Agreement with Greenville First Bank, N.A., dated September 20, 2005 (incorporated by reference to Exhibit 10.1 of the Company's Form
                           10-Q for the period ended September 30, 2005).10.7
                        
                        
                        First Amendment to Office Lease Agreement with Greenville First Bank,
                           N.A., dated September 20, 2005 (incorporated by reference to Exhibit 10.2 of the Company's Form
                           10-Q for the period ended September 30, 2005).10.8
                        
                        
                        Loan Agreement by and between Southern First Bancshares, Inc. and The
                           Bankers Bank, National Association, dated December 28, 2007 (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed January 4, 2008).*10.9
                        
                        
                        Stock Pledge Agreement by and between Southern First Bancshares, Inc.
                           and the Bankers Bank, National Association, dated December 28, 2007 (incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed January 4, 2008).*10.10
                        
                        
                        Employment Agreement by and between Southern First Bancshares, Inc.
                           with R. Arthur Seaver, Jr. dated December 17, 2008 (incorporated by reference to Exhibit 10.3 of the Company's Form 8-K filed December 23, 2008).*10.11
                        
                        
                        Employment Agreement by and between Southern First Bancshares, Inc.
                           with F. Justin Strickland dated December 17, 2008 (incorporated by reference to Exhibit 10.4 of the Company's Form 8-K filed December 23, 2008).*10.12
                        
                        
                        Employment Agreement by and between Southern First Bancshares, Inc.
                           with James M. Austin, III dated December 17, 2008 (incorporated by reference to Exhibit 10.5 of the Company's Form 8-K filed December 23, 2008).*10.13
                        
                        
                        Employment Agreement by and between Southern First Bancshares, Inc.
                           with Frederick Gilmer, III dated December 17, 2008 (incorporated by reference to Exhibit 10.6 of the Company's Form 8-K filed December 23, 2008).*10.14
                        
                        
                        Employment Agreement by and between Southern First Bancshares, Inc.
                           with J. Edward Terrell dated December 17, 2008 (incorporated by reference to Exhibit 10.7 of the Company's Form 8-K filed December 23, 2008).*10.15
                        
                        
                        Form of Split Dollar Agreement between certain executives and
                           Southern First Bancshares, Inc. (incorporated by reference to Exhibit
                           10.1 of the Company's Form 8-K filed February 18, 2009).*10.16
                        
                        
                        First Amendment to the Southern First Bancshares 2000 Stock Incentive
                           Plan, adopted October 21, 2008 (incorporated by reference to Exhibit 10.1 of the Company's Form
                           10-Q filed for the period ended September 30, 2008).*10.17
                        
                        
                        Form of Southern First Bank, N.A. Salary Continuation Agreement dated December 17, 2008 (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K filed December 23, 2008).*10.18
                        
                        
                        Form of First Amendment to Southern First Bank, N.A. Salary
                           Continuation Agreement dated December 17, 2008 (incorporated by reference to Exhibit 10.2 of the Company's Form 8-K filed December 23, 2008).*10.19
                        
                        
                        Warrant with The United States Department of Treasury to Purchase up
                           to 30,554 shares of Common Stock (incorporated by reference to
                           Exhibit 4.1 of the Company's Form 8-K filed March 3, 2009).*
 84


10.20
                        
                        
                        Letter Agreement, dated February 27, 2009, including Securities Purchase Agreement  Standard Terms
                           incorporated by reference therein, between the Company and the United
                           States Department of the Treasury (incorporated by reference to
                           Exhibit 10.1 of the Company's Form 8-K filed March 3, 2009).*10.21
                        
                        
                        ARRA Side Letter Agreement, dated February 27, 2009, between the Company and the United States Department of the
                           Treasury (incorporated by reference to Exhibit 10.2 of the Company's
                           Form 8-K filed March 3, 2009).*10.22
                        
                        
                        Form of Waiver, executed by each of Messrs. James M. Austin, III,
                           Fred Gilmer, III, R. Arthur Seaver, Jr., F. Justin Strickland, and J.
                           Edward Terrell (incorporated by reference to Exhibit 10.3 of the
                           Company's Form 8-K filed March 3, 2009).*10.23
                        
                        
                        Form of Letter Amendment, executed by each of Messrs. James M.
                           Austin, III, Fred Gilmer, III, R. Arthur Seaver, Jr., F. Justin
                           Strickland, and J. Edward Terrell with the Company (incorporated by
                           reference to Exhibit 10.4 of the Company's Form 8-K filed March 3, 2009).*10.24
                        
                        
                        Amended and Restated Loan Agreement with Silverton Bank, N.A., dated April 30, 2009, (incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q filed May 7, 2010).21
                        
                        
                        Subsidiaries.23
                        
                        
                        Consent of Independent Public Accountants.24
                        
                        
                        Power of Attorney (contained herein as part of the signature pages).31.1
                        
                        
                        Rule 13a-14(a) Certification of the Chief Executive Officer.31.2
                        
                        
                        Rule 13a-14(a) Certification of the Chief Financial Officer.32
                        
                        
                        Section 1350 Certifications. * Management contract or compensatory plan or arrangement required to
                     be filed as an Exhibit to this Annual Report on Form 10-K.
 85


SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act
                     of 1934 (the "Exchange Act"), the registrant caused this report to be
                     signed on its behalf by the undersigned, thereunto duly authorized. SOUTHERN FIRST BANCSHARES, INC.  Date: March 2, 2010
                           
                           
                           By:
                           
                           
                           /s/R. Arthur Seaver, Jr.Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
                     appears below constitutes and appoints R. Arthur Seaver, Jr., his
                     true and lawful attorney-in-fact and agent, with full power of
                     substitution and resubstitution, for him and in his name, place and
                     stead, in any and all capacities, to sign any and all amendments to
                     this Annual Report on Form 10-K, and to file the same, with all
                     exhibits thereto, and other documents in connection therewith, with
                     the Securities and Exchange Commission, granting unto the
                     attorney-in-fact and agent full power and authority to do and perform
                     each and every act and thing requisite or necessary to be done in and
                     about the premises, as fully to all intents and purposes as he might
                     or could do in person, hereby ratifying and confirming all that the
                     attorney-in-fact and agent, or his substitute or substitutes, may
                     lawfully do or cause to be done by virtue hereof. In accordance with the Exchange Act, this report has been signed
                     below by the following persons on behalf of the registrant in the
                     capacities and on the dates indicated.  Signature
                           
                           
                           Title
                           
                           
                           Date/s/James M. Austin, III
                           
                           
                           Chief Financial Officer,
                           
                           
                           March 2, 2010James M. Austin, III
                           
                           
                           (Principal Financial andAccounting Officer)/s/Andrew B. Cajka, Jr.
                           
                           
                           Director
                           
                           
                           March 2, 2010Andrew B. Cajka, Jr.Mark A. Cothran
                           
                           
                           Director/s/Leighton M. Cubbage
                           
                           
                           Director
                           
                           
                           February 23, 2010Leighton M. Cubbage/s/David G. Ellison
                           
                           
                           Director
                           
                           
                           March 2, 2010David G. Ellison/s/Anne S. Ellefson
                           
                           
                           Director
                           
                           
                           February 23, 2010Anne S. EllefsonFred Gilmer, Jr.
                           
                           
                           Director/s/Tecumseh Hooper, Jr.
                           
                           
                           Director
                           
                           
                           February 23, 2010Tecumseh Hooper, Jr.Rudolph G. Johnstone, III, M.D.
                           
                           
                           Director/s/James B. Orders, III
                           
                           
                           Director, Chairman
                           
                           
                           March 2, 2010James B. Orders, III/s/William B. Sturgis
                           
                           
                           Director
                           
                           
                           February 23, 2010William B. Sturgis/s/R. Arthur Seaver, Jr.
                           
                           
                           Director, Chief Executive Officer
                           
                           
                           March 2, 2010R. Arthur Seaver, Jr.
                           
                           
                           (Principal Executive Officer)
 86


EXHIBIT INDEX  3.1
                           
                           
                           Articles of Incorporation, as amended (incorporated by reference to
                              Exhibit 3.1 of the Company's Registration Statement on Form SB-2,
                              File No. 333-83851).3.2
                           
                           
                           Articles of Amendment to the Articles of Incorporation establishing
                              the terms of the Series T Preferred Stock (incorporated by reference
                              to Exhibit 3.1 of the Company's Current Report on Form 8-K filed on March 3, 2009).3.3
                           
                           
                           Amended and Restated Bylaws dated March 18, 2008 (incorporated by reference to Exhibit 3.4 of the Company's Form 10-K filed March 24, 2008).4.1
                           
                           
                           See Exhibits 3.1, 3.2 and 3.3 for provisions in Southern First
                              Bancshares's Articles of Incorporation and Bylaws defining the rights
                              of holders of the common stock and the Series T Preferred Stock.4.2
                           
                           
                           Form of certificate of common stock (incorporated by reference to
                              Exhibit 4.2 of the Company's Registration Statement on Form SB-2,
                              File No. 333-83851).4.3
                           
                           
                           Form of Series T Preferred Stock Certificate (incorporated by
                              reference to Exhibit 4.2 of the Company's Form 8-K filed March 3, 2009).*10.1
                           
                           
                           Lease Agreement between Greenville First Bank and Halton Properties,
                              LLC, formerly Cothran Properties, LLC (incorporated by reference to
                              Exhibit 10.2 of the Company's Form 10-KSB filed on March 28, 2000).10.2
                           
                           
                           Data Processing Services Agreement dated June 28, 1999 between Greenville First Bancshares and the Intercept Group
                              (incorporated by reference to Exhibit 10.3 of the Company's
                              Registration Statement on Form SB-2, File No. 333-83851).10.3
                           
                           
                           Form of Stock Warrant Agreement (incorporated by reference to Exhibit
                              10.4 of the Company's Registration Statement on Form SB-2, File No.
                              333-83851).*10.4
                           
                           
                           2000 Greenville First Bancshares, Inc. Stock Incentive Plan and Form
                              of Option Agreement (incorporated by reference to Exhibit 10.7 to the
                              Company's Form 10-QSB for the period ended March 31, 2000).*10.5
                           
                           
                           Sublease Agreement between Greenville First Bank, N.A. and Augusta
                              Road Holdings, LLC dated February 26, 2004 (incorporated by reference
                              to Exhibit 10.6 of the Company's Form 10-QSB for the period ended June 30, 2004).10.6
                           
                           
                           Bonaventure I Office Lease Agreement with Greenville First Bank, N.A., dated September 20, 2005 (incorporated by reference to Exhibit 10.1 of the Company's Form
                              10-Q for the period ended September 30, 2005).10.7
                           
                           
                           First Amendment to Office Lease Agreement with Greenville First Bank,
                              N.A., dated September 20, 2005 (incorporated by reference to Exhibit 10.2 of the Company's Form
                              10-Q for the period ended September 30, 2005).10.8
                           
                           
                           Loan Agreement by and between Southern First Bancshares, Inc. and The
                              Bankers Bank, National Association, dated December 28, 2007 (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed January 4, 2008).*10.9
                           
                           
                           Stock Pledge Agreement by and between Southern First Bancshares, Inc.
                              and The Bankers Bank, National Association, dated December 28, 2007 (incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed January 4, 2008).*10.10
                           
                           
                           Employment Agreement by and between Southern First Bancshares, Inc.
                              with R. Arthur Seaver, Jr. dated December 17, 2008 (incorporated by reference to Exhibit 10.3 of the Company's Form 8-K filed December 23, 2008).*10.11
                           
                           
                           Employment Agreement by and between Southern First Bancshares, Inc.
                              with F. Justin Strickland dated December 17, 2008 (incorporated by reference to Exhibit 10.4 of the Company's Form 8-K filed December 23, 2008).*10.12
                           
                           
                           Employment Agreement by and between Southern First Bancshares, Inc.
                              with James M. Austin, III dated December 17, 2008 (incorporated by reference to Exhibit 10.5 of the Company's Form 8-K filed December 23, 2008).*10.13
                           
                           
                           Employment Agreement by and between Southern First Bancshares, Inc.
                              with Frederick Gilmer, III dated December 17, 2008 (incorporated by reference to Exhibit 10.6 of the Company's Form 8-K filed December 23, 2008).*10.14
                           
                           
                           Employment Agreement by and between Southern First Bancshares, Inc.
                              with J. Edward Terrell dated December 17, 2008 (incorporated by reference to Exhibit 10.7 of the Company's Form 8-K filed December 23, 2008).*10.15
                           
                           
                           Form of Split Dollar Agreement between certain executives and
                              Southern First Bancshares, Inc. (incorporated by reference to Exhibit
                              10.1 of the Company's Form 8-K filed February 18, 2009).*
 87


10.16
                        
                        
                        First Amendment to the Southern First Bancshares 2000 Stock Incentive
                           Plan, adopted October 21, 2008 (incorporated by reference to Exhibit 10.1 of the Company's Form
                           10-Q filed for the period ended September 30, 2008).*10.17
                        
                        
                        Form of Southern First Bank, N.A. Salary Continuation Agreement dated December 17, 2008 (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K filed December 23, 2008).*10.18
                        
                        
                        Form of First Amendment to Southern First Bank, N.A. Salary
                           Continuation Agreement dated December 17, 2008 (incorporated by reference to Exhibit 10.2 of the Company's Form 8-K filed December 23, 2008).*10.19
                        
                        
                        Warrant with The United States Department of Treasury to Purchase up
                           to 330,554 shares of Common Stock (incorporated by reference to
                           Exhibit 4.1 of the Company's Form 8-K filed March 3, 2009).*10.20
                        
                        
                        Letter Agreement, dated February 27, 2009, including Securities Purchase Agreement  Standard Terms
                           incorporated by reference therein, between the Company and the United
                           States Department of the Treasury (incorporated by reference to
                           Exhibit 10.1 of the Company's Form 8-K filed March 3, 2009).*10.21
                        
                        
                        ARRA Side Letter Agreement, dated February 27, 2009, between the Company and the United States Department of the
                           Treasury (incorporated by reference to Exhibit 10.2 of the Company's
                           Form 8-K filed March 3, 2009).*10.22
                        
                        
                        Form of Waiver, executed by each of Messrs. James M. Austin, III,
                           Fred Gilmer, III, R. Arthur Seaver, Jr., F. Justin Strickland, and J.
                           Edward Terrell (incorporated by reference to Exhibit 10.3 of the
                           Company's Form 8-K filed March 3, 2009).*10.23
                        
                        
                        Form of Letter Amendment, executed by each of Messrs. James M.
                           Austin, III, Fred Gilmer, III, R. Arthur Seaver, Jr., F. Justin
                           Strickland, and J. Edward Terrell with the Company (incorporated by
                           reference to Exhibit 10.4 of the Company's Form 8-K filed March 3, 2009).*10.24
                        
                        
                        Amended and Restated Loan Agreement with Silverton Bank, N.A., dated April 30, 2009, (incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q filed May 7, 2010).21
                        
                        
                        Subsidiaries.23
                        
                        
                        Consent of Independent Public Accountants.24
                        
                        
                        Power of Attorney (contained herein as part of the signature pages).31.1
                        
                        
                        Rule 13a-14(a) Certification of the Chief Executive Officer.31.2
                        
                        
                        Rule 13a-14(a) Certification of the Chief Financial Officer.32
                        
                        
                        Section 1350 Certifications. * Management contract or compensatory plan or arrangement required to
                     be filed as an Exhibit to this Annual Report on Form 10-K.
 88