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, 2010. 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 $19,206,345 as of
                  the last business day of the registrant's most recently completed
                  second fiscal quarter. 3,457,877 shares of the registrant's common stock were outstanding
                  as of March 4, 2011 DOCUMENTS INCORPORATED BY REFERENCE  Proxy Statement for the Annual Meeting of Shareholders to be held on
                              May 17, 2011.
                           
                           
                           Part III (Portions of Items 10-14)
 1


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 amount of our loan portfolio collateralized by real estate and
                     weaknesses in the real estate market; our ability to comply with our Formal Agreement and potential
                     regulatory actions if we fail to comply; restrictions or conditions imposed by our regulators on our
                     operations may make it more difficult for us to achieve our goals; significant increases in competitive pressure in the banking and
                     financial services industries; changes in the interest rate environment which could reduce
                     anticipated or actual margins; changes in political conditions or the legislative or regulatory
                     environment, including the effect of recent financial reform
                     legislation on the banking and financial services industries; 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; increased funding costs due to market illiquidity, increased
                     competition for funding, and/or increased regulatory requirements
                     with regard to funding; changes in deposit flows; changes in technology; changes in monetary and tax policies; the adequacy of the level of our allowance for loan losses and the
                     amount of loan loss provisions required in future periods; changes in monetary and tax policies, including confirmation of the
                     income tax refund claims received by the Internal Revenue Service
                     ("IRS"); changes in accounting policies and practices, as may be adopted by
                     the regulatory agencies, as well as the Public Company Accounting
                     Oversight Board and the Financial Accounting Standards Board; the rate of delinquencies and amounts of loans charged-off; the rate of loan growth in recent years and the lack of seasoning of
                     a portion of our loan portfolio; our ability to maintain appropriate levels of capital and to comply
                     with our higher individual minimum capital ratios; our ability to attract and retain key personnel; our ability to retain our existing customers, including our deposit
                     relationships;
 2


adverse changes in asset quality and resulting credit risk-related
                     losses and expenses; loss of consumer confidence and economic disruptions resulting from
                     terrorist activities; and other risks and uncertainties detailed in Part I, Item 1A of this
                     Annual Report on Form 10-K and from time to time in our filings with
                     the Securities and Exchange Commission (the "SEC").
 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. Beginning in 2008 and continuing through the
                  present, 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. 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 363,609.4 shares of the company's common stock, adjusted for
                  the 10% stock dividend in 2011, 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 $7.136 per share of the common
                  stock, adjusted for the 10% stock dividend in 2011. 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. On June 8, 2010, the Bank entered into a formal agreement (the
                  "Formal Agreement") with its primary regulator, the Office of the
                  Comptroller of the Currency (the "OCC"). The Formal Agreement seeks
                  to enhance the Bank's existing practices and procedures in the areas
                  of credit risk management, credit underwriting, liquidity, and funds
                  management. In addition, the OCC has established Individual Minimum
                  Capital Ratio levels of Tier 1 and total capital for the Bank that
                  are higher than the minimum and well capitalized ratios applicable to
                  all banks. Specifically, we must maintain total risk-based capital of
                  at least 12%, Tier 1 capital of at least 10%, and a leverage ratio of
                  at least 9%. The Board of Directors and management of the Bank have
                  aggressively worked to improve these practices and procedures and
                  believe the Company is currently in compliance with substantially all
                  of the requirements of the Formal Agreement. See "Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations" for more discussion of the Formal Agreement.
 3


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. 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 454,000 residents. Greenville is also one
                  of the state's wealthiest counties, with estimated median household
                  income of $53,000 for 2010. 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. In July of 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
                  380,000 residents, while Lexington County is the 6th largest county with a population of approximately 257,000. From 2000
                  to 2010, the combined estimated population of Richland and
                  neighboring Lexington counties grew approximately 18.8% to an
                  estimated 638,000. The median household income for Richland and
                  Lexington Counties combined was $55,000 for 2010. In January 2007, we opened our first office in Columbia as a loan
                  production office which became a full-service branch in July 2007. In
                  July of 2008 we opened our second branch office in the Columbia
                  market which is located on Sunset Avenue in Lexington. In August of
                  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, 2010, we had net loans of $564.0 million, representing 76.6% 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
 4


bank. As of December 31, 2010, our average loan size was
                  approximately $204,000. 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
                  $48.1 million, or 8.4% 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 voting members of the officers' loan committee, which is
                  comprised of a group of our senior commercial lenders, bank
                  president, and CEO.  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
                  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, 2010,
                  approximately $74.9 million, or 13.1% of our loans had loan-to-value
                  ratios which exceeded regulatory supervisory limits, of which 104
                  loans totaling approximately $31.3 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, 2010, the maximum amount we could lend to one
                  borrower is $11.8 million. However, our internal lending limit at
                  December 31, 2010 is $7.0 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, 2010, loans secured by first or second
                  mortgages on real estate made up approximately 79.6% 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
 5


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, 2010, commercial real estate loans (other than
                     construction loans) amounted to $301.8 million, or approximately
                     53.0% of our loan portfolio. Of our commercial real estate loan
                     portfolio, $164.0 million in loans were non-owner occupied
                     properties, representing 52.4% of our commercial real estate
                     portfolio and 28.6% of our total loan portfolio. The remainder of our
                     commercial real estate loan portfolio, $137.9 million in loans or
                     44.0% of the commercial loan portfolio, were owner occupied. Owner
                     occupied loans represented 24.1% of our total loan portfolio. At
                     December 31, 2010, our individual commercial real estate loans ranged
                     in size from approximately $1,500 to $5.6 million, with an average
                     loan size of approximately $503,000. These loans generally have terms
                     of five years or less, although payments may be structured on a
                     longer amortization basis. We evaluate each borrower on an individual
                     basis and attempt to determine the business risks and credit profile
                     of each borrower. We attempt to reduce credit risk in the commercial
                     real estate portfolio by emphasizing loans on owner-occupied office
                     and retail buildings where the loan-to-value ratio, established by
                     independent appraisals, does not exceed 85%. We also generally
                     require that a borrower's cash flow exceeds 115% of monthly debt
                     service obligations. 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, 2010, total
                     construction loans amounted to $19.9 million, or 3.5% of our loan
                     portfolio. Included in the $19.9 million was $11.3 million, or 2.0%
                     of our loan portfolio, that were commercial construction, and $8.6
                     million, or 1.5% of our loan portfolio, that were consumer
                     construction loans. At December 31, 2010, our commercial construction
                     and development real estate loans ranged in size from approximately
                     $45,000 to $1.8 million, with an average loan size of approximately
                     $552,000. At December 31, 2010, our individual residential
                     construction and development real estate loans ranged in size from
                     approximately $35,000 to $1.8 million, with an average loan size of
                     approximately $451,000. 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,
                     2010, residential real estate loans (other than construction loans)
                     amounted to $133.7 million, or 23.4%
 6


of our loan portfolio. Included in the residential real estate loans
                     was $54.2 million, or 9.5% of our loan portfolio, in first and second
                     mortgages on individuals' homes, and $79.5 million, or 13.9% of our
                     loan portfolio, in home equity loans. At December 31, 2010, our
                     individual residential real estate loans ranged in size from $5,000
                     to $2.6 million, with an average loan size of approximately $281,000.
                     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, 2010, our individual home equity lines of
                     credit ranged in size from $1,000 to $1.7 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, 2010, commercial business
                  loans amounted to $109.5 million, or 19.1% of our loan portfolio, and
                  ranged in size from approximately $1,000 to $2.5 million, with an
                  average loan size of approximately $160,000. 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 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, 2010, 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, 2010,
                  consumer loans amounted to $8.1 million, or 1.4% of our loan
                  portfolio, and ranged in size from $100 to $742,000, with an average
                  loan size of approximately $15,000. 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 16.1% of total
                  deposits at December 31, 2010. 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
 7


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, 2010, there were 33 financial institutions other than
                  us in our primary market of Greenville County and 22 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 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, Wells Fargo, and SunTrust. 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, 2010, the most recent date for which market data is
                  available, total deposits in the bank's primary service area,
                  Greenville County, were over $10.4 billion, which represented a 1.3%
                  deposit decrease from 2009. At June 30, 2010, our deposits
                  represented 4.2% 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 $12.9 billion in deposits as of June 30,
                  2010, a 1.9% decrease from 2009. Our deposits represent 0.8% of
                  the market. Employees At December 31, 2010 and 2009, we employed a total of 104 and 105
                  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.
 8


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 363,609.4 shares of Southern First's common stock (adjusted
                     for the 2011 stock dividend) 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. 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 $7.136 per
                     share of the common stock (adjusted for the 2011 stock dividend).
 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 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 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.
 In June 2010, the Federal Reserve, the FDIC and the OCC issued a
                     comprehensive final guidance on incentive compensation policies
                     intended to ensure that the incentive compensation policies of
                     banking organizations do not undermine the safety and soundness of
                     such organizations by encouraging excessive risk-taking. The
                     guidance, which covers all employees that have the ability to
                     materially affect the risk profile of an organization, either
                     individually or as part of a group, is based upon the key principles
                     that a banking organization's incentive compensation arrangements
                     should (i) provide incentives that do not encourage risk-taking
                     beyond the organization's ability to effectively identify
 9


and manage risks, (ii) be compatible with effective internal controls
                     and risk management, and (iii) be supported by strong corporate
                     governance, including active and effective oversight by the
                     organization's board of directors.
 The Federal Reserve will review, as part of the regular, risk-focused
                     examination process, the incentive compensation arrangements of
                     banking organizations, such as the Company, that are not "large,
                     complex banking organizations." These reviews will be tailored to
                     each organization based on the scope and complexity of the
                     organization's activities and the prevalence of incentive
                     compensation arrangements. The findings of the supervisory
                     initiatives will be included in reports of examination. Deficiencies
                     will be incorporated into the organization's supervisory ratings,
                     which can affect the organization's ability to make acquisitions and
                     take other actions. Enforcement actions may be taken against a
                     banking organization if its incentive compensation arrangements, or
                     related risk-management control or governance processes, pose a risk
                     to the organization's safety and soundness and the organization is
                     not taking prompt and effective measures to correct the deficiencies.
 On July 21, 2010, the U.S. President signed into law the Dodd-Frank
                     Wall Street Reform and Consumer Protection Act of 2010 (the
                     "Dodd-Frank Act"), a comprehensive regulatory framework that will
                     likely result in dramatic changes across the financial regulatory
                     system, some of which became effective immediately and some of which
                     will not become effective until various future dates.  Implementation
                     of the Dodd-Frank Act will require many new rules to be made by
                     various federal regulatory agencies over the next several
                     years.  Uncertainty remains as to the ultimate impact of the
                     Dodd-Frank Act until final rulemaking is complete, which could have a
                     material adverse impact either on the financial services industry as
                     a whole or on our business, financial condition, results of
                     operations, and cash flows.  Provisions in the legislation that
                     affect consumer financial protection regulations, deposit insurance
                     assessments, payment of interest on demand deposits, and interchange
                     fees could increase the costs associated with deposits and place
                     limitations on certain revenues those deposits may generate.  The
                     Dodd-Frank Act includes provisions that, among other things, will:
 ○Centralize responsibility for consumer financial protection by
                     creating a new agency, the Bureau of Consumer Financial Protection,
                     responsible for implementing, examining, and enforcing compliance
                     with federal consumer financial laws;
 ○Create the Financial Stability Oversight Council that will recommend
                     to the Federal Reserve increasingly strict rules for capital,
                     leverage, liquidity, risk management and other requirements as
                     companies grow in size and complexity;
 ○Provide mortgage reform provisions regarding a customer's ability to
                     repay, restricting variable-rate lending by requiring that the
                     ability to repay variable-rate loans be determined by using the
                     maximum rate that will apply during the first five years of a
                     variable-rate loan term, and making more loans subject to provisions
                     for higher cost loans, new disclosures, and certain other revisions;
 ○Change the assessment base for federal deposit insurance from the
                     amount of insured deposits to consolidated assets less tangible
                     capital, eliminate the ceiling on the size of the Deposit Insurance
                     Fund ("DIF"), and increase the floor on the size of the DIF, which
                     generally will require an increase in the level of assessments for
                     institutions with assets in excess of $10 billion;
 ○Make permanent the $250,000 limit for federal deposit insurance and
                     provide unlimited federal deposit insurance until December 31, 2012
                     for noninterest-bearing demand transaction accounts at all insured
                     depository institutions;
 ○Implement corporate governance revisions, including with regard to
                     executive compensation and proxy access by shareholders, which apply
                     to all public companies, not just financial institutions;
 ○Repeal the federal prohibitions on the payment of interest on demand
                     deposits, thereby permitting depository institutions to pay interest
                     on business transactions and other accounts;
 ○Amend the Electronic Fund Transfer Act ("EFTA") to, among other
                     things, give the Federal Reserve the authority to establish rules
                     regarding interchange fees charged for electronic debit transactions
                     by payment card issuers having assets over $10 billion and to enforce
                     a new statutory requirement that such fees be reasonable and
                     proportional to the actual cost of a transaction to the issuer;
 ○Eliminate the Office of Thrift Supervision ("OTS") one year from the
                     date of the new law's enactment. The Office of the Comptroller of the
                     Currency ("OCC"), which is currently the primary federal regulator
                     for national banks, will become the primary federal regulator for
                     federal thrifts.  In addition, the Federal Reserve will supervise and
                     regulate all savings and loan holding companies that were formerly
                     regulated by the OTS.
 10


On September 27, 2010, the U.S. President signed into law the Small
                     Business Jobs Act of 2010 (the "Act"). The Small Business Lending
                     Fund (the "SBLF"), which was enacted as part of the Act, is a $30
                     billion fund that encourages lending to small businesses by providing
                     Tier 1 capital to qualified community banks with assets of less than
                     $10 billion. On December 21, 2010, the U.S. Treasury published the
                     application form, term sheet and other guidance for participation in
                     the SBLF. Under the terms of the SBLF, the Treasury will purchase
                     shares of senior preferred stock from banks, bank holding companies,
                     and other financial institutions that will qualify as Tier 1 capital
                     for regulatory purposes and rank senior to a participating
                     institution's common stock. The application deadline for
                     participating in the SBLF is March 31, 2011.
 Internationally, both the Basel Committee on Banking Supervision (the
                     "Basel Committee") and the Financial Stability Board (established in
                     April 2009 by the Group of Twenty ("G-20") Finance Ministers and
                     Central Bank Governors to take action to strengthen regulation and
                     supervision of the financial system with greater international
                     consistency, cooperation, and transparency) have committed to raise
                     capital standards and liquidity buffers within the banking system
                     ("Basel III"). On September 12, 2010, the Group of Governors and
                     Heads of Supervision agreed to the calibration and phase-in of the
                     Basel III minimum capital requirements (raising the minimum Tier 1
                     common equity ratio to 4.5% and minimum Tier 1 equity ratio to 6.0%,
                     with full implementation by January 2015) and introducing a capital
                     conservation buffer of common equity of an additional 2.5% with full
                     implementation by January 2019. The U.S. federal banking agencies
                     support this agreement. In December 2010, the Basel Committee issued
                     the Basel III rules text, outlining the details and time-lines of
                     global regulatory standards on bank capital adequacy and liquidity.
                     According to the Basel Committee, the Framework sets out higher and
                     better-quality capital, better risk coverage, the introduction of a
                     leverage ratio as a backstop to the risk-based requirement, measures
                     to promote the build-up of capital that can be drawn down in periods
                     of stress, and the introduction of two global liquidity standards.
 In November 2010, the Federal Reserve's monetary policymaking
                     committee, the Federal Open Market Committee ("FOMC"), decided that
                     further support to the economy was needed. With short-term interest
                     rates already nearing 0%, the FOMC agreed to deliver that support by
                     committing to purchase additional longer-term securities, as it did
                     in 2008 and 2009. The FOMC intends to buy an additional $600 billion
                     of longer-term U.S. Treasury securities by mid-2011 and will continue
                     to reinvest repayments of principal on its holdings of securities, as
                     it has been doing since August 2010.
 In November 2010, the FDIC approved two proposals that amend the
                     deposit insurance assessment regulations. The first proposal
                     implements a provision in the Dodd-Frank Act that changes the
                     assessment base from one based on domestic deposits (as it has been
                     since 1935) to one based on assets. The assessment base changes from
                     adjusted domestic deposits to average consolidated total assets minus
                     average tangible equity.
 The second proposal changes the deposit insurance assessment system
                     for large institutions in conjunction with the guidance given in the
                     Dodd-Frank Act. Since the new base would be much larger than the
                     current base, the FDIC will lower assessment rates, which achieves
                     the FDIC's goal of not significantly altering the total amount of
                     revenue collected from the industry. Risk categories and debt ratings
                     will be eliminated from the assessment calculation for large banks
                     which will instead use scorecards. The scorecards will include
                     financial measures that are predictive of long-term performance. A
                     large financial institution will continue to be defined as an insured
                     depository institution with at least $10 billion in assets. Both
                     changes in the assessment system will be effective as of April 1,
                     2011 and will be payable at the end of September.
 In December 2010, the FDIC voted to increase the required amount of
                     reserves for the designated reserve ratio ("DRR") to 2.0%. The ratio
                     is higher than the 1.35% set by the Dodd-Frank Act in July 2010 and
                     is an integral part of the FDIC's comprehensive, long-range
                     management plan for the DIF. On December 16, 2010, the Federal
                     Reserve issued a proposal to implement a provision in the Dodd-Frank
                     Act that requires the Federal Reserve to set debit card interchange
                     fees. The proposed rule, if implemented in its current form, would
                     result in a significant reduction in debit-card interchange revenue.
                     Though the rule technically does not apply to institutions with less
                     than $10 billion in assets, there is concern that the price controls
                     may harm community banks, which could be pressured by the marketplace
                     to lower their own interchange rates.
 In February 2011, the FDIC approved the final rules that, as noted
                     above, change the assessment base from domestic deposits to average
                     assets minus average tangible equity, adopt a new scorecard-based
                     assessment system for financial institutions with more than $10
                     billion in assets, and finalize the DRR target size at 2.0% of
                     insured deposits.
 On December 29, 2010, the Dodd-Frank Act was amended to include full
                     FDIC insurance on Interest on Lawyers Trust Accounts ("IOLTAs").
                     IOLTAs will receive unlimited insurance coverage as
                     noninterest-bearing transaction accounts for two years ending
                     December 31, 2012. With respect to any other potential future
                     government assistance programs,
 11


we will evaluate the merits of the programs, including the terms of
                     the financing, the Company's capital position, the cost to the
                     Company of alternative capital, and the Company's strategy for the
                     use of additional capital, to determine whether it is prudent to
                     participate.
 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 and remained elevated in 2010. 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. Proposed Legislation and Regulatory Action From time to time, various legislative and regulatory initiatives are
                  introduced in Congress and state legislatures, as well as by
                  regulatory agencies. Such initiatives may include proposals to expand
                  or contract the powers of bank holding companies and depository
                  institutions or proposals to substantially change the financial
                  institution regulatory system. Such legislation could change banking
                  statutes and the operating environment of the Company in substantial
                  and unpredictable ways. If enacted, such legislation could increase
                  or decrease the cost of doing business, limit or expand permissible
                  activities or affect the competitive balance among banks, savings
                  associations, credit unions, and other financial institutions. We
                  cannot predict whether any such legislation will be enacted, and, if
                  enacted, the effect that it, or any implementing regulations, would
                  have on the financial condition or results of operations of the
                  Company. A change in statutes, regulations or regulatory policies
                  applicable to the Company or the Bank could have a material effect on
                  the business of the Company. 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;
 12


acting as agent or broker in selling credit life insurance and other
                     types of insurance in connection with credit transactions; and 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
 13


for certain retirement-account depositors. However, the FDIC has
                  increased the coverage up to $250,000 for each non-retirement
                  depositor through December 31, 2013. 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
                  report of any insured depository
 14


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 CAMELS 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 institution if an undercapitalized institution fails
                  to submit an acceptable capital restoration plan or fails in any
                  material respect to implement a plan accepted
 15


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, 2010, 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 and 2010 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
                  for the fourth quarter of 2010 equaled 5.765 basis points for each
                  $100 in domestic deposits at our institution. These assessments,
                  which may be revised based upon the level of deposits, will continue
                  until the bonds mature in the years 2017 through 2019. 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
 16


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, and interstate merging by
                  banks.  The Dodd-Frank Act removes previous state law restrictions on
                  de novo interstate branching in states such as South Carolina. This
                  change permits out-of-state banks to open de novo branches in states
                  where the laws of the state where the de novo branch to be opened
                  would permit a bank chartered by that state to open a de novo branch. 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
 17


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 February 15, 2011, 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, 2010, 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
                  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.
 18


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, 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;
 19


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. 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. We may have higher loan losses than we have allowed for in our
                        allowance for loan losses. Our actual loans losses could exceed our allowance for loan losses
                  and therefore our historic allowance for loan losses may not be
                  adequate. As of December 31, 2010, approximately 54.7% of our loan
                  portfolio, was secured by commercial real estate. Repayment of such
                  loans is generally considered more subject to market risk than
                  residential mortgage loans. Industry experience shows that a portion
                  of loans will be come delinquent and a portion of loans will require
                  partial or entire charge-off. Regardless of the underwriting criteria
                  utilized, losses may be experienced as a result of various factors
                  beyond our control, including among other things, changes in market
                  conditions affecting the value of loan collateral and problems
                  affecting borrower credit. We have entered into a Formal Agreement under which our regulators
                        will require us to take certain actions. On June 8, 2010, the Bank entered into a Formal Agreement with its
                  primary regulator, the OCC. The Formal Agreement seeks to enhance the
                  Bank's existing practices and procedures in the areas of credit risk
                  management, credit underwriting, liquidity, and funds management. The
                  Board of Directors and management of the Bank have aggressively
                  worked to improve these practices and procedures and believe the
                  Company is currently in compliance with substantially all of the
                  requirements of the Formal Agreement. We intend to take all actions necessary to enable the Bank to
                  continue compliance with the requirements of the Formal Agreement,
                  and as the date hereof we have submitted all documentation required
                  as of this date to the OCC. There can be no assurance that the Bank
                  will be able to continue to comply fully with the provisions of the
                  Formal Agreement, and the determination of our compliance will be
                  made by the Supervisory Authorities. Failure to meet the requirements
                  of the Formal Agreement could result in additional regulatory
                  requirements, which could ultimately lead to additional supervisory
                  actions. In addition, the Supervisory Authorities may amend the
                  Formal Agreement based on the results of their ongoing examinations. 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 through 2011. 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
 20


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 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 T 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 10.52%
                  of the shares of our common stock outstanding as of December 31, 2010
                  (including the shares issuable upon exercise of the warrant in total
                  shares
 21


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 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 Treasury to third parties, we may not, without the consent of
                  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 91.7% of our interest
                  income for the year ended December 31, 2010. 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. We have a concentration of credit exposure in commercial real estate
                        and a downturn in commercial real estate could adversely affect our
                        business, financial condition, and results of operations. At December 31, 2010, 54.7% of our loan portfolio was secured by
                  commercial real estate. Loans secured by commercial real estate are
                  generally viewed as having more risk of default than loans secured by
                  residential real estate or consumer loans because repayment of the
                  loans often depends on the successful operation of the property, the
                  income stream of the borrowers, the accuracy of the estimate of the
                  property's value at completion of construction, and the estimated
                  cost of construction. Such loans are generally more risky than loans
                  secured by residential real estate or consumer loans because those
                  loans ware typically not secured by real estate collateral. An
                  adverse development with respect to one lending relationship can
                  expose us to a significantly greater risk of loss compared with a
                  single-family residential mortgage loan because we typically have
                  more than one loan with such borrowers. Additionally, these loans
                  typically involve larger loan balances to single borrowers or groups
                  of related borrowers compared with single-family residential mortgage
                  loans. Therefore, the deterioration of one or a few of these loans
                  could cause a significant decline in the related asset quality.
                  Because of the general economic slowdown we are currently
                  experiencing, these loans represent higher risk and could result in a
                  sharp increase in loans charged-off and could require us to
                  significantly increase our allowance for loan losses, which could
                  have a material adverse impact on our business, financial condition,
                  results of operations, and cash flows. 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, 2010, approximately 79.6% 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 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
 22


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, 2010, we paid approximately $1.1 million in
                  deposit insurance assessments. 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. At December 31, 2010, the remaining
                  prepaid insurance premium was $1.8 million. 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 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.
 23


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, Fred Gilmer, III,
                  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. 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.
 24


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 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.
 25


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, 2010,
                  approximately $74.9 million of our loans, or 13.1% of total loans and
                  105.2% of our bank's risk-based capital, had loan-to-value ratios
                  that exceeded regulatory supervisory guidelines, of which 104 loans
                  totaling approximately $31.3 million had loan-to-value ratios of 100%
                  or more. Included in the $74.9 million of loans that exceeded
                  supervisory guidelines at December 31, 2010, $36.3 million of our
                  commercial loans, or 6.3% 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 document exceptions. As of December 31, 2010,
                  approximately 4% of the loans in our portfolio included document
                  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
 26


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. 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. (Removed and Reserved.)
 27


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, 2011. 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 2010 and 2009
                  (adjusted for the 10% stock dividend in 2011).  2010
                           
                           
                           High
                           
                           
                           LowFirst Quarter
                           
                           $
                           7.36
                           
                           $
                           5.50Second Quarter
                           
                           
                           8.04
                           
                           
                           6.36Third Quarter
                           
                           
                           6.59
                           
                           
                           5.41Fourth Quarter
                           
                           
                           7.05
                           
                           
                           5.452009
                           
                           
                           High
                           
                           
                           LowFirst Quarter
                           
                           $
                           7.44
                           
                           $
                           4.32Second Quarter
                           
                           
                           6.35
                           
                           
                           4.55Third Quarter
                           
                           
                           7.73
                           
                           
                           5.60Fourth Quarter
                           
                           
                           7.67
                           
                           
                           5.55
 28


The following table sets forth equity compensation plan information
                  at December 31, 2010. 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 dividends in 2006 and 2011.  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 holders2000 Stock options (1)
                           
                           
                           354,105
                           
                           $
                           8.51
                           
                           
                           59,6482010 Stock Incentive Plan - options
                           
                           
                           -
                           
                           
                           -
                           
                           
                           302,5002006 Restricted Stock Plan
                           
                           
                           -
                           
                           
                           -
                           
                           
                           9,3502010 Stock Incentive Plan - restricted stock
                           
                           
                           -
                           
                           
                           -
                           
                           
                           66,000Total
                           
                           
                           354,105
                           
                           $
                           8.51
                           
                           
                           437,498  (1)
                           
                           
                           Under the terms of Plan no further incentive stock option awards may
                              be granted, effective March 2010; however, the Plan will remain in
                              effect until all remaining awards have been issued as non-qualified
                              stock option awards, and all awards previously granted have vested or
                              have been forfeited.
 29


Item 6. Selected Financial Data  Years Ended December 31,2010
                           
                           
                           2009
                           
                           
                           2008
                           
                           
                           2007
                           
                           
                           2006(Dollars and shares in thousands, except per share amounts)Summary Balance Sheet Data:Assets
                           
                           $
                           736,490
                           
                           $
                           719,297
                           
                           $
                           692,979
                           
                           $
                           628,129
                           
                           $
                           509,344Federal funds sold
                           
                           
                           49,731
                           
                           
                           6,462
                           
                           
                           8,800
                           
                           
                           9,257
                           
                           
                           7,467Investment securities
                           
                           
                           72,853
                           
                           
                           94,633
                           
                           
                           85,412
                           
                           
                           87,507
                           
                           
                           74,304Loans, net (1)
                           
                           
                           564,006
                           
                           
                           566,510
                           
                           
                           559,602
                           
                           
                           503,098
                           
                           
                           397,234Allowance for loan losses
                           
                           
                           8,386
                           
                           
                           7,760
                           
                           
                           7,005
                           
                           
                           5,751
                           
                           
                           4,949Deposits
                           
                           
                           536,296
                           
                           
                           494,084
                           
                           
                           469,537
                           
                           
                           412,821
                           
                           
                           345,504FHLB advances and related debt
                           
                           
                           122,700
                           
                           
                           142,700
                           
                           
                           149,675
                           
                           
                           150,500
                           
                           
                           108,500Note payable
                           
                           
                           -
                           
                           
                           4,250
                           
                           
                           15,000
                           
                           
                           8,020
                           
                           
                           -Junior subordinated debentures
                           
                           
                           13,403
                           
                           
                           13,403
                           
                           
                           13,403
                           
                           
                           13,403
                           
                           
                           13,403Shareholders' equity
                           
                           
                           59,216
                           
                           
                           59,841
                           
                           
                           39,786
                           
                           
                           38,278
                           
                           
                           34,583Summary Results of Operations Data:Interest income
                           
                           $
                           35,529
                           
                           $
                           36,177
                           
                           $
                           40,213
                           
                           $
                           39,520
                           
                           $
                           30,929Interest expense
                           
                           
                           15,317
                           
                           
                           16,895
                           
                           
                           21,853
                           
                           
                           22,781
                           
                           
                           16,579Net interest income
                           
                           
                           20,212
                           
                           
                           19,282
                           
                           
                           18,360
                           
                           
                           16,739
                           
                           
                           14,350Provision for loan losses
                           
                           
                           5,610
                           
                           
                           4,310
                           
                           
                           3,161
                           
                           
                           2,050
                           
                           
                           1,650Net interest income after provision for loan losses
                           
                           
                           14,602
                           
                           
                           14,972
                           
                           
                           15,199
                           
                           
                           14,689
                           
                           
                           12,700Noninterest income (loss)
                           
                           
                           2,371
                           
                           
                           1,843
                           
                           
                           (400
                           )
                           
                           1,262
                           
                           
                           579Noninterest expenses
                           
                           
                           15,890
                           
                           
                           15,051
                           
                           
                           12,321
                           
                           
                           10,875
                           
                           
                           7,351Income before income tax expense
                           
                           
                           1,083
                           
                           
                           1,764
                           
                           
                           2,478
                           
                           
                           5,076
                           
                           
                           5,928Income tax expense
                           
                           
                           193
                           
                           
                           345
                           
                           
                           626
                           
                           
                           1,641
                           
                           
                           2,027Net income
                           
                           $
                           890
                           
                           $
                           1,419
                           
                           $
                           1,852
                           
                           $
                           3,435
                           
                           $
                           3,901Preferred stock dividends
                           
                           
                           865
                           
                           
                           730
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -Dividend accretion
                           
                           
                           472
                           
                           
                           424
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -Net income (loss) available to common shareholders
                           
                           $
                           (447
                           )
                           $
                           265
                           
                           $
                           1,852
                           
                           $
                           3,435
                           
                           $
                           3,901Per Common Share Data (2):Basic
                           
                           $
                           (0.13
                           )
                           $
                           0.08
                           
                           $
                           0.56
                           
                           $
                           1.06
                           
                           $
                           1.21Diluted
                           
                           $
                           (0.13
                           )
                           $
                           0.08
                           
                           $
                           0.53
                           
                           $
                           0.96
                           
                           $
                           1.09Book value
                           
                           $
                           12.80
                           
                           $
                           13.05
                           
                           $
                           11.88
                           
                           $
                           11.81
                           
                           $
                           10.72Weighted average number of common shares outstanding:Basic
                           
                           
                           3,453
                           
                           
                           3,360
                           
                           
                           3,298
                           
                           
                           3,236
                           
                           
                           3,225Diluted
                           
                           
                           3,453
                           
                           
                           3,389
                           
                           
                           3,484
                           
                           
                           3,557
                           
                           
                           3,562Performance Ratios:Return on average assets
                           
                           
                           0.12
                           %
                           
                           0.20
                           %
                           
                           0.27
                           %
                           
                           0.60
                           %
                           
                           0.85
                           %Return on average equity
                           
                           
                           1.47
                           %
                           
                           2.51
                           %
                           
                           4.73
                           %
                           
                           9.40
                           %
                           
                           11.95
                           %Return on average common equity
                           
                           
                           (0.98
                           )%
                           
                           0.64
                           %
                           
                           4.73
                           %
                           
                           9.40
                           %
                           
                           11.95
                           %Net interest margin, tax equivalent
                           
                           
                           2.91
                           %
                           
                           2.84
                           %
                           
                           2.82
                           %
                           
                           3.05
                           %
                           
                           3.27
                           %Loan to deposit ratio (1)
                           
                           
                           106.73
                           %
                           
                           116.23
                           %
                           
                           120.67
                           %
                           
                           123.26
                           %
                           
                           116.40
                           %Efficiency ratio (3):
                           
                           
                           70.36
                           %
                           
                           71.25
                           %
                           
                           68.60
                           %
                           
                           60.41
                           %
                           
                           49.24
                           %Asset Quality Ratios:Nonperforming assets, past due and restructured loans to total loans (1)
                           
                           
                           2.61
                           %
                           
                           2.69
                           %
                           
                           1.73
                           %
                           
                           0.92
                           %
                           
                           0.62
                           %Nonperforming assets, past due and restructured loans to total assets
                           
                           
                           2.03
                           %
                           
                           2.15
                           %
                           
                           1.42
                           %
                           
                           0.75
                           %
                           
                           0.49
                           %Net charge-offs to average total loans (1)
                           
                           
                           0.86
                           %
                           
                           0.63
                           %
                           
                           0.35
                           %
                           
                           0.27
                           %
                           
                           0.32
                           %Allowance for loan losses to nonperforming loans
                           
                           
                           89.92
                           %
                           
                           66.09
                           %
                           
                           91.00
                           %
                           
                           129.65
                           %
                           
                           332.46
                           %Allowance for loan losses to total loans (1)
                           
                           
                           1.47
                           %
                           
                           1.35
                           %
                           
                           1.24
                           %
                           
                           1.13
                           %
                           
                           1.23
                           %Capital Ratios:Average equity to average assets
                           
                           
                           8.16
                           %
                           
                           7.85
                           %
                           
                           5.73
                           %
                           
                           6.35
                           %
                           
                           7.15
                           %
 30


Years Ended December 31,2010
                        
                        
                        2009
                        
                        
                        2008
                        
                        
                        2007
                        
                        
                        2006(Dollars and shares in thousands, except per share amounts)Common equity to assets
                        
                        
                        6.01
                        %
                        
                        6.17
                        %
                        
                        5.74
                        %
                        
                        6.09
                        %
                        
                        6.79
                        %Leverage ratio
                        
                        
                        9.60
                        %
                        
                        9.60
                        %
                        
                        9.80
                        %
                        
                        9.50
                        %
                        
                        8.70
                        %Tier 1 risk-based capital ratio
                        
                        
                        12.00
                        %
                        
                        11.60
                        %
                        
                        11.60
                        %
                        
                        11.30
                        %
                        
                        11.10
                        %Total risk-based capital ratio
                        
                        
                        13.20
                        %
                        
                        12.80
                        %
                        
                        12.80
                        %
                        
                        12.40
                        %
                        
                        12.30
                        %Growth Ratios and Other Data:Percentage change in net income available to common shareholder
                        
                        
                        (268.68
                        )%
                        
                        (85.69
                        )%
                        
                        (46.09
                        )%
                        
                        (11.93
                        )%
                        
                        55.15
                        %Percentage change in diluted net income per common share
                        
                        
                        (262.50
                        )%
                        
                        (84.48
                        )%
                        
                        (45.28
                        )%
                        
                        (11.67
                        )%
                        
                        53.85
                        %Percentage change in assets
                        
                        
                        2.39
                        %
                        
                        3.80
                        %
                        
                        10.32
                        %
                        
                        23.32
                        %
                        
                        25.67
                        %Percentage change in loans(1)
                        
                        
                        (0.44
                        )%
                        
                        1.35
                        %
                        
                        11.35
                        %
                        
                        26.52
                        %
                        
                        18.92
                        %Percentage change in deposits
                        
                        
                        8.54
                        %
                        
                        5.23
                        %
                        
                        13.74
                        %
                        
                        19.48
                        %
                        
                        35.95
                        %Percentage change in equity
                        
                        
                        (1.04
                        )%
                        
                        50.41
                        %
                        
                        3.94
                        %
                        
                        10.68
                        %
                        
                        13.49
                        %  (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 dividends in July 2006 and January 2011.(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. 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, 2010. 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 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 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
 31


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 We use fair value measurements to record fair value adjustments to
                  certain financial instruments and to determine fair value
                  disclosures. Additionally, we may be required to record other assets
                  at fair value on a nonrecurring basis. These nonrecurring fair value
                  adjustments typically involve application of lower-of-cost-or-market
                  accounting or writedowns of individual assets. Further, we include in
                  the Notes to the Consolidated Financial Statements information about
                  the extent to which fair value is used to measure assets and
                  liabilities, the valuation methodologies used, and the related impact
                  to income. Additionally, for financial instruments not recorded at
                  fair value, we disclose the estimate of their fair value. Fair value is defined as the price that would be received to sell the
                  asset or paid to transfer the liability in an orderly transaction
                  between market participants at the measurement date. Accounting
                  standards establish a three-level hierarchy for disclosure of assets
                  and liabilities recorded at fair value. The classification of assets
                  and liabilities within the hierarchy is based on whether the inputs
                  to the valuation methodology used for measurement are observable or
                  unobservable. Observable inputs reflect market-derived or
                  market-based information obtained from independent sources, while
                  unobservable inputs reflect our estimates about market data. The
                  three levels of inputs that are used to classify fair value
                  measurements are as follows: Level 1 - Valuation is based upon quoted prices for identical
                     instruments traded in active markets. Level 1 instruments generally
                     include securities traded on active exchange markets, such as the New
                     York Stock Exchange, as well as securities that are traded by dealers
                     or brokers in active over-the-counter markets. Instruments we
                     classify as Level 1 are instruments that have been priced directly
                     from dealer trading desks and represent actual prices at which such
                     securities have traded within active markets. Level 1 instruments
                     also include commercial loans held for sale for which binding sales
                     contracts have been entered into as of the balance sheet date. Level 2 - Valuation is based upon quoted prices for similar
                     instruments in active markets, quoted prices for identical or similar
                     instruments in markets that are not active, and model-based valuation
                     techniques, such as matrix pricing, for which all significant
                     assumptions are observable in the market. Instruments we classify as
                     Level 2 include securities that are valued based on pricing models
                     that use relevant observable information generated by transactions
                     that have occurred in the market place that involve similar
                     securities. Level 2 instruments also include mortgage loans held for
                     sale that are valued based on prices for other mortgage whole loans
                     with similar characteristics and commercial loans held for sale that
                     are based on independent collateral appraisals. Level 3 - Valuation is generated from model-based techniques that use
                     significant assumptions not observable in the market. These
                     unobservable assumptions reflect the Company's estimates of
                     assumptions market participants would use in pricing the asset or
                     liability. Valuation techniques include use of option pricing models,
                     discounted cash flow models, and similar techniques.
 We attempt to maximize the use of observable inputs and minimize the
                  use of unobservable inputs when developing fair value measurements.
                  When available, we use quoted market prices to measure fair value. If
                  market prices are not available, fair value measurement is based upon
                  models that use primarily market-based or independently-sourced
                  market parameters. Most of our financial instruments use either of
                  the foregoing methodologies, collectively Level 1 and Level 2
                  measurements, to determine fair value adjustments recorded to our
                  financial statements. However, in certain cases, when market
                  observable inputs for model-based valuation techniques may not be
                  readily available, we are required to make judgments about
                  assumptions market participants would use in estimating the fair
                  value of the financial instrument. The degree of management judgment involved in determining the fair
                  value of an instrument is dependent upon the availability of quoted
                  market prices or observable market parameters. For instruments that
                  trade actively and have quoted market prices or observable market
                  parameters, there is minimal subjectivity involved in measuring fair
                  value. When observable market prices and parameters are not fully
                  available, management judgment is necessary to estimate fair value.
                  In addition, changes in the market conditions may reduce the
                  availability of quoted prices or observable data. For example,
                  reduced liquidity in the capital markets or changes in secondary
                  market activities could result in observable market inputs becoming
                  unavailable. When significant adjustments are required to available
                  observable inputs, it may be appropriate to utilize an estimate based
                  primarily on unobservable inputs. When an active market for a
                  security does not exist, the use of management estimates that
                  incorporate current market participant expectations of future cash
                  flows, and include appropriate risk premiums, is acceptable. Significant judgment may be required to determine whether certain
                  assets measured at fair value are included in Level 2 or Level 3. If
                  fair value measurement is based upon recent observable market
                  activity of such assets or comparable assets (other than
 32


forced or distressed transactions) that occur in sufficient volume
                  and do not require significant adjustment using unobservable inputs,
                  those assets are classified as Level 2. If not, they are classified
                  as Level 3. Making this assessment requires significant judgment. 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. 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, 2010, we spent $0.70 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, 2010 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,
                  hundreds of financial institutions failed or
 33


merged with other institutions during 2008, 2009, and 2010, 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 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 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 SBLF, the
                  Dodd-Frank Act or any other governmental program on the financial
                  markets. The weak economic conditions are expected to continue into 2011.
                  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, 2010 was $890,000, a 37.3%
                  decrease from $1.4 million for the year ended December 31, 2009. The
                  $529,000 decrease in net income resulted primarily from a $1.3
                  million increase in the provision for loan losses and an $839,000
                  increase in noninterest expenses, partially offset by increases of
                  $930,000 in net interest income and $528,000 in noninterest income
                  and a $152,000 reduction in income tax expense. Our efficiency ratio,
                  excluding real estate owned activity and gain on sale and impairment
                  charge on securities, was 70.5% for 2010, compared to 70.2% in 2009.
                  The slight 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, 2010 and 2009, our net interest income was
                  $20.2 million and $19.3 million, respectively. Our average earning
                  assets increased $17.7 million during the twelve months ended
                  December 31, 2010 compared to the average for the same period in
                  2009, while our interest bearing liabilities increased only $12.6
                  million. The primary reason that earning assets increased by $5.1
                  million more than interest bearing liabilities is related to the $9.5
                  million increase in our noninterest- bearing deposits. The increase
                  in average earning assets is primarily related to a $10.8 million
                  increase in our average loans, while the increase in average
                  interest-bearing liabilities is related to a $37.0 million increase
                  in our interest-bearing deposits, partially offset by a $24.4 million
                  decrease in notes payable and other debt. 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 2010, 2009, and 2008. 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.
 34


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. At December 31,
                  2010, we had investments of $849,000 in certificates of deposit at
                  other banks and investments of $99,000 at December 31, 2009 and 2008.
                  During the same periods, we 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.  Average Balances, Income and Expenses, Yields and RatesFor the Years Ended December 31,2010
                           
                           
                           2009
                           
                           
                           2008Average Balance
                           
                           
                           Income/Expense
                           
                           
                           Yield/Rate
                           
                           
                           Average Balance
                           
                           
                           Income/Expense
                           
                           
                           Yield/Rate
                           
                           
                           Average Balance
                           
                           
                           Income/Expense
                           
                           
                           Yield/RateEarning assets:Federal funds sold
                           
                           $
                           25,666
                           
                           $
                           59
                           
                           
                           0.23
                           %
                           $
                           14,375
                           
                           $
                           31
                           
                           
                           0.22
                           %
                           $
                           13,506
                           
                           $
                           261
                           
                           
                           1.93
                           %Investment securities, taxable
                           
                           
                           86,418
                           
                           
                           2,617
                           
                           
                           3.03
                           %
                           
                           94,733
                           
                           
                           4,278
                           
                           
                           4.52
                           %
                           
                           89,616
                           
                           
                           4,750
                           
                           
                           5.30
                           %Investment securities, nontaxable (1)
                           
                           
                           7,822
                           
                           
                           429
                           
                           
                           5.49
                           %
                           
                           3,898
                           
                           
                           235
                           
                           
                           6.04
                           %
                           
                           3,746
                           
                           
                           232
                           
                           
                           6.20
                           %Loans
                           
                           
                           579,383
                           
                           
                           32,587
                           
                           
                           5.62
                           %
                           
                           568,556
                           
                           
                           31,722
                           
                           
                           5.58
                           %
                           
                           547,720
                           
                           
                           35,058
                           
                           
                           6.40
                           %Total earning assets
                           
                           
                           699,289
                           
                           
                           35,692
                           
                           
                           5.10
                           %
                           
                           681,562
                           
                           
                           36,266
                           
                           
                           5.32
                           %
                           
                           654,588
                           
                           
                           40,301
                           
                           
                           6.16
                           %Nonearning assets
                           
                           
                           43,251
                           
                           
                           
                           
                           
                           
                           
                           
                           38,571
                           
                           
                           
                           
                           
                           
                           
                           
                           28,001Total assets
                           
                           $
                           742,540
                           
                           
                           
                           
                           
                           
                           
                           $
                           720,133
                           
                           
                           
                           
                           
                           
                           
                           $
                           682,589Interest-bearing liabilities:NOW accounts
                           
                           $
                           96,901
                           
                           $
                           1,234
                           
                           
                           1.27
                           %
                           $
                           43,465
                           
                           $
                           301
                           
                           
                           0.69
                           %
                           $
                           38,850
                           
                           $
                           399
                           
                           
                           1.03
                           %Savings & money market
                           
                           
                           97,183
                           
                           
                           954
                           
                           
                           0.98
                           %
                           
                           86,506
                           
                           
                           958
                           
                           
                           1.11
                           %
                           
                           89,482
                           
                           
                           1,694
                           
                           
                           1.89
                           %Time deposits
                           
                           
                           291,129
                           
                           
                           7,238
                           
                           
                           2.49
                           %
                           
                           318,255
                           
                           
                           8,737
                           
                           
                           2.75
                           %
                           
                           303,054
                           
                           
                           12,714
                           
                           
                           4.20
                           %Total interest-bearing deposits
                           
                           
                           485,213
                           
                           
                           9,424
                           
                           
                           1.94
                           %
                           
                           448,226
                           
                           
                           9,996
                           
                           
                           2.23
                           %
                           
                           431,386
                           
                           
                           14,807
                           
                           
                           3.43
                           %Note payable and other debt
                           
                           
                           131,961
                           
                           
                           5,538
                           
                           
                           4.20
                           %
                           
                           156,313
                           
                           
                           6,474
                           
                           
                           4.14
                           %
                           
                           159,076
                           
                           
                           6,281
                           
                           
                           3.95
                           %Junior subordinated debt
                           
                           
                           13,403
                           
                           
                           355
                           
                           
                           2.64
                           %
                           
                           13,403
                           
                           
                           425
                           
                           
                           3.17
                           %
                           
                           13,403
                           
                           
                           765
                           
                           
                           5.71
                           %Total interest-bearing liabilities
                           
                           
                           630,577
                           
                           
                           15,317
                           
                           
                           2.43
                           %
                           
                           617,942
                           
                           
                           16,895
                           
                           
                           2.73
                           %
                           
                           603,865
                           
                           
                           21,853
                           
                           
                           3.62
                           %Noninterest-bearing liabilities
                           
                           
                           51,356
                           
                           
                           
                           
                           
                           
                           
                           
                           45,686
                           
                           
                           
                           
                           
                           
                           
                           
                           39,605Shareholders' equity
                           
                           
                           60,607
                           
                           
                           
                           
                           
                           
                           
                           
                           56,505
                           
                           
                           
                           
                           
                           
                           
                           
                           39,119Total liabilities and shareholders' equity
                           
                           $
                           742,540
                           
                           
                           
                           
                           
                           
                           
                           $
                           720,133
                           
                           
                           
                           
                           
                           
                           
                           $
                           682,589Net interest spread
                           
                           
                           
                           
                           
                           
                           
                           
                           2.67
                           %
                           
                           
                           
                           
                           
                           
                           
                           2.59
                           %
                           
                           
                           
                           
                           
                           
                           
                           2.54
                           %Net interest income( tax equivalent)/margin
                           
                           
                           
                           
                           $
                           20,375
                           
                           
                           2.91
                           %
                           
                           
                           
                           $
                           19,371
                           
                           
                           2.84
                           %
                           
                           
                           
                           $
                           18,448
                           
                           
                           2.82
                           %Less: tax-equivalent adjustment (1)
                           
                           
                           
                           
                           
                           (163
                           )
                           
                           
                           
                           
                           
                           
                           
                           (89
                           )
                           
                           
                           
                           
                           
                           
                           
                           (88
                           )Net interest income
                           
                           
                           
                           
                           $
                           20,212
                           
                           
                           
                           
                           
                           
                           
                           $
                           19,282
                           
                           
                           
                           
                           
                           
                           
                           $
                           18,360 (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, 2010 was 2.91%,
                  compared to 2.84% for the year ended December 31, 2009 and 2.82% for
                  the year ended December 31, 2008. Our net interest spread was 2.68%
                  for the year ended December 31, 2010, compared to 2.59% for the year
                  ended December 31, 2009 and 2.54% for the year ended December 31,
                  2008. 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. 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 2010 from 2.87% for the fourth quarter of
                  2009 to 3.03% for the fourth quarter of 2010. During the twelve-month
                  periods ended December 31, 2010, 2009 and 2008, interest earning
                  assets exceeded interest bearing liabilities by $68.7 million, $63.6
                  million, and $50.7 million, respectively. During 2010,
                  interest-earning assets averaged $699.3 million, compared to $681.6
                  million in 2009 and $654.6 million in 2008. The 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,
                  2010. While our loan yield increased by 4 basis points for the 2010
                  period, our investment yield decreased 135 basis points, resulting in
                  a 20 basis point decrease in the overall
 35


yield on our interest earning assets during 2010. However, the
                  decrease in our interest earning asset yield was offset by a 30 basis
                  point decrease in the cost of our interest-bearing liabilities.
                  During 2010, the cost of our interest bearing deposits decreased by
                  29 basis points compared to the same period in 2009, while the
                  combined cost of our borrowings remained virtually unchanged for the
                  2010 period. As of December 31, 2010, most 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 $4.7 million increase in average nonearning assets during the
                  year ended December 31, 2010 compared to the same period in 2009 is
                  due primarily to a $2.5 million increase in prepaid expenses due to
                  the $3.2 million prepaid to the FDIC in December 2009, as well as an
                  increase of $2.6 million in other real estate owned. In addition, the
                  $4.1 million increase in average shareholders' equity during the 2010
                  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, 2010 vs. 2009
                           
                           
                           December 31, 2009 vs. 2008Increase (Decrease) Due to Change in
                           
                           
                           Increase (Decrease) Due to Change inVolume
                           
                           
                           Rate
                           
                           
                           Rate/Volume
                           
                           
                           Total
                           
                           
                           Volume
                           
                           
                           Rate
                           
                           
                           Rate/Volume
                           
                           
                           TotalInterest incomeLoans
                           
                           $
                           626
                           
                           $
                           235
                           
                           $
                           4
                           
                           $
                           865
                           
                           $
                           1,334
                           
                           $
                           (4,499
                           )
                           $
                           (171
                           )
                           $
                           (3,336
                           )Investment securities
                           
                           
                           (197
                           )
                           
                           (1,407
                           )
                           
                           63
                           
                           
                           (1,541
                           )
                           
                           276
                           
                           
                           (706
                           )
                           
                           (40
                           )
                           
                           (470
                           )Federal funds sold
                           
                           
                           26
                           
                           
                           1
                           
                           
                           1
                           
                           
                           28
                           
                           
                           17
                           
                           
                           (232
                           )
                           
                           (15
                           )
                           
                           (230
                           )Total interest income
                           
                           
                           455
                           
                           
                           (1,171
                           )
                           
                           68
                           
                           
                           (648
                           )
                           
                           1,627
                           
                           
                           (5,437
                           )
                           
                           (226
                           )
                           
                           (4,036
                           )Interest expenseDeposits
                           
                           
                           936
                           
                           
                           (1,376
                           )
                           
                           (132
                           )
                           
                           (572
                           )
                           
                           622
                           
                           
                           (5,214
                           )
                           
                           (219
                           )
                           
                           (4,811
                           )Note payable and other debt
                           
                           
                           (1,016
                           )
                           
                           96
                           
                           
                           (15
                           )
                           
                           (935
                           )
                           
                           (109
                           )
                           
                           307
                           
                           
                           (5
                           )
                           
                           193Junior subordinated debt
                           
                           
                           -
                           
                           
                           (71
                           )
                           
                           -
                           
                           
                           (71
                           )
                           
                           -
                           
                           
                           (340
                           )
                           
                           -
                           
                           
                           (340
                           )Total interest expense
                           
                           
                           (80
                           )
                           
                           (1,351
                           )
                           
                           (147
                           )
                           
                           (1,578
                           )
                           
                           513
                           
                           
                           (5,247
                           )
                           
                           (224
                           )
                           
                           (4,958
                           )Net interest income
                           
                           $
                           535
                           
                           $
                           180
                           
                           $
                           215
                           
                           $
                           930
                           
                           $
                           1,114
                           
                           $
                           (190
                           )
                           $
                           (2
                           )
                           $
                           922 Net interest income, the largest component of our income, was $20.2
                  million, $19.3 million, and $18.4 million, for the years ended
                  December 31, 2010, 2009, and 2008, respectively. The increases in
                  2010 and 2009 related primarily to the net effect of higher levels of
                  both average interest-earning assets and interest-bearing
                  liabilities. Average interest-earning assets increased $17.7 million
                  and $27.0 million during the years ended December 31, 2010 and 2009,
                  respectively, compared to the prior years. During the same periods of
                  2010 and 2009, average interest-bearing liabilities increased $12.6
                  million and $14.1 million, respectively, compared to the prior years.
                  The higher average balances resulted in $535,000 and $1.1 million of
                  additional net interest income during the years ended 2010 and 2009,
                  respectively, compared to the same periods in 2009 and 2008. In
                  addition, lower rates on the average balances, especially on our
                  interest-bearing deposits, produced additional net interest income of
                  $180,000 for the 2010 period while the lower rates reduced net
                  interest income by $190,000 in 2009. Interest income for the year ended December 31, 2010 was $35.5
                  million, consisting of $32.6 million on loans, $2.9 million on
                  investments, and $59,000 on federal funds sold. Interest income for
                  the same period 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 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 on loans for the years
                  ended December 31, 2010, 2009 and 2008 represented 91.7%, 87.7% and
                  87.2%, respectively, of total interest income, while income from
                  investments and federal funds sold represented 8.3%, 12.3% and 12.8%
                  of total interest income for the years ended December 31, 2010, 2009
                  and 2008, respectively. The high 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 82.9%, 83.4% and 83.7% of
                  average interest-earning assets for the years ended December 31,
                  2010, 2009 and 2008, respectively. Included in interest income on
                  loans for the years ended December 31, 2010, 2009 and 2008 was
                  $452,000, $599,000 and $727,000, respectively, related to the net
                  amortization of loan fees and capitalized loan origination costs.
 36


Interest expense for the year ended December 31, 2010 was $15.3
                  million, a 9.3% decrease compared to $16.9 million for the year ended
                  December 31, 2009. For the years ended December 31, 2010 and 2009,
                  interest expense consisted of $9.4 million and $10.0 million,
                  respectively, related to deposits and $5.9 million and $6.9 million,
                  respectively, related to borrowings. Interest expense for the year
                  ended December 31, 2008 was $21.9 million, consisting of $14.8
                  million related to deposits and $7.0 million related to borrowings.
                  Interest expense on deposits for the years ended December 31, 2010,
                  2009 and 2008 represented 61.5%, 59.2% and 67.8%, respectively, of
                  total interest expense, while interest expense on borrowings
                  represented 38.5%, 40.8% and 32.2%, respectively, of total interest
                  expense. During the year ended December 31, 2010, average
                  interest-bearing deposits were higher by $37.0 million than for the
                  same period in 2009, while FHLB advances and other borrowings were
                  $24.4 million lower than for the same period in 2009. Average
                  interest-bearing deposits were higher by $16.8 million during the
                  year ended December 31, 2009 than for the same period 2008, while
                  FHLB advances and other borrowings during 2009 were $2.8 million
                  lower than for the same period in 2008. 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, 2010, we incurred a noncash expense
                  related to the provision for loan losses of $5.6 million, bringing
                  the allowance for loan losses to $8.4 million, or 1.47% of gross
                  loans, as of December 31, 2010. The $5.6 million provision for 2010
                  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, 2010, we charged-off $5.2
                  million in loans and recorded $176,000 of recoveries on loans
                  previously charged-off. The $5.0 million net charge-offs represented
                  0.86% of the average outstanding loan portfolio for the year ended
                  December 31, 2010. At December 31, 2010, 2009 and 2008, the allowance for loan losses
                  represented 89.9%, 66.1%, and 91.0% of the amount of non-performing
                  loans. A significant portion, or 77.1%, of nonperforming loans at
                  December 31, 2010 are secured by real estate. Our nonperforming loans
                  have been written down to approximately 72% 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 $5.6 million for the year ended
                  December 31, 2010 to be adequate. In comparison, for the same periods in 2009 and 2008, we added $4.3
                  million and $3.2 million, respectively, to the provision for loan
                  losses, resulting in an allowance of $7.8 million and $7.0 million at
                  December 31, 2009 and 2008. The allowance for loan losses as a
                  percentage of gross loans was 1.35% and 1.24% at December 31, 2009
                  and 2008, respectively. We reported net charge-offs of $3.6 million
                  and $1.9 million for the years ended December 31, 2009 and 2008,
                  respectively, including recoveries of $109,000 and $28,000 for the
                  same periods in 2009 and 2008. The net charge-offs of $3.6 million
                  and $1.9 million during 2009 and 2008, respectively, represented
                  0.63% and 0.35% of the average outstanding loan portfolios for the
                  respective years.
 37


Noninterest Income The following tables set forth information related to our noninterest
                  income (loss) (dollars in thousands).  Years ended December 31,2010
                           
                           
                           2009
                           
                           
                           2008Loan fee income
                           
                           $
                           711
                           
                           $
                           431
                           
                           $
                           197Service fees on deposit accounts
                           
                           
                           583
                           
                           
                           732
                           
                           
                           653Income from bank owned life insurance
                           
                           
                           554
                           
                           
                           605
                           
                           
                           462Gain on sale of investment securities
                           
                           
                           1,156
                           
                           
                           41
                           
                           
                           33Other than temporary impairment on investment securities
                           
                           
                           (450
                           )
                           
                           -
                           
                           
                           (1,931
                           )Real estate owned activity
                           
                           
                           (674
                           )
                           
                           (342
                           )
                           
                           (140
                           )Gain on sale of property and equipment
                           
                           
                           18
                           
                           
                           -
                           
                           
                           -Other income
                           
                           
                           473
                           
                           
                           376
                           
                           
                           326Total noninterest income (loss)
                           
                           $
                           2,371
                           
                           $
                           1,843
                           
                           $
                           (400
                           ) Noninterest income for the year ended December 31, 2010 was $2.4
                  million, an increase of $528,000, or 28.6% compared to noninterest
                  income of $1.8 million during the same period in 2009. The $528,000
                  increase in 2010 was primarily related to the $1.2 million gain on
                  sale of investment securities, partially offset by an other than
                  temporary impairment charge which resulted in a net gain of $706,000.
                  In addition, loan fee income increased by $280,000 and other income
                  increased by $97,000. Partially offsetting the increases in income
                  was a $332,000 increased loss on real estate owned activity income,
                  $51,000 decrease in bank owned life insurance, and a decreased of
                  $149,000 in deposit account fees. Noninterest income resulted in a
                  loss for the year ended December 31, 2008 of $400,000. Loan fee income consists primarily of late charge fees, fees from
                  issuance of lines and letters of credit, and mortgage origination
                  fees we receive on residential loans funded and closed by a third
                  party. Loan fees were $711,000 and $431,000 for the years ended
                  December 31, 2010 and 2009, respectively. The $280,000 increase
                  relates primarily to an increase in mortgage origination and referral
                  fees of $305,000, partially offset by decreases of $7,000 in late
                  fees and $18,000 in fees related to lines and letters of credit.
                  Mortgage origination and referral fees were $580,000 in 2010 compared
                  to $275,000 in 2009. In addition, we received $93,000 in late charge
                  fees in 2010 compared to $100,000 for the same period in 2009 and
                  $38,000 and $56,000 of fees related to lines and letters of credit
                  for the years ended December 31, 2010 and 2009, respectively. Income from loan fees increased by $234,000 to $431,000 for the year
                  ended December 31, 2009 from $197,000 for the same period in 2008.
                  The increase relates primarily to an increase of $262,000 in mortgage
                  origination fees, partially offset by decreases of $8,000 in fees
                  related to lines and letters of credit and $20,000 in late
                  charge 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 $583,000 and $732,000 for the years
                  ended December 31, 2010 and 2009, respectively. The $149,000 decrease
                  is primarily related to a $181,000 decrease in NSF fees, partially
                  offset by a $32,000 increase in service charges and other deposit
                  related fees. NSF fee income was $252,000 and $433,000 for the years
                  ended December 31, 2010 and 2009, respectively, representing 43.2% of
                  total service fees on deposits in 2010 compared to 59.2% in 2009.
                  Service charge fees were $283,000 and $248,000 for the years ended
                  December 31, 2010 and 2009, respectively, while other fees such as
                  overdraft and returned item fees were $48,000 and $51,000 for the
                  same periods in 2010 and 2009. 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 $5,000 decrease in NSF fees. Other deposit related fees
                  were $263,000 and $195,000 for the years ended December 31, 2009 and
                  2008, respectively. NSF income was $433,000 and $438,000 for the same
                  periods ended December 31, 2009 and 2008, respectively, representing
                  59.2% of total service fees on deposits in 2009 compared to 67.1% of
                  total service fees on deposits in 2008. We held $14.5 million of bank owned life insurance as of December 31,
                  2010, compared to $14.0 million as of December 31, 2009. Income
                  derived from this life insurance was $554,000, $605,000, and $462,000
                  for the years ended December 31, 2010, 2009, and 2008, respectively.
                  The $51,000 decrease in income from life insurance during 2010 is due
                  to reduced rates of return on the insurance policies due to the
                  current market environment. We recorded a $1.2 million gain on sale of investment securities
                  during the twelve months ended December 31, 2010. We sold $110.0
                  million of securities and purchased $112.9 million of securities,
                  allowing us to reposition our investment portfolio to better match
                  our anticipated future cashflow needs. The gain on sale also assisted
                  us in meeting our higher regulatory capital
 38


requirements. In addition, we recorded a $450,000
                  other-than-temporary impairment charge on one of our private-label
                  collateralized mortgage obligations during the third quarter of 2010
                  and subsequently sold the security in November 2010. Comparatively,
                  we recorded gains of $41,000 and $33,000 on the sale or call of
                  investment securities during the years ended December 31, 2009 and
                  2008, respectively. In addition, during 2008 we recorded an
                  impairment charge of $1.9 million 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. The FNMA preferred stock was sold in
                  the third quarter of 2009. Real estate owned activity includes income and expenses from property
                  held for sale and other real estate we own, including real estate
                  acquired in settlement of loans. For the years ended December 31,
                  2010 and 2009, our expenses related to owning the real estate
                  exceeded income received on the properties by $674,000 and $342,000,
                  respectively. During 2010, we received rental income of $165,000,
                  incurred expenses of $168,000 and recorded write-downs or losses on
                  sale of $671,000. During 2009 and 2008, we had net losses of $342,000
                  and $140,000, respectively. 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, sale of customer checks, and fees received
                  on wire transfers. Other income was $473,000 and $376,000 for the
                  years ended December 31, 2010 and 2009, respectively. The $97,000
                  increase resulted primarily from a $72,000 increase in debit card
                  transaction fees and a $25,000 increase in other client service
                  related fees. Debit card transaction fees were $340,000 and $268,000
                  for the years ended December 31, 2010 and 2009, respectively and
                  represented 71.9% and 71.3% of total other income for the 2010 and
                  2009 periods, respectively. The corresponding transaction costs
                  associated with debit card transactions are included in outside
                  service expense. The debit card transaction costs were $128,000 and
                  $98,000 for the years ended December 31, 2010 and 2009, 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, 2010 and 2009 was $212,000 and $170,000, respectively. 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 $230,000 for the year ended December 31, 2008 and represented
                  70.6% of total other income for the year ended December 31, 2008. The
                  corresponding transaction costs associated with debit card
                  transactions were approximately $92,000 for the year ended December
                  31, 2008 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, 2008 was $138,000. Noninterest Expenses The following tables set forth information related to our noninterest
                  expenses (dollars in thousands).  Years ended December 31,2010
                           
                           
                           2009
                           
                           
                           2008Compensation and benefits
                           
                           $
                           8,245
                           
                           $
                           7,840
                           
                           $
                           6,817Professional fees
                           
                           
                           659
                           
                           
                           650
                           
                           
                           525Marketing
                           
                           
                           690
                           
                           
                           659
                           
                           
                           583Insurance
                           
                           
                           1,533
                           
                           
                           1,433
                           
                           
                           560Occupancy
                           
                           
                           2,135
                           
                           
                           1,938
                           
                           
                           1,554Data processing and related costs
                           
                           
                           1,624
                           
                           
                           1,451
                           
                           
                           1,352Telephone
                           
                           
                           303
                           
                           
                           266
                           
                           
                           176Other
                           
                           
                           701
                           
                           
                           814
                           
                           
                           754Total noninterest expenses
                           
                           $
                           15,890
                           
                           $
                           15,051
                           
                           $
                           12,321 We incurred noninterest expenses of $15.9 million for the year ended
                  December 31, 2010 compared to $15.1 million and $12.3 million for the
                  years ended December 31, 2009 and 2008, respectively. For the year
                  ended December 31, 2010 compensation and benefits, occupancy, and
                  data processing and related costs accounted for 75.5% of the total
                  noninterest expenses compared to 74.6% in 2009 and 78.9% in 2008. Our efficiency ratio was 70.5% for the year ended December 31, 2010
                  compared to 70.2% and 61.6% for the same periods in 2009 and 2008.
                  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
 39


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 years ended
                  December 31, 2010 and 2009, compared to the same period in 2008. The following tables set forth information related to our
                  compensation and benefits (dollars in thousands).  Years ended December 31,2010
                           
                           
                           2009
                           
                           
                           2008Base compensation
                           
                           $
                           6,395
                           
                           $
                           5,799
                           
                           $
                           4,960Incentive compensation
                           
                           
                           504
                           
                           
                           702
                           
                           
                           758Total compensation
                           
                           
                           6,899
                           
                           
                           6,501
                           
                           
                           5,718Benefits
                           
                           
                           1,479
                           
                           
                           1,479
                           
                           
                           1,249Capitalized loan origination costs
                           
                           
                           (133
                           )
                           
                           (140
                           )
                           
                           (150
                           )Total compensation and benefits
                           
                           $
                           8,245
                           
                           $
                           7,840
                           
                           $
                           6,817 Total compensation and benefits expense was $8.3 million, $7.8
                  million and $6.8 million for the years ended December 31, 2010, 2009
                  and 2008, respectively. Compensation and benefits represented 51.9%
                  of our total noninterest expenses for the year ended December 31,
                  2010, 52.1% for the 2009 period, and 55.3% for the 2008 period. The
                  $405,000 increase in compensation and benefits expense in 2010
                  compared to 2009 is primarily related to a $596,000 increase in base
                  compensation, partially offset by a $198,000 reduction in incentive
                  compensation. 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 $7,000 during the
                  2010 period. Compensation and benefits expense increased by $1.0 million in 2009
                  compared to 2008. The increase is a result of $839,000 additional
                  base compensation and $230,000 of additional benefits cost, partially
                  offset by a reduction in incentive compensation of $56,000. Loan
                  origination costs decreased $10,000 during the 2009 period. The $596,000 increase in base compensation expense for the year ended
                  December 31, 2010, compared to the same period in 2009, related
                  primarily to the cost of the additional employees hired to staff our
                  new regional headquarters in Columbia, South Carolina, as well as
                  annual salary increases. The $839,000 increase in base compensation
                  expense in 2009 compared to 2008, related to the addition of 13
                  employees, plus the impact of 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 added positions in mortgage origination,
                  credit and client services. Incentive compensation decreased $198,000 and $56,000 for the years
                  ended December 31, 2010 and 2009, respectively compared to the 2009
                  and 2008 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
                  2010 and 2009. For the year ended December 31, 2010, incentive
                  compensation represented 7.3% of total compensation, compared to
                  10.8% and 13.3% for the years ended December 31, 2009 and 2008,
                  respectively. The incentive compensation expense recorded for the
                  years 2010, 2009, and 2008 represented an accrual of the estimated
                  incentive compensation earned during the respective year. Benefits expense for both years ended December 31, 2010 and 2009 was
                  $1.5 million and $1.3 million for the year ended December 31, 2008.
                  Benefits expense represented 21.4%, 22.8%, and 21.8% of the total
                  compensation for the years ended December 31, 2010, 2009, and 2008,
                  respectively. The following tables set forth information related to our data
                  processing and related costs (dollars in thousands).  Years ended December 31,2010
                           
                           
                           2009
                           
                           
                           2008Data processing costs
                           
                           $
                           1,223
                           
                           $
                           1,087
                           
                           $
                           1,032Debit card transaction expense
                           
                           
                           128
                           
                           
                           98
                           
                           
                           92Courier expense
                           
                           
                           111
                           
                           
                           112
                           
                           
                           104Other expenses
                           
                           
                           162
                           
                           
                           154
                           
                           
                           124Total data processing and related costs
                           
                           $
                           1,624
                           
                           $
                           1,451
                           
                           $
                           1,352 Total data processing and related costs were $1.6 million, $1.5
                  million and $1.4 million for the years ended December 31, 2010, 2009
                  and 2008, respectively. During the year ended December 31, 2010, our
                  data processing costs for our core processing system increased by
                  $136,000 to $1.2 million compared to $1.1 million for the same period
                  in 2009. Data processing costs for our core processing system were
                  $1.0 million for the year ended December 31, 2008.
 40


We have contracted with an outside computer service company to
                  provide our core data processing services. Data processing costs
                  increased $136,000, or 12.5%, for the year ended December 31, 2010
                  and $55,000, or 5.3%, for the year ended December 31, 2009 compared
                  to the same periods in 2009 and 2008, respectively. 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. Our electronic banking and credit bureau
                  fees, specifically, have increased as we have grown our client base
                  during the year ended December 31, 2010. We receive income from debit card transactions performed by our
                  clients. Since we outsource this service, we are charged related
                  transaction expenses by our merchant service provider. Debit card
                  transaction expense was $128,000 and $98,000 for the years ended
                  December 31, 2010 and 2009, respectively, and $92,000 for the year
                  ended December 31, 2008. Occupancy expense represented 13.4%, 12.9% and 12.6% of total
                  noninterest expenses for the years ended December 31, 2010, 2009, and
                  2008, respectively. Occupancy expense increased $197,000 to $2.1
                  million for the year ended December 31, 2010 from $1.9 million for
                  the same period in 2009. The increase is due primarily to the
                  expenses related to our new regional headquarters in Columbia, South
                  Carolina which opened in August 2009. During 2009, occupancy expense
                  increased $384,000 from $1.6 million for the year ended December 31,
                  2008, due primarily to the additional expenses associated with our
                  two new retail offices opened in July 2008. The remaining $64,000 increase in general and administrative expenses
                  for the year ended December 31, 2010, compared to the same period in
                  2009, resulted primarily from increases of $100,000 in insurance
                  expenses, $9,000 in professional fees, $31,000 in marketing expenses,
                  $37,000 in telephone expenses, partially offset by a decrease of
                  $113,000 in other expenses. The increase in insurance expense is
                  primarily related to a general increase in the assessment rate used
                  to calculate FDIC insurance premiums as well as an increased
                  assessment from the OCC. The increases in marketing and telephone
                  expenses are essentially due to increased community support and
                  additional marketing efforts in our two primary markets and to
                  additional communication costs associated with our new regional
                  headquarters in Columbia, South Carolina. In addition, the $113,000
                  decrease in other expense is primarily due to a $52,000 decrease in
                  general office supplies as well as a $58,000 decrease in decrease in
                  collection expenses. Contributing to the increase in noninterest expenses for the year
                  ended December 31, 2009 compared to the same period in 2008 were
                  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 during 2009 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. Income tax expense was $193,000, $345,000 and $626,000 for the years
                  ended December 31, 2010, 2009 and 2008, respectively. Our effective
                  tax rate was 17.8% for the year ended December 31, 2010, and 19.6%
                  and 25.3% for the years ended December 31, 2009 and 2008,
                  respectively. The lower net income during these years, combined with
                  additional tax-exempt income from bank owned life insurance and state
                  and municipal investment securities, increased the impact that our
                  tax-exempt income had in lowering our effective tax rate. Balance Sheet Review General At December 31, 2010, we had total assets of $736.5 million,
                  consisting principally of $572.4 million in loans, $72.9 million in
                  investments, $49.7 million in federal funds sold, and $14.5 million
                  in bank owned life insurance. Our liabilities at December 31, 2010
                  totaled $677.3 million, consisting principally of $536.3 million in
                  deposits, $122.7 million in FHLB advances and related debt, and $13.4
                  million of junior subordinated debentures. At December 31, 2010, our
                  shareholders' equity was $59.2 million. 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.
 41


Federal Funds Sold At December 31, 2010, our $49.7 million in short-term investments in
                  federal funds sold on an overnight basis comprised 6.8% of total
                  assets, compared to $6.5 million, or 0.9% of total assets, at
                  December 31, 2009. Investments At December 31, 2010, the $72.9 million in our investment securities
                  portfolio represented approximately 9.9% of our total assets. We held
                  Government sponsored enterprise securities, municipal securities, and
                  mortgage-backed securities with a fair value of $63.8 million and an
                  amortized cost of $64.9 million for an unrealized loss of $1.1
                  million. The amortized costs and the fair value of our investments at December
                  31, 2010, 2009, and 2008 are shown in the following table (dollars in
                  thousands).  2010
                           
                           
                           2009
                           
                           
                           2008Amortized
                           
                           
                           Fair
                           
                           
                           Amortized
                           
                           
                           Fair
                           
                           
                           Amortized
                           
                           
                           FairCost
                           
                           
                           Value
                           
                           
                           Cost
                           
                           
                           Value
                           
                           
                           Cost
                           
                           
                           ValueAvailable for SaleGovernment sponsored enterprises
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           11,615
                           
                           $
                           11,540
                           
                           $
                           18,483
                           
                           $
                           18,708State and political subdivisions
                           
                           
                           11,331
                           
                           
                           11,166
                           
                           
                           5,267
                           
                           
                           5,309
                           
                           
                           3,790
                           
                           
                           3,772Mortgage-backed securities
                           
                           
                           53,518
                           
                           
                           52,617
                           
                           
                           58,580
                           
                           
                           59,346
                           
                           
                           43,700
                           
                           
                           41,886Preferred stock
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           84
                           
                           
                           66Total
                           
                           $
                           64,849
                           
                           $
                           63,783
                           
                           $
                           75,462
                           
                           $
                           76,195
                           
                           $
                           66,057
                           
                           $
                           64,432Held to MaturityMortgage-backed securities
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           9,225
                           
                           $
                           9,516
                           
                           $
                           12,519
                           
                           $
                           12,618 Contractual maturities and yields on our investments at December 31,
                  2010 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, 2010, 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 SaleState and political subdivisions
                           
                           $
                           -
                           
                           
                           -
                           
                           $
                           5,719
                           
                           
                           3.10
                           %
                           $
                           5,447
                           
                           
                           3.66
                           %
                           $
                           11,166
                           
                           
                           3.37
                           %Mortgage-backed securities
                           
                           
                           95
                           
                           
                           3.98
                           %
                           
                           -
                           
                           
                           -
                           
                           
                           52,522
                           
                           
                           2.58
                           %
                           
                           52,617
                           
                           
                           2.59
                           %Total
                           
                           $
                           95
                           
                           
                           3.98
                           %
                           $
                           5,719
                           
                           
                           3.10
                           %
                           $
                           57,969
                           
                           
                           2.71
                           %
                           $
                           63,783
                           
                           
                           2.74
                           % At December 31, 2010, the Company had 27 individual investments that
                  were in an unrealized loss position for less than 12 months. The
                  unrealized losses were primarily attributable to changes in interest
                  rates, rather than deterioration in credit quality. The majority of
                  these securities are government or agency securities currently rated
                  AA or AAA by Moody or Standard and Poor's, and therefore, pose
                  minimal credit risk. The Company considers the length of time and
                  extent to which the fair value of available-for-sale debt securities
                  have been less than cost to conclude that such securities were not
                  other-than-temporarily impaired. We also consider other factors such
                  as the financial condition of the issuer including credit ratings and
                  specific events affecting the operations of the issuer, volatility of
                  the security, underlying assets that collateralize the debt security,
                  and other industry and macroeconomic conditions. As the Company has
                  no intent to sell securities with unrealized losses and it is not
                  more-likely-than-not that the Company will be required to sell these
                  securities before recovery of amortized cost, we have concluded that
                  the securities are not impaired on an other-than-temporary basis. Included in our investment portfolio at December 31, 2010 is one
                  private-label collateralized mortgage backed security with a book
                  value of $2.9 million, approximate fair value of $2.5 million and a
                  Standard and Poor's rating of BBB-. The CMO is collateralized by
                  single-family residences concentrated in Georgia and Florida, for
                  which approximately 41% of the underlying loans have limited
                  documents. Although these are not classified as sub-prime obligations
                  or considered the "high risk" tranches, the majority of "structured"
                  investments within all credit markets have been impacted by
                  volatility and credit concerns and economic stresses throughout 2008
                  and 2009 and continuing into 2010. The result has been that the
                  market for these investments has become significantly less liquid and
                  the spread as compared to alternative investments has widened
                  dramatically. Due to this illiquidity, the Company has recorded a
                  liquidity discount in the form of an unrealized loss of $350,000
                  related to the private-label CMO.
 42


The Company evaluates this security for other-than-temporary
                  impairment quarterly based on the Bloomberg Default model which uses
                  relevant assumptions such as prepayment rate, default rate and loss
                  severity in determining the expected recovery of the contractual cash
                  flows. The average prepayment speed (CPR), default rate (CDR) and
                  severity used in the valuation were approximately 6%, 1%, and 38%,
                  respectively. Other investments are comprised of the following and are recorded at
                  cost which approximates fair value (dollars in thousands):  December 31, 2010
                           
                           
                           
                           
                           
                           December 31, 2009Federal Reserve Bank stock
                           
                           $
                           1,485
                           
                           
                           
                           
                           $
                           1,485Federal Home Loan Bank stock
                           
                           
                           6,333
                           
                           
                           
                           
                           
                           7,088Certificates of deposit
                           
                           
                           849
                           
                           
                           
                           
                           
                           99Investment in Trust Preferred subsidiaries
                           
                           
                           403
                           
                           
                           
                           
                           
                           403Investment receivable
                           
                           
                           -
                           
                           
                           
                           
                           
                           138$
                           9,070
                           
                           
                           
                           
                           $
                           9,213 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, 2010 and 2009 were $579.4 million and $568.6
                  million, respectively. Before allowance for loan losses, total loans
                  outstanding at December 31, 2010 and 2009 were $572.4 million and
                  $574.3 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, 2010 (dollars in
                  thousands). The $41.6 million decrease in commercial construction
                  loans during the past 2 years is primarily due to projects being
                  completed and the loan restructured into a permanent loan either with
                  our bank or another financial institution.  2010
                           
                           
                           2009
                           
                           
                           2008
                           
                           
                           2007
                           
                           
                           2006%of
                           
                           
                           
                           
                           
                           %of
                           
                           
                           
                           
                           
                           %of
                           
                           
                           
                           
                           
                           %of
                           
                           
                           
                           
                           
                           %ofAmount
                           
                           
                           Total
                           
                           
                           Amount
                           
                           
                           Total
                           
                           
                           Amount
                           
                           
                           Total
                           
                           
                           Amount
                           
                           
                           Total
                           
                           
                           Amount
                           
                           
                           TotalReal Estate:CommercialOwner Occupied
                           
                           $
                           137,873
                           
                           
                           24.1
                           %
                           $
                           132,569
                           
                           
                           23.1
                           %
                           $
                           113,370
                           
                           
                           20.0
                           %
                           $
                           114,168
                           
                           
                           22.4
                           %
                           $
                           77,668
                           
                           
                           19.3
                           %Non-owner occupied
                           
                           
                           163,971
                           
                           
                           28.6
                           %
                           
                           160,460
                           
                           
                           27.9
                           %
                           
                           151,274
                           
                           
                           26.7
                           %
                           
                           147,478
                           
                           
                           29.0
                           %
                           
                           126,008
                           
                           
                           31.3
                           %Construction
                           
                           
                           11,344
                           
                           
                           2.0
                           %
                           
                           22,741
                           
                           
                           4.0
                           %
                           
                           52,981
                           
                           
                           9.4
                           %
                           
                           38,464
                           
                           
                           7.6
                           %
                           
                           20,466
                           
                           
                           5.1
                           %Total commercial real estate
                           
                           
                           313,188
                           
                           
                           54.7
                           %
                           
                           315,770
                           
                           
                           55.0
                           %
                           
                           317,625
                           
                           
                           56.1
                           %
                           
                           300,110
                           
                           
                           59.0
                           %
                           
                           224,142
                           
                           
                           55.7
                           %ConsumerResidential
                           
                           
                           54,161
                           
                           
                           9.5
                           %
                           
                           55,377
                           
                           
                           9.6
                           %
                           
                           60,336
                           
                           
                           10.7
                           %
                           
                           59,815
                           
                           
                           11.7
                           %
                           
                           59,187
                           
                           
                           14.7
                           %Home equity
                           
                           
                           79,528
                           
                           
                           13.9
                           %
                           
                           74,348
                           
                           
                           13.0
                           %
                           
                           62,987
                           
                           
                           11.1
                           %
                           
                           46,806
                           
                           
                           9.2
                           %
                           
                           35,986
                           
                           
                           9.0
                           %Construction
                           
                           
                           8,569
                           
                           
                           1.5
                           %
                           
                           7,940
                           
                           
                           1.4
                           %
                           
                           8,905
                           
                           
                           1.5
                           %
                           
                           7,153
                           
                           
                           1.4
                           %
                           
                           8,259
                           
                           
                           2.0
                           %Total consumer real estate
                           
                           
                           142,258
                           
                           
                           24.9
                           %
                           
                           137,665
                           
                           
                           24.0
                           %
                           
                           132,228
                           
                           
                           23.3
                           %
                           
                           113,774
                           
                           
                           22.3
                           %
                           
                           103,432
                           
                           
                           25.7
                           %Total real estate
                           
                           
                           455,446
                           
                           
                           79.6
                           %
                           
                           453,435
                           
                           
                           79.0
                           %
                           
                           449,853
                           
                           
                           79.4
                           %
                           
                           413,884
                           
                           
                           81.3
                           %
                           
                           327,574
                           
                           
                           81.4
                           %Commercial business
                           
                           
                           109,450
                           
                           
                           19.1
                           %
                           
                           110,539
                           
                           
                           19.3
                           %
                           
                           106,479
                           
                           
                           18.8
                           %
                           
                           86,863
                           
                           
                           17.1
                           %
                           
                           65,891
                           
                           
                           16.4
                           %Consumer - other
                           
                           
                           8,079
                           
                           
                           1.4
                           %
                           
                           11,021
                           
                           
                           1.9
                           %
                           
                           11,194
                           
                           
                           2.0
                           %
                           
                           9,051
                           
                           
                           1.8
                           %
                           
                           9,524
                           
                           
                           2.4
                           %Deferred origination fees, net
                           
                           
                           (583
                           )
                           
                           (0.1
                           )%
                           
                           (725
                           )
                           
                           (0.2
                           )%
                           
                           (919
                           )
                           
                           (0.2
                           )%
                           
                           (949
                           )
                           
                           (0.2
                           )%
                           
                           (806
                           )
                           
                           (0.2
                           )%Total gross loans, net of deferred fees
                           
                           
                           572,392
                           
                           
                           100.0
                           %
                           
                           574,270
                           
                           
                           100.0
                           %
                           
                           566,607
                           
                           
                           100.0
                           %
                           
                           508,849
                           
                           
                           100.0
                           %
                           
                           402,183
                           
                           
                           100.0
                           %Less - allowance for loan losses
                           
                           
                           (8,386
                           )
                           
                           
                           
                           
                           (7,760
                           )
                           
                           
                           
                           
                           (7,005
                           )
                           
                           
                           
                           
                           (5,751
                           )
                           
                           
                           
                           
                           (4,949
                           )Total loans, net
                           
                           $
                           564,006
                           
                           
                           
                           
                           $
                           566,510
                           
                           
                           
                           
                           $
                           559,602
                           
                           
                           
                           
                           $
                           503,098
                           
                           
                           
                           
                           $
                           397,234
 43


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, 2010
                  (dollars in thousands).  One yearor less
                           
                           
                           After onebut withinfive years
                           
                           
                           After fiveyears
                           
                           
                           TotalReal estate - mortgage
                           
                           $
                           99,026
                           
                           $
                           257,649
                           
                           $
                           78,858
                           
                           $
                           435,533Real estate - construction
                           
                           
                           13,800
                           
                           
                           4,659
                           
                           
                           1,454
                           
                           
                           19,913Total real estate
                           
                           
                           112,826
                           
                           
                           262,308
                           
                           
                           80,312
                           
                           
                           455,446Commercial
                           
                           
                           53,677
                           
                           
                           53,933
                           
                           
                           1,840
                           
                           
                           109,450Consumer - other
                           
                           
                           4,162
                           
                           
                           3,338
                           
                           
                           579
                           
                           
                           8,079Deferred origination fees, net
                           
                           
                           (180
                           )
                           
                           (319
                           )
                           
                           (84
                           )
                           
                           (583
                           )Total gross loan, net of deferred fees
                           
                           $
                           170,485
                           
                           $
                           319,260
                           
                           $
                           82,647
                           
                           $
                           572,392Loans maturing - after one year withFixed interest rates
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           $
                           200,230Floating interest rates
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           $
                           201,677 Provision and Allowance for Loan Losses We have established an allowance for loan losses through a provision
                  for loan losses charged as an expense. Loan losses are charged
                  against the allowance when management believes the uncollectibility
                  of a loan balance, either in whole or in part, is confirmed.
                  Subsequent recoveries, if any, are credited to the allowance. In conjunction with the changes in the current economic environment
                  and as required by our Formal Agreement with the OCC, we have revised
                  and updated our allowance for losses policy. Management regularly
                  evaluates the allowance for loan losses and periodically reviews 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. Periodically, we adjust the amount of the allowance based
                  on changing circumstances. We maintain an unallocated component of the allowance in order to
                  reflect the margin of imprecision inherent in the underlying
                  assumptions used in the methodologies for estimating specific and
                  general losses in the portfolio. Uncertainties and 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 or problem loans, quality of loan review
                  and board of director oversight, concentrations of credit, and peer
                  group comparisons are factors considered in determining the
                  unallocated portion. 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 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.
 44


A significant portion of the loans in our loan portfolio have been
                  originated in the past five years. 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 known as seasoning.
                  The benefit of having time for loans to "season," is that it allows a
                  company to evaluate how loans perform during different economic
                  cycles. We believe that the recent prolonged recession has allowed us
                  to evaluate the performance of our loan portfolio during "stressful"
                  times. 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. 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. At December 31, 2010 and December 31, 2009, the allowance for loan
                  losses was $8.4 million and $7.8 million, respectively, or 1.47% and
                  1.35% of outstanding loans, respectively. During the years ended
                  December 31, 2010 and 2009, our net charged-off loans were $5.0
                  million and $3.6 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. The following table summarizes the activity related to our allowance
                  for loan losses for the five years ended December 31, 2010 (dollars
                  in thousands).  December 31,2010
                           
                           
                           2009
                           
                           
                           2008
                           
                           
                           2007
                           
                           
                           2006Balance, beginning of year
                           
                           $
                           7,760
                           
                           $
                           7,005
                           
                           $
                           5,751
                           
                           $
                           4,949
                           
                           $
                           4,490Charge-offs:Commercial
                           
                           
                           (2,873
                           )
                           
                           (1,640
                           )
                           
                           (647
                           )
                           
                           (74
                           )
                           
                           (65
                           )Real estate-construction
                           
                           
                           (659
                           )
                           
                           (1,351
                           )
                           
                           (1,150
                           )
                           
                           (1,085
                           )
                           
                           (181
                           )Real estate-mortgage
                           
                           
                           (1,457
                           )
                           
                           (540
                           )
                           
                           (109
                           )
                           
                           (80
                           )
                           
                           (982
                           )Consumer
                           
                           
                           (171
                           )
                           
                           (133
                           )
                           
                           (29
                           )
                           
                           (57
                           )
                           
                           (78
                           )Total charge-offs
                           
                           
                           (5,160
                           )
                           
                           (3,664
                           )
                           
                           (1,935
                           )
                           
                           (1,296
                           )
                           
                           (1,306
                           )Recoveries:Commercial
                           
                           
                           167
                           
                           
                           92
                           
                           
                           17
                           
                           
                           -
                           
                           
                           8Real estate-construction
                           
                           
                           1
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -Real estate-mortgage
                           
                           
                           6
                           
                           
                           14
                           
                           
                           11
                           
                           
                           33
                           
                           
                           65Consumer
                           
                           
                           2
                           
                           
                           3
                           
                           
                           -
                           
                           
                           15
                           
                           
                           42Total recoveries
                           
                           
                           176
                           
                           
                           109
                           
                           
                           28
                           
                           
                           48
                           
                           
                           115Net loans charged-off
                           
                           $
                           (4,984
                           )
                           $
                           (3,555
                           )
                           $
                           (1,907
                           )
                           $
                           (1,248
                           )
                           $
                           (1,191
                           )Provision for loan losses
                           
                           
                           5,610
                           
                           
                           4,310
                           
                           
                           3,161
                           
                           
                           2,050
                           
                           
                           1,650Balance, end of year
                           
                           $
                           8,386
                           
                           $
                           7,760
                           
                           $
                           7,005
                           
                           $
                           5,751
                           
                           $
                           4,949Allowance for loan losses to gross loans
                           
                           
                           1.47
                           %
                           
                           1.35
                           %
                           
                           1.24
                           %
                           
                           1.13
                           %
                           
                           1.23
                           %Net charge-offs to average loans
                           
                           
                           0.86
                           %
                           
                           0.63
                           %
                           
                           0.35
                           %
                           
                           0.27
                           %
                           
                           0.32
                           % Nonperforming Assets The following table shows the nonperforming assets and the related
                  percentage of nonperforming assets to total assets and gross loans
                  for the five years ended December 31, 2010 (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.  December 31,2010
                           
                           
                           2009
                           
                           
                           2008
                           
                           
                           2007
                           
                           
                           2006Loans on nonaccrual:Mortgage
                           
                           $
                           7,194
                           
                           $
                           7,964
                           
                           $
                           6,818
                           
                           $
                           4,316
                           
                           $
                           1,424Commercial
                           
                           
                           2,125
                           
                           
                           3,702
                           
                           
                           868
                           
                           
                           75
                           
                           
                           32Consumer
                           
                           
                           7
                           
                           
                           75
                           
                           
                           13
                           
                           
                           45
                           
                           
                           33Total nonaccrual loans
                           
                           
                           9,326
                           
                           
                           11,741
                           
                           
                           7,699
                           
                           
                           4,436
                           
                           
                           1,489
 45


December 31,2010
                        
                        
                        2009
                        
                        
                        2008
                        
                        
                        2007
                        
                        
                        2006Total of nonperforming loans
                        
                        
                        9,326
                        
                        
                        11,741
                        
                        
                        7,699
                        
                        
                        4,436
                        
                        
                        1,489Real estate acquired in settlement of loans
                        
                        
                        5,629
                        
                        
                        3,704
                        
                        
                        2,116
                        
                        
                        268
                        
                        
                        1,012Total nonperforming assets
                        
                        $
                        14,955
                        
                        $
                        15,445
                        
                        $
                        9,815
                        
                        $
                        4,704
                        
                        $
                        2,501Loans over 90 days past due (1)
                        
                        $
                        6,439
                        
                        $
                        4,686
                        
                        $
                        7,008
                        
                        $
                        4,582
                        
                        $
                        945Nonperforming assets as a percentage of:Total assets
                        
                        
                        2.03
                        %
                        
                        2.15
                        %
                        
                        1.42
                        %
                        
                        0.75
                        %
                        
                        0.49
                        %Gross loans
                        
                        
                        2.61
                        %
                        
                        2.69
                        %
                        
                        1.73
                        %
                        
                        0.92
                        %
                        
                        0.62
                        %(1) Loans over 90 days are included in nonaccrual loans At December 31, 2010, nonperforming assets were $15.0 million, or
                  2.03% of total assets and 2.61% of gross loans. Comparatively,
                  nonperforming assets were $15.5 million, or 2.15% of total assets and
                  2.69% of gross loans at December 31, 2009. Nonaccrual loans decreased
                  $2.4 million to $9.3 million at December 31, 2010 from $11.7 million
                  at December 31, 2009. The decrease is due primarily to the transfer
                  of 6 properties totaling $3.4 million to real estate acquired in
                  settlement of loans. In addition, we have added $4.6 million or 21
                  new loans to nonaccrual while removing or charging off $3.6 million
                  or 13 non-accrual loans from 2009. The amount of foregone interest
                  income on the nonaccrual loans for the years ended December 31, 2010
                  and 2009 was approximately $376,000 and $638,000, respectively. The
                  amount of interest income recorded in 2010 for loans that were on
                  nonaccrual at December 31, 2010 was approximately $255,000 and
                  approximately $305,000 in 2009. Other nonperforming assets include real estate acquired in settlement
                  of loans. These assets increased $1.9 million to $5.6 million at
                  December 31, 2010 from $3.7 million at December 31, 2009. The balance
                  at December 31, 2010 includes 10 commercial properties for $4.3
                  million and 2 pieces of residential real estate totaling $1.4
                  million. We believe that these properties are appropriately valued at
                  the lower of cost or market as of December 31, 2010. Subsequent to
                  December 31, 2010, we sold one large residential property which was
                  recorded at $1.3 million, reducing our real estate acquired in
                  settlement of loans to $4.3 million. In conjunction with the changes
                  in the current economic environment and as required by our Formal
                  Agreement with the OCC, we have revised and updated our credit risk
                  policy which addresses treatment of other real estate owned. As a general practice, most of our loans are originated with
                  relatively short maturities of five years or less. As a result, when
                  a loan reaches its maturity we frequently renew the loan and thus
                  extend its maturity using the same credit standards as those used
                  when the loan was first originated. Due to these loan practices, we
                  may, at times, renew loans which are classified as nonperforming
                  after evaluating the loan's collateral value and financial strength
                  of its guarantors. Nonperforming loans are renewed at terms generally
                  consistent with the ultimate source of repayment and rarely at
                  reduced rates. In these cases the Bank will seek additional credit
                  enhancements, such as additional collateral or additional guarantees
                  to further protect the loan. When a loan is no longer performing in
                  accordance with its stated terms, the Bank will typically seek
                  performance under the guarantee. In addition, approximately 80% of our loans are collateralized by
                  real estate and over 81% of our impaired loans are secured by real
                  estate. The Bank utilizes third party appraisers to determine the
                  fair value of collateral dependent loans. Our current loan and
                  appraisal policies require the Bank to obtain updated appraisals on
                  an annual basis, either through a new external appraisal or an
                  appraisal evaluation. Impaired loans are individually reviewed on a
                  quarterly basis to determine the level of impairment. As of December
                  31, 2010, we do not have any impaired loans carried at a value in
                  excess of the appraised value. We typically charge-off a portion or
                  create a specific reserve for impaired loans when we do not expect
                  repayment to occur as agreed upon under the original terms of the
                  loan agreement. At December 31, 2010, impaired loans amounted to approximately $9.3
                  million for which $6.0 million of these loans have a reserve of
                  approximately $1.9 million allocated in the allowance. During 2010,
                  the average recorded investment in impaired loans was approximately
                  $10.1 million. At December 31, 2009, impaired loans amounted to
                  approximately $10.9 million for which $5.9 million of these loans had
                  a reserve of approximately $1.1 million allocated in the allowance.
                  During 2009, the average recorded investment in impaired loans was
                  approximately $9.1 million. As of December 31, 2010 we had approximately $1.7 million of
                  potential problem loans, primarily loans with a risk rating of
                  special mention or substandard, 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. We
                  monitor these loans closely and review performance on a regular basis. The Company's loan approval process includes review of modifications
                  on all criticized loans greater than $100,000.  A loan is considered
                  to be a troubled debt restructuring ("TDR") when the debtor was
                  experiencing financial difficulties and the
 46


Company provided concessions such that we will not collect all
                  principal and interest in accordance with the original terms of the
                  loan agreement.  As of December 31, 2010 and 2009, we determined that
                  we had two loans totaling $488,000 and $482,000, respectively, which
                  we considered TDRs. These loans are included in the nonaccrual loan
                  amounts in the above table. 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. In accordance with our Formal Agreement, we
                  have adopted guidelines regarding our use of brokered CDs that limit
                  our brokered CDs to 25% 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 $86.4 million at December
                  31, 2010 and $147.9 at December 31, 2009. As our wholesale deposits
                  have matured during the past two years, we have successfully replaced
                  them with local deposits. While wholesale deposits decreased $114.6
                  million during 2010 and 2009, our retail deposits have increased
                  $181.3 million. We anticipate being 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 107%, 116%, and 121% at December 31, 2010,
                  2009, and 2008, 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,
                  2010, 2009, and 2008 (dollars in thousands).  2010
                           
                           
                           2009
                           
                           
                           2008Amount
                           
                           
                           Rate
                           
                           
                           Amount
                           
                           
                           Rate
                           
                           
                           Amount
                           
                           
                           RateNoninterest bearing demand deposits
                           
                           $
                           45,957
                           
                           
                           -
                           %
                           $
                           36,509
                           
                           
                           -
                           %
                           $
                           33,815
                           
                           
                           -
                           %Interest bearing demand deposits
                           
                           
                           96,901
                           
                           
                           1.27
                           %
                           
                           43,465
                           
                           
                           0.69
                           %
                           
                           38,850
                           
                           
                           1.03
                           %Money market accounts
                           
                           
                           94,398
                           
                           
                           1.00
                           %
                           
                           84,342
                           
                           
                           1.13
                           %
                           
                           87,617
                           
                           
                           1.93
                           %Savings accounts
                           
                           
                           2,785
                           
                           
                           0.21
                           %
                           
                           2,164
                           
                           
                           0.16
                           %
                           
                           1,865
                           
                           
                           0.33
                           %Time deposits less than $100,000
                           
                           
                           78,837
                           
                           
                           2.16
                           %
                           
                           50,635
                           
                           
                           2.88
                           %
                           
                           48,639
                           
                           
                           3.92
                           %Time deposits greater than $100,000
                           
                           
                           212,292
                           
                           
                           2.61
                           %
                           
                           267,620
                           
                           
                           2.73
                           %
                           
                           254,415
                           
                           
                           4.25
                           %Total deposits
                           
                           $
                           531,170
                           
                           
                           1.78
                           %
                           $
                           484,735
                           
                           
                           2.07
                           %
                           $
                           465,201
                           
                           
                           3.18
                           % The $28.2 million increase in time deposits less than $100,000 for
                  the year ended December 31, 2010 compared to the 2009 period and the
                  $55.3 million decrease in time deposits of $100,000 or more is a
                  result of our intense focus to replace our out-of-market deposits
                  with local deposits. 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 $356.6 million, $246.8 million, and $205.9 million at December
                  31, 2010, 2009 and 2008, 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,
                  2010 and 2009 is as follows (dollars in thousands):  2010
                           
                           
                           2009Three months or less
                           
                           $
                           36,196
                           
                           $
                           51,945Over three through six months
                           
                           
                           37,715
                           
                           
                           32,859Over six through twelve months
                           
                           
                           33,176
                           
                           
                           69,672Over twelve months
                           
                           
                           72,336
                           
                           
                           91,448Total
                           
                           $
                           179,423
                           
                           $
                           245,924 The Dodd-Frank Act also permanently raises the current standard
                  maximum deposit insurance amount to $250,000. The standard maximum
                  insurance amount of $100,000 had been temporarily raised to $250,000
                  until December 31, 2013. The FDIC insurance
 47


coverage limit applies per depositor, per insured depository
                  institution for each account ownership category. In addition, we are
                  voluntarily participating in the FDIC's TAGP. Under this program, all
                  noninterest-bearing transaction accounts are fully guaranteed by the
                  FDIC for the entire amount of the account. On April 13, 2010, the
                  FDIC approved an interim rule that extended the TAGP to December 31,
                  2010. We have elected to continue our voluntary participation in the
                  program. Coverage under the program is in addition to and separate
                  from the basic coverage available under the FDIC's general deposit
                  insurance rules. We believe participation in the program is enhancing
                  our ability to retain customer deposits. On September 1, 2010, we entered into new agreements with the FHLB on
                  three of our FHLB advances totaling $37.5 million.  In accordance
                  with EITF 96-19, we determined that the fair value of the modified
                  advances will not change by more than 10% from the fair value of the
                  original advance. Therefore, the modified FHLB advances are
                  considered to be a restructuring and no gain or loss is recorded. 
                  The original FHLB advances had a weighted rate of 4.65% and an
                  average remaining life of 18 months.  Under the modified
                  arrangements, the $37.5 million in FHLB advances have a weighted
                  average rate of 2.67% and an average remaining life of 43 months. Capital Resources Total shareholders' equity was $59.2 million at December 31, 2010 and
                  $59.8 million at December 31, 2009. 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 363,609.4 shares of our common stock
                  (adjusted for the stock dividend in 2011) 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
                  $7.136 per share of the common stock (adjusted for the stock dividend
                  in 2011). On June 8, 2010, the Bank entered into a Formal Agreement with its
                  primary regulator, the OCC. The Formal Agreement seeks to enhance the
                  Bank's existing practices and procedures in the areas of credit risk
                  management, credit underwriting, liquidity, and funds management. In
                  addition, the OCC has established Individual Minimum Capital Ratio
                  levels of Tier 1 and total capital for the Bank that are higher than
                  the minimum and well capitalized ratios applicable to all banks.
                  Specifically, we must maintain total risk-based capital of at least
                  12%, Tier 1 capital of at least 10%, and a leverage ratio of at least
                  9%. The Board of Directors and management of the Bank have
                  aggressively worked to improve these practices and procedures and
                  believe the Company is currently in compliance with substantially all
                  of the requirements of the Formal Agreement. 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, 2010. Since our inception, we have not paid cash
                  dividends.  2010
                           
                           
                           2009
                           
                           
                           2008Return on average assets
                           
                           
                           0.12
                           %
                           
                           0.20
                           %
                           
                           0.27
                           %Return on average equity
                           
                           
                           1.47
                           %
                           
                           2.51
                           %
                           
                           4.73
                           %Return on average common equity
                           
                           
                           (0.98
                           %)
                           
                           0.64
                           %
                           
                           4.73
                           %Average equity to average assets ratio
                           
                           
                           8.16
                           %
                           
                           7.85
                           %
                           
                           5.73
                           %Common equity to assets ratio
                           
                           
                           6.01
                           %
                           
                           6.17
                           %
                           
                           5.74
                           % Our return on average assets was 0.12% for the year ended December
                  31, 2010 and 0.20% and 0.27% for the years ended December 31, 2009
                  and 2008, respectively. In addition, our return on average equity
                  decreased to 1.47% from 2.51% for the years ended December 31, 2010
                  and 2009, respectively, and 4.73% for the same periods in 2008. The
                  increase in the equity to total assets ratio from December 31, 2008
                  to December 31, 2010 is primarily related to the $17.3 million
                  received in conjunction with the issuance of preferred stock. In
                  addition, our return on average common equity was (0.98%) and our
                  common equity to assets ratio was 6.01% for the year ended December
                  31, 2010. 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.
 48


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 "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%. 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%. In addition, we have agreed with the OCC that the Bank will maintain
                  total risk-based capital of at least 12%, Tier 1 capital of at least
                  10%, and a leverage ratio of at least 9%.  As of December 31, 2010,
                  our capital ratios exceed these ratios and we remain "well
                  capitalized." However, if we fail to maintain these required capital
                  levels, then the OCC may deem noncompliance to be an unsafe and
                  unsound banking practice which may make the Bank subject to a capital
                  directive, a consent order, or such other administrative actions or
                  sanctions as the OCC considers necessary.  It is uncertain what
                  actions, if any, the OCC would take with respect to noncompliance
                  with these ratios, what action steps the OCC might require the Bank
                  to take to remedy this situation, and whether such actions would be
                  successful.
 49


The following table summarizes the capital amounts and ratios of the
                  Bank and the regulatory minimum requirements at December 31, 2010,
                  2009, and 2008 (dollars in thousands).  Actual
                           
                           
                           OCC RequiredCapital RatioMinimum
                           
                           
                           For capitaladequacy purposesMinimum
                           
                           
                           To be well capitalizedunder promptcorrectiveaction provisionsMinimumAmount
                           
                           
                           Ratio
                           
                           
                           Amount
                           
                           
                           Ratio
                           
                           
                           Amount
                           
                           
                           Ratio
                           
                           
                           Amount
                           
                           
                           RatioAs of December 31, 2010Total Capital (to risk weighted assets)
                           
                           $
                           78,659
                           
                           
                           13.2
                           %
                           
                           71,487
                           
                           
                           12.0
                           %
                           
                           47,658
                           
                           
                           8.0
                           %
                           
                           59,572
                           
                           
                           10.0
                           %Tier 1 Capital (to risk weighted assets)
                           
                           
                           71,201
                           
                           
                           12.0
                           %
                           
                           59,572
                           
                           
                           10.0
                           %
                           
                           23,829
                           
                           
                           4.0
                           %
                           
                           35,743
                           
                           
                           6.0
                           %Tier 1 Capital (to average assets)
                           
                           
                           71,201
                           
                           
                           9.6
                           %
                           
                           66,895
                           
                           
                           9.0
                           %
                           
                           29,731
                           
                           
                           4.0
                           %
                           
                           37,164
                           
                           
                           5.0
                           %As of December 31, 2009Total Capital (to risk weighted assets)
                           
                           $
                           77,393
                           
                           
                           12.8
                           %
                           
                           N/A
                           
                           
                           N/A
                           
                           
                           48,215
                           
                           
                           8.0
                           %
                           
                           60,268
                           
                           
                           10.0
                           %Tier 1 Capital (to risk weighted assets)
                           
                           
                           69,857
                           
                           
                           11.6
                           %
                           
                           N/A
                           
                           
                           N/A
                           
                           
                           24,107
                           
                           
                           4.0
                           %
                           
                           36,161
                           
                           
                           6.0
                           %Tier 1 Capital (to average assets)
                           
                           
                           69,857
                           
                           
                           9.6
                           %
                           
                           N/A
                           
                           
                           N/A
                           
                           
                           29,028
                           
                           
                           4.0
                           %
                           
                           36,285
                           
                           
                           5.0
                           %As of December 31, 2008Total Capital (to risk weighted assets)
                           
                           $
                           75,004
                           
                           
                           12.8
                           %
                           
                           N/A
                           
                           
                           N/A
                           
                           
                           46,894
                           
                           
                           8.0
                           %
                           
                           58,617
                           
                           
                           10.0
                           %Tier 1 Capital (to risk weighted assets)
                           
                           
                           67,997
                           
                           
                           11.6
                           %
                           
                           N/A
                           
                           
                           N/A
                           
                           
                           23,447
                           
                           
                           4.0
                           %
                           
                           35,170
                           
                           
                           6.0
                           %Tier 1 Capital (to average assets)
                           
                           
                           58,236
                           
                           
                           9.8
                           %
                           
                           N/A
                           
                           
                           N/A
                           
                           
                           27,821
                           
                           
                           4.0
                           %
                           
                           34,776
                           
                           
                           5.0
                           % The ability of the Company to pay cash dividends is dependent upon
                  receiving cash in the form of dividends from the Bank. The dividends
                  that may be paid by the Bank to the Company are subject to legal
                  limitations and regulatory capital requirements. The approval of the
                  OCC is required if the total of all 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. Further, the
                  Company cannot pay cash dividends on its common stock during any
                  calendar quarter unless full dividends on the Series T preferred
                  stock for the dividend period ending during the calendar quarter have
                  been declared and the Company has not failed to pay a dividend in the
                  full amount of the Series T Preferred Stock with respect to the
                  period in which such dividend payment in respect of its common stock
                  would occur. In addition, the Company must currently obtain
                  preapproval of the Federal Reserve before paying dividends. 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, 2010, unfunded commitments to
                  extend credit were approximately $86.4 million, of which $9.5 million
                  is at fixed rates and $76.9 million is at variable rates. At December
                  31, 2009, unfunded commitments to extend credit were $90.5 million,
                  of which approximately $10.6 million was at fixed rates and $79.9
                  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 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.
 50


At December 31, 2010 and 2009, respectively, there was a $2.8 million
                  and $5.5 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, 2010, 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
                           
                           $
                           49,731
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           49,731Investment securities
                           
                           
                           2,709
                           
                           
                           7,321
                           
                           
                           25,585
                           
                           
                           28,168
                           
                           
                           63,783Loans
                           
                           
                           298,597
                           
                           
                           45,227
                           
                           
                           180,043
                           
                           
                           39,693
                           
                           
                           563,560Total earning assets
                           
                           $
                           351,037
                           
                           $
                           52,548
                           
                           $
                           205,628
                           
                           $
                           67,861
                           
                           $
                           677,074Interest-bearing liabilities:Money market and NOW
                           
                           $
                           237,481
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           237,481Regular savings
                           
                           
                           3,229
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           3,229Time deposits
                           
                           
                           56,746
                           
                           
                           103,238
                           
                           
                           88,786
                           
                           
                           -
                           
                           
                           248,770FHLB advances and related debt
                           
                           
                           70,200
                           
                           
                           -
                           
                           
                           37,500
                           
                           
                           15,000
                           
                           
                           122,700Junior subordinated debentures
                           
                           
                           13,403
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           13,403Total interest-bearing liabilities
                           
                           $
                           381,059
                           
                           $
                           103,238
                           
                           $
                           126,286
                           
                           $
                           15,000
                           
                           $
                           625,583Period gap
                           
                           $
                           (30,022
                           )
                           $
                           (50,690
                           )
                           $
                           79,342
                           
                           $
                           52,862Cumulative Gap
                           
                           
                           (30,022
                           )
                           
                           (80,712
                           )
                           
                           (1,370
                           )
                           
                           51,491Ratio of cumulative gap to total earning assets
                           
                           
                           (4.4
                           %)
                           
                           (11.9
                           %)
                           
                           (0.2
                           %)
                           
                           7.6
                           %
 51


As measured over the one-year time interval, we were liability
                  sensitive during the year ended December 31, 2010 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 50% and 51% of our loans were variable rate loans at
                  December 31, 2010 and 2009, respectively. The ratio of cumulative gap
                  to total earning assets after twelve months was (11.9%) because $80.7
                  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, 2010, 77.4% of our interest-bearing liabilities were
                  either variable rate or had a maturity of less than one year. Of the
                  $381.1 million of interest-bearing liabilities set to reprice within
                  three months, 63.2% 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, 2010, we had $80.7 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, 2010. 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, 2010 and 2009, our liquid assets amounted to $53.9
                  million and $12.1 million, or 7.3% and 1.7% of total assets,
                  respectively. Our investment securities at December 31, 2010 and 2009
                  amounted to $72.9 million and $94.6 million, or 9.9% and 13.2% 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
                  3 federal funds purchased lines of credit with correspondent banks
                  totaling $30.5 million for which there were no borrowings against the
                  lines at December 31, 2010. 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, 2010 was $9.6 million, based on the bank's $6.3 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 headquarters and main office with a remaining
                  term of seven years. The lease provides for annual lease rate
                  escalations based on cost of living adjustments. 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.
 52


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, 2010 (dollars in thousands).  Payments Due by PeriodWithinOne Year
                           
                           
                           Over One to TwoYears
                           
                           
                           Over Twoto ThreeYears
                           
                           
                           Over Threeto FiveYears
                           
                           
                           AfterFiveYears
                           
                           
                           TotalCertificates of deposit
                           
                           $
                           159,984
                           
                           $
                           64,748
                           
                           $
                           19,571
                           
                           $
                           4,467
                           
                           $
                           -
                           
                           $
                           248,770FHLB advances and related debt
                           
                           
                           70,200
                           
                           
                           -
                           
                           
                           20,000
                           
                           
                           17,500
                           
                           
                           15,000
                           
                           
                           122,700Junior subordinated debentures
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           13,403
                           
                           
                           13,403Operating lease obligations
                           
                           
                           1,726
                           
                           
                           1,740
                           
                           
                           1,759
                           
                           
                           1,774
                           
                           
                           2,732
                           
                           
                           9,731Total
                           
                           $
                           231,910
                           
                           $
                           66,488
                           
                           $
                           41,330
                           
                           $
                           23,741
                           
                           $
                           31,135
                           
                           $
                           394,604 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 March 2010, guidance related to derivatives and hedging was
                  amended to exempt embedded credit derivative features related to the
                  transfer of credit risk from potential bifurcation and separate
                  accounting. Embedded features related to other types of risk and
                  other embedded credit derivative features are not exempt from
                  potential bifurcation and separate accounting. The amendments were
                  effective for the Company on July 1, 2010. These amendments will have
                  no impact on the financial statements. In July 2010, the Receivables topic of the FASB Accounting Standards
                  Codification ("ASC") was amended to require expanded disclosures
                  related to a company's allowance for credit losses and the credit
                  quality of its financing receivables. The amendments will require the
                  allowance disclosures to be provided on a disaggregated basis. The
                  Company is required to begin to comply with the disclosures in its
                  financial statements for the year ended December 31, 2010.
                  Disclosures about Troubled Debt Restructurings required by the Update
                  have been deferred by FASB in a proposed Update. The Dodd-Frank Act includes several provisions that will affect how
                  community banks, thrifts, and small bank and thrift holding companies
                  will be regulated.  Among other things, the Dodd-Frank Act abolishes
                  the Office of Thrift Supervision and transfers its functions to the
                  Office of the Comptroller of the Currency, relaxes rules regarding
                  interstate branching, allows financial institutions to pay interest
                  on business checking accounts, changes the scope of federal deposit
                  insurance coverage, and imposes new capital requirements on bank and
                  thrift holding companies.  The Dodd-Frank Act also establishes the
                  Bureau of Consumer Financial Protection as an independent entity
                  within the Federal Reserve, which will be given the authority to
                  promulgate consumer protection regulations applicable to all entities
                  offering consumer financial services or products, including
                  banks.  Additionally, the Dodd-Frank Act includes a series of
                  provisions covering mortgage loan origination standards affecting
                  originator compensation, minimum repayment standards, and
                  pre-payments.  Management is actively reviewing the regulatory
                  provisions of the Dodd-Frank Act and assessing its probable impact on
                  our business, financial condition, and results of operations.
 53


In August 2010, two updates were issued to amend various SEC rules
                  and schedules pursuant to Release No. 33-9026: Technical Amendments
                  to Rules, Forms, Schedules and Codification of Financial Reporting
                  Policies and based on the issuance of SEC Staff Accounting Bulletin
                  112. The amendments related primarily to business combinations and
                  removed references to "minority interest" and added references to
                  "controlling" and "noncontrolling interests(s)". The updates were
                  effective upon issuance but 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.
 54


Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2010, 2009 and 2008   Report of Independent Registered Public Accounting Firm
                           
                           
                           56Consolidated Balance Sheets
                           
                           
                           57Consolidated Statements of Income
                           
                           
                           58Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss)
                           
                           
                           59Consolidated Statements of Cash Flows
                           
                           
                           61Notes to Consolidated Financial Statements
                           
                           
                           63
 55


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, 2010 and 2009,
                  and the related consolidated statements of income, shareholders'
                  equity and comprehensive income (loss), and cash flows for each of
                  the three years in the period ended December 31, 2010. 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. The Company is not required to have, nor
                  were we engaged to perform an audit of its internal control over
                  financial reporting. Our audit included consideration of internal
                  control over financial reporting as a basis for designing audit
                  procedures that are appropriate in the circumstances, but not for the
                  purpose of expressing an opinion on the effectiveness of the
                  Company's internal control over financial reporting. Accordingly, we
                  express no such opinion. An audit also includes examining, on a test
                  basis, evidence supporting the amounts and disclosures in the
                  financial statements, 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, 2010 and 2009, and the results of their operations and
                  their cash flows for each of the three years in the period ended
                  December 31, 2010, in conformity with U.S. generally accepted
                  accounting principles.  
 Greenville, South CarolinaMarch 4, 2011
 56


SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETS(in thousands, except share data)  December 31,2010
                           
                           
                           2009AssetsCash and cash equivalents:Cash and due from banks
                           
                           $
                           4,119
                           
                           $
                           5,620Federal funds sold
                           
                           
                           49,731
                           
                           
                           6,462Total cash and cash equivalents
                           
                           
                           53,850
                           
                           
                           12,082Investment securities:Investment securities available for sale
                           
                           
                           63,783
                           
                           
                           76,195Investment securities held to maturity (fair value $0 and $9,516)
                           
                           
                           -
                           
                           
                           9,225Other investments, at cost
                           
                           
                           9,070
                           
                           
                           9,213Total investment securities
                           
                           
                           72,853
                           
                           
                           94,633Loans
                           
                           
                           572,392
                           
                           
                           574,270Less allowance for loan losses
                           
                           
                           (8,386
                           )
                           
                           (7,760
                           )Loans, net
                           
                           
                           564,006
                           
                           
                           566,510Bank owned life insurance
                           
                           
                           14,528
                           
                           
                           13,974Property and equipment, net
                           
                           
                           15,884
                           
                           
                           16,410Deferred income taxes
                           
                           
                           2,994
                           
                           
                           3,486Other assets
                           
                           
                           12,375
                           
                           
                           12,202Total assets
                           
                           $
                           736,490
                           
                           $
                           719,297LiabilitiesDeposits
                           
                           $
                           536,296
                           
                           $
                           494,084Federal Home Loan Bank advances and repurchase agreements
                           
                           
                           122,700
                           
                           
                           142,700Note payable
                           
                           
                           -
                           
                           
                           4,250Junior subordinated debentures
                           
                           
                           13,403
                           
                           
                           13,403Other liabilities
                           
                           
                           4,875
                           
                           
                           5,019Total liabilities
                           
                           
                           677,274
                           
                           
                           659,456Commitments and Contingencies - Note 13Shareholders' equity:Preferred stock, par value $.01 per share, 10,000,000 shares
                              authorized, 17,299 shares issued and outstanding
                           
                           
                           14,960
                           
                           
                           15,432Common stock, par value $.01 per share, 10,000,000 shares authorized,
                              3,457,877 and 3,094,481 shares issued and outstanding at December 31,
                              2010 and 2009, respectively
                           
                           
                           35
                           
                           
                           31Nonvested restricted stock
                           
                           
                           -
                           
                           
                           (14
                           )Additional paid-in capital
                           
                           
                           37,629
                           
                           
                           34,097Accumulated other comprehensive income (loss)
                           
                           
                           (707
                           )
                           
                           484Retained earnings
                           
                           
                           7,299
                           
                           
                           9,811Total shareholders' equity
                           
                           
                           59,216
                           
                           
                           59,841Total liabilities and shareholders' equity
                           
                           $
                           736,490
                           
                           $
                           719,297 See notes to consolidated financial statements that are an integral
                  part of these consolidated statements. Paid in capital, retained
                  earnings and common shares outstanding as of December 31, 2010 have
                  been adjusted to reflect the 10 percent stock dividend in 2011.
 57


SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF INCOME(in thousands, except per share data)  For the years ended December 31,2010
                           
                           
                           2009
                           
                           
                           2008InterestincomeLoans
                           
                           $
                           32,587
                           
                           $
                           31,722
                           
                           $
                           35,058Investment securities
                           
                           
                           2,883
                           
                           
                           4,424
                           
                           
                           4,894Federal funds sold
                           
                           
                           59
                           
                           
                           31
                           
                           
                           261Total interest income
                           
                           
                           35,529
                           
                           
                           36,177
                           
                           
                           40,213Interest expenseDeposits
                           
                           
                           9,424
                           
                           
                           9,996
                           
                           
                           14,807Borrowings
                           
                           
                           5,893
                           
                           
                           6,899
                           
                           
                           7,046Total interest expense
                           
                           
                           15,317
                           
                           
                           16,895
                           
                           
                           21,853Net interest income
                           
                           
                           20,212
                           
                           
                           19,282
                           
                           
                           18,360Provision for loan losses
                           
                           
                           5,610
                           
                           
                           4,310
                           
                           
                           3,161Net interest income after provision for loan losses
                           
                           
                           14,602
                           
                           
                           14,972
                           
                           
                           15,199Noninterest income (loss)Loan fee income
                           
                           
                           711
                           
                           
                           431
                           
                           
                           197Service fees on deposit accounts
                           
                           
                           583
                           
                           
                           732
                           
                           
                           653Income from bank owned life insurance
                           
                           
                           554
                           
                           
                           605
                           
                           
                           462Gain on sale of investment securities
                           
                           
                           1,156
                           
                           
                           41
                           
                           
                           33Other than temporary impairment on investment securities
                           
                           
                           (450
                           )
                           
                           -
                           
                           
                           (1,931
                           )Real estate owned activity
                           
                           
                           (674
                           )
                           
                           (342
                           )
                           
                           (140
                           )Gain on sale of property and equipment
                           
                           
                           18
                           
                           
                           -
                           
                           
                           -Other income
                           
                           
                           473
                           
                           
                           376
                           
                           
                           326Total noninterest income (loss)
                           
                           
                           2,371
                           
                           
                           1,843
                           
                           
                           (400
                           )Noninterest expensesCompensation and benefits
                           
                           
                           8,245
                           
                           
                           7,840
                           
                           
                           6,817Professional fees
                           
                           
                           659
                           
                           
                           650
                           
                           
                           525Marketing
                           
                           
                           690
                           
                           
                           659
                           
                           
                           583Insurance
                           
                           
                           1,533
                           
                           
                           1,433
                           
                           
                           560Occupancy
                           
                           
                           2,135
                           
                           
                           1,938
                           
                           
                           1,554Data processing and related costs
                           
                           
                           1,624
                           
                           
                           1,451
                           
                           
                           1,352Telephone
                           
                           
                           303
                           
                           
                           266
                           
                           
                           176Other
                           
                           
                           701
                           
                           
                           814
                           
                           
                           754Noninterest expenses
                           
                           
                           15,890
                           
                           
                           15,051
                           
                           
                           12,321Income before income tax expense
                           
                           
                           1,083
                           
                           
                           1,764
                           
                           
                           2,478Income tax expense
                           
                           
                           193
                           
                           
                           345
                           
                           
                           626Net income
                           
                           
                           890
                           
                           
                           1,419
                           
                           
                           1,852Preferred stock dividends
                           
                           
                           865
                           
                           
                           730
                           
                           
                           -Dividend accretion
                           
                           
                           472
                           
                           
                           424
                           
                           
                           -Net income (loss) available to common shareholders
                           
                           $
                           (447
                           )
                           $
                           265
                           
                           $
                           1,852Earnings (loss) per common shareBasic
                           
                           $
                           (0.13
                           )
                           $
                           0.08
                           
                           $
                           0.56Diluted
                           
                           $
                           (0.13
                           )
                           $
                           0.08
                           
                           $
                           0.53Weighted average common shares outstandingBasic
                           
                           
                           3,453,473
                           
                           
                           3,360,398
                           
                           
                           3,297,696Diluted
                           
                           
                           3,453,473
                           
                           
                           3,388,864
                           
                           
                           3,484,143 See notes to consolidated financial statements that are an integral
                  part of these consolidated statements. Earnings per share and common
                  shares outstanding have been adjusted to reflect the 10 percent stock
                  dividend in 2011.
 58


SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITYAND COMPREHENSIVE INCOME (LOSS)FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008(in thousands, except share data)  Common stock
                           
                           
                           Preferred stock
                           
                           
                           Nonvestedrestricted
                           
                           
                           Additionalpaid-in
                           
                           
                           Accumulatedothercomprehensiveincome
                           
                           
                           RetainedShares
                           
                           
                           Amount
                           
                           
                           Shares
                           
                           
                           Amount
                           
                           
                           stock
                           
                           
                           capital
                           
                           
                           (loss)
                           
                           
                           Earnings
                           
                           
                           TotalDecember 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
                           
                           
                           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
                           
                           $
                           39,786Net 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 taxRealized gain on securities
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (27
                           )
                           
                           -
                           
                           
                           (27
                           )Total comprehensive income
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           2,982Preferred stock transactions:Proceeds from issuance of preferred stock
                           
                           
                           -
                           
                           
                           -
                           
                           
                           17,299
                           
                           
                           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 options and warrants
                           
                           
                           49,618
                           
                           
                           1
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           300
                           
                           
                           -
                           
                           
                           -
                           
                           
                           301Amortization of deferred compensation on restricted stock
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           13
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           13Compensation expense related to stock options, net of tax
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           105
                           
                           
                           -
                           
                           
                           -
                           
                           
                           105December 31, 2009
                           
                           
                           3,094,481
                           
                           $
                           31
                           
                           
                           17,299
                           
                           $
                           15,432
                           
                           $
                           (14
                           )
                           $
                           34,097
                           
                           $
                           484
                           
                           $
                           9,811
                           
                           $
                           59,841Net income
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           890
                           
                           
                           890Comprehensive income, net of tax -Unrealized holding loss on securities available for sale
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (878
                           )
                           
                           -
                           
                           
                           (878
                           )
 59


Common stock
                        
                        
                        Preferred stock
                        
                        
                        Nonvestedrestricted
                        
                        
                        Additionalpaid-in
                        
                        
                        Accumulatedothercomprehensiveincome
                        
                        
                        RetainedShares
                        
                        
                        Amount
                        
                        
                        Shares
                        
                        
                        Amount
                        
                        
                        stock
                        
                        
                        capital
                        
                        
                        (loss)
                        
                        
                        Earnings
                        
                        
                        TotalReclassification adjustment included in net income, net of tax
                        
                        
                        -
                        
                        $
                        -
                        
                        
                        -
                        
                        $
                        -
                        
                        $
                        -
                        
                        $
                        -
                        
                        $
                        (763
                        )
                        $
                        -
                        
                        $
                        (763
                        )Other than temporary impairment
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        450
                        
                        
                        
                        
                        
                        450Total comprehensive income (loss)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (301
                        )Preferred stock transactions:Cash dividends on Series T preferred stock
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        (865
                        )
                        
                        (865
                        )Dividend accretion
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        (472
                        )
                        
                        -
                        
                        
                        472
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -Proceeds from exercise of stock warrants
                        
                        
                        48,700
                        
                        
                        1
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        294
                        
                        
                        -
                        
                        
                        -
                        
                        
                        295Stock dividend on common stock (10%)
                        
                        
                        314,696
                        
                        
                        3
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        2,534
                        
                        
                        
                        
                        
                        (2,537
                        )
                        
                        -Amortization of deferred compensation on restricted stock
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        14
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        14Compensation expense related to stock options, net of tax
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        232
                        
                        
                        -
                        
                        
                        -
                        
                        
                        232December 31, 2010
                        
                        
                        3,457,877
                        
                        $
                        35
                        
                        
                        17,299
                        
                        $
                        14,960
                        
                        $
                        -
                        
                        $
                        37,629
                        
                        $
                        (707
                        )
                        $
                        7,299
                        
                        $
                        59,216 See notes to consolidated financial statements that are an integral
                  part of these consolidated statements.
 60


SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)  For the years ended December 31,2010
                           
                           
                           2009
                           
                           
                           2008Operating activitiesNet income
                           
                           $
                           890
                           
                           $
                           1,419
                           
                           $
                           1,852Adjustments to reconcile net income to cash provided by operating activities:Provision for loan losses
                           
                           
                           5,610
                           
                           
                           4,310
                           
                           
                           3,161Depreciation and other amortization
                           
                           
                           853
                           
                           
                           731
                           
                           
                           541Accretion and amortization of securities discounts and premiums, net
                           
                           
                           1,092
                           
                           
                           449
                           
                           
                           114Loss on sale of real estate owned
                           
                           
                           102
                           
                           
                           203
                           
                           
                           38Write-down of real estate owned
                           
                           
                           569
                           
                           
                           302
                           
                           
                           110Gain on sale of investment securitiesAvailable for sale
                           
                           
                           (811
                           )
                           
                           (41
                           )
                           
                           (33
                           )Held to maturity
                           
                           
                           (345
                           )
                           
                           -
                           
                           
                           -Other than temporary impairment on investment securities
                           
                           
                           450
                           
                           
                           -
                           
                           
                           1,931Gain on sale of property and equipment
                           
                           
                           (18
                           )
                           
                           -
                           
                           
                           -Compensation expense related to stock options and restricted stock grants
                           
                           
                           246
                           
                           
                           118
                           
                           
                           70Increase in cash surrender value of bank owned life insurance
                           
                           
                           (554
                           )
                           
                           (605
                           )
                           
                           (462
                           )Decrease (increase) in deferred tax asset
                           
                           
                           1,100
                           
                           
                           (417
                           )
                           
                           (1,317
                           )Decrease (increase) in other assets, net
                           
                           
                           1,750
                           
                           
                           (3,049
                           )
                           
                           280Increase (decrease) in other liabilities, net
                           
                           
                           (144
                           )
                           
                           (559
                           )
                           
                           628Net cash provided by operating activities
                           
                           
                           10,790
                           
                           
                           2,861
                           
                           
                           6,913Investing activitiesIncrease (decrease) in cash realized from:Origination of loans, net
                           
                           
                           (6,539
                           )
                           
                           (15,770
                           )
                           
                           (61,708
                           )Purchase of property and equipment
                           
                           
                           (326
                           )
                           
                           (5,433
                           )
                           
                           (6,851
                           )Purchase of investment securities:Available for sale
                           
                           
                           (112,858
                           )
                           
                           (44,773
                           )
                           
                           (32,725
                           )Other investments
                           
                           
                           (750
                           )
                           
                           (894
                           )
                           
                           (909
                           )Payment and maturity of investment securities:Available for sale
                           
                           
                           21,904
                           
                           
                           27,363
                           
                           
                           28,557Held to maturity
                           
                           
                           1,110
                           
                           
                           3,261
                           
                           
                           2,265Other investments
                           
                           
                           138
                           
                           
                           141
                           
                           
                           1,125Proceeds from sale of investment securitiesAvailable for sale
                           
                           
                           100,939
                           
                           
                           7,630
                           
                           
                           -Held to maturity
                           
                           
                           8,358
                           
                           
                           -
                           
                           
                           -Other investments
                           
                           
                           755
                           
                           
                           -
                           
                           
                           -Purchase of life insurance policies
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (4,000
                           )Proceeds from sale of property and equipment
                           
                           
                           18
                           
                           
                           -
                           
                           
                           -Proceeds from sale of real estate acquired in settlement of loans
                           
                           
                           837
                           
                           
                           759
                           
                           
                           47Net cash provided by (used for) investing activities
                           
                           
                           13,586
                           
                           
                           (27,716
                           )
                           
                           (74,199
                           )Financing activitiesIncrease in deposits, net
                           
                           
                           42,212
                           
                           
                           24,547
                           
                           
                           56,717Increase (decrease) in note payable
                           
                           
                           (4,250
                           )
                           
                           (10,750
                           )
                           
                           6,980Increase (decrease) in Federal Home Loan Bank advances and related debt
                           
                           
                           (20,000
                           )
                           
                           (6,975
                           )
                           
                           (825
                           )Proceeds from the issuance of preferred stock
                           
                           
                           -
                           
                           
                           15,856
                           
                           
                           -Proceeds from the issuance of stock warrant
                           
                           
                           -
                           
                           
                           1,418
                           
                           
                           -Cash dividend on preferred stock
                           
                           
                           (865
                           )
                           
                           (620
                           )
                           
                           -Proceeds from the exercise of stock options and warrants
                           
                           
                           295
                           
                           
                           301
                           
                           
                           603Net cash provided by financing activities
                           
                           
                           17,392
                           
                           
                           23,777
                           
                           
                           63,475Net increase (decrease) in cash and cash equivalents
                           
                           
                           41,768
                           
                           
                           (1,078
                           )
                           
                           (3,811
                           )Cash and cash equivalents, beginning of year
                           
                           
                           12,082
                           
                           
                           13,160
                           
                           
                           16,971Cash and cash equivalents, end of year
                           
                           $
                           53,850
                           
                           $
                           12,082
                           
                           $
                           13,160
 61


For the years ended December 31,2010
                        
                        
                        2009
                        
                        
                        2008Supplemental informationCash paid forInterest
                        
                        $
                        15,639
                        
                        $
                        17,119
                        
                        $
                        22,345Income taxes
                        
                        $
                        -
                        
                        $
                        605
                        
                        $
                        1,892Schedule of non-cash transactionsForeclosure of real estate
                        
                        $
                        3,433
                        
                        $
                        4,552
                        
                        $
                        2,044Unrealized (gain) loss on securities, net of income taxes
                        
                        $
                        1,191
                        
                        $
                        (1,563
                        )
                        $
                        1,175 See notes to consolidated financial statements that are an integral
                  part of these consolidated statements.
 62


NOTE 1. Summary of Significant Accounting Policies and Activities Southern First Bancshares, Inc., (the "Company") is a bank holding company, organized in South
                  Carolina, whose principal activity is the ownership and management of
                  its wholly-owned subsidiary, Southern First Bank, N.A. (the "Bank").
                  The Bank is a national bank organized under the laws of the United
                  States and located in Greenville and Richland Counties in 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 Greenville First Statutory
                  Trusts I and II are special purpose subsidiaries organized for the
                  sole purpose of issuing an aggregate of $13.4 million of trust
                  preferred securities. On July 2, 2007, the Company and Bank changed
                  their names from Greenville First Bancshares, Inc. and Greenville
                  First Bank, N.A. to Southern First Bancshares, Inc. and Southern
                  First Bank, N.A., respectively. 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. Use of 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. Material estimates that are particularly
                  susceptible to significant change in the near term relate to the
                  determination of the allowance for loan losses, fair value of
                  financial instruments, evaluating other-than-temporary-impairment of
                  investment securities and valuation of deferred tax assets. 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 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, 2010 and 2009, real estate
                  loans represented 79.6% and 79.0%, 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 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.
 63


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 through the date of this filing 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. Stock Dividend On January 18, 2011, the company's Board of Directors approved a 10
                  percent stock dividend to the company's shareholders.  The record
                  date was January 28, 2011 and the distribution date was February 14,
                  2011.  Certain amounts in our Consolidated Balance Sheets, including
                  common shares outstanding, have been adjusted to reflect the stock
                  dividend. In addition, earnings per share and average shares
                  outstanding in our Consolidated Statements of Income have been
                  adjusted to reflect the stock dividend. Investments in 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 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.
 64


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 nonaccrual status when principal or
                  interest becomes ninety days past due, or when payment in full is not
                  anticipated. When a loan is placed on nonaccrual status, interest
                  accrued but not received is generally reversed against interest
                  income. Cash receipts on nonaccrual loans are not recorded as
                  interest income, but are used to reduce the loan's principal balance.
                  A nonaccrual loan is generally returned to accrual status and accrual
                  of interest is resumed when payments have been according to the terms
                  and conditions of the loan for a continuous six month period. 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 uncollectaibility 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 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.
 65


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 in settlement of loans 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 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 (Loss) Comprehensive income (loss) 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. 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 on 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.
 66


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, 2010, 2009 and 2008 (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, 2010, 2009 and 2008, 753,422, 486,286 and 96,360
                  options, respectively, were anti-dilutive in the calculation of
                  earnings per share as their exercise price exceeded the fair market
                  value. All earnings per share amounts have been restated to reflect
                  the 10% stock dividend issued in January 2011.  2010
                           
                           
                           2009
                           
                           
                           2008Numerator:Net income
                           
                           $
                           890
                           
                           $
                           1,419
                           
                           $
                           1,852Less: Preferred stock dividends
                           
                           
                           865
                           
                           
                           730
                           
                           
                           -Dividend accretion (1)
                           
                           
                           472
                           
                           
                           424
                           
                           
                           -Net income (loss) available to common shareholders
                           
                           $
                           (447
                           )
                           $
                           265
                           
                           $
                           1,852Denominator:Weighted-average common shares outstanding - basic
                           
                           
                           3,453,473
                           
                           
                           3,360,398
                           
                           
                           3,297,696Common stock equivalents
                           
                           
                           -
                           
                           
                           28,466
                           
                           
                           186,447Weighted-average common shares outstanding - diluted
                           
                           
                           3,453,473
                           
                           
                           3,388,864
                           
                           
                           3,484,143Earnings (loss) per common share:Basic
                           
                           $
                           (0.13
                           )
                           $
                           0.08
                           
                           $
                           0.56Diluted
                           
                           $
                           (0.13
                           )
                           $
                           0.08
                           
                           $
                           0.53 (1) Preferred stock dividend required to be accreted over estimated
                  life of warrant issued in conjunction with preferred stock. 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 March 2010, guidance related to derivatives and hedging was
                  amended to exempt embedded credit derivative features related to the
                  transfer of credit risk from potential bifurcation and separate
                  accounting. Embedded features related to other types of risk and
                  other embedded credit derivative features are not exempt from
                  potential bifurcation and separate accounting. The amendments were
                  effective for the Company on July 1, 2010. These amendments had no
                  impact on the financial statements. In July 2010, the Receivables topic of the ASC was amended to require
                  expanded disclosures related to a company's allowance for credit
                  losses and the credit quality of its financing receivables. The
                  amendments require the allowance disclosures to be provided on a
                  disaggregated basis. The Company is required to begin to comply with
                  the disclosures in its financial statements for the year ended
                  December 31, 2010. Disclosures about Troubled Debt Restructurings
                  required by the Update have been deferred by FASB in a proposed
                  Update. See Note 5. On July 21, 2010, President Obama signed into law the Dodd-Frank Wall
                  Street Reform and Consumer Protection Act (the "Dodd-Frank Act"),
                  which significantly changes the regulation of financial institutions
                  and the financial services industry.  The Dodd-Frank Act includes
                  several provisions that will affect how community banks, thrifts, and
                  small bank and thrift holding companies will be regulated in the
                  future.  Among other things, these provisions abolish the Office of
                  Thrift Supervision and transfer its functions to the other federal
                  banking agencies, relax rules regarding interstate branching, allow
                  financial institutions to pay interest on business checking accounts,
                  change the scope of federal deposit insurance coverage, and impose
                  new capital
 67


requirements on bank and thrift holding companies.  The Dodd-Frank
                  Act also establishes the Bureau of Consumer Financial Protection as
                  an independent entity within the Federal Reserve, which will be given
                  the authority to promulgate consumer protection regulations
                  applicable to all entities offering consumer financial services or
                  products, including banks.  Additionally, the Dodd-Frank Act includes
                  a series of provisions covering mortgage loan origination standards
                  affecting originator compensation, minimum repayment standards, and
                  pre-payments.  Management is actively reviewing the provisions of the
                  Dodd-Frank Act and assessing its probable impact on our business,
                  financial condition, and results of operations. In August 2010, two updates were issued to amend various SEC rules
                  and schedules pursuant to Release No. 33-9026: Technical Amendments
                  to Rules, Forms, Schedules and Codification of Financial Reporting
                  Policies and based on the issuance of SEC Staff Accounting Bulletin
                  112. The amendments related primarily to business combinations and
                  removed references to "minority interest" and added references to
                  "controlling" and "noncontrolling interests(s)". The updates were
                  effective upon issuance but 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. 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, 2010 and 2009, the Bank had $13.1 million and
                  $3.0 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, 2010 and 2009 federal funds sold
                  amounted to $49.7 million and $6.5 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, 2010Amortized
                           
                           
                           Gross Unrealized
                           
                           
                           FairCost
                           
                           
                           Gains
                           
                           
                           Losses
                           
                           
                           ValueAvailable for saleState and political subdivisions
                           
                           $
                           11,331
                           
                           $
                           12
                           
                           $
                           177
                           
                           $
                           11,166Mortgage-backed securitiesFHLMC
                           
                           
                           17,985
                           
                           
                           -
                           
                           
                           288
                           
                           
                           17,697FNMA
                           
                           
                           31,780
                           
                           
                           112
                           
                           
                           463
                           
                           
                           31,429GNMA
                           
                           
                           888
                           
                           
                           88
                           
                           
                           -
                           
                           
                           976Collateralized Mortgage Obligations
                           
                           
                           2,865
                           
                           
                           -
                           
                           
                           350
                           
                           
                           2,51553,518
                           
                           
                           200
                           
                           
                           1,101
                           
                           
                           52,617Total
                           
                           $
                           64,849
                           
                           $
                           212
                           
                           $
                           1,278
                           
                           $
                           63,783
 68


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
                           
                           $
                           -
                           
                           $
                           9,516 The amortized costs and fair values of investment securities
                  available for sale at December 31, 2010 and 2009, 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, 2010
                           
                           
                           December 31, 2009Amortized Cost
                           
                           
                           FairValue
                           
                           
                           AmortizedCost
                           
                           
                           FairValueAvailable for saleDue after one through five years
                           
                           $
                           91
                           
                           $
                           95
                           
                           $
                           242
                           
                           $
                           251Due after five through ten years
                           
                           
                           5,783
                           
                           
                           5,719
                           
                           
                           9,968
                           
                           
                           10,035Due after ten years
                           
                           
                           58,975
                           
                           
                           57,969
                           
                           
                           65,252
                           
                           
                           65,909$
                           64,849
                           
                           $
                           63,783
                           
                           $
                           75,462
                           
                           $
                           76,195Held to maturityDue after one through five years
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           155
                           
                           $
                           159Due after five through ten years
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1,830
                           
                           
                           1,906Due after ten years
                           
                           
                           -
                           
                           
                           -
                           
                           
                           7,240
                           
                           
                           7,451$
                           -
                           
                           $
                           -
                           
                           $
                           9,225
                           
                           $
                           9,516
 69


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, 2010 and 2009 (dollars in thousands).  Less than 12 months
                           
                           
                           12 months or longer
                           
                           
                           Total#
                           
                           
                           Fairvalue
                           
                           
                           Unrealizedlosses
                           
                           
                           #
                           
                           
                           Fairvalue
                           
                           
                           Unrealizedlosses
                           
                           
                           #
                           
                           
                           Fairvalue
                           
                           
                           UnrealizedlossesAs of December 31, 2010Available for saleState and political subdivisions
                           
                           
                           16
                           
                           $
                           8,101
                           
                           $
                           177
                           
                           
                           -
                           
                           $
                           -
                           
                           $
                           -
                           
                           
                           16
                           
                           $
                           8,101
                           
                           $
                           177Mortgage-backedFHLMC
                           
                           
                           5
                           
                           
                           17,697
                           
                           
                           288
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           5
                           
                           
                           17,697
                           
                           
                           288FNMA
                           
                           
                           6
                           
                           
                           24,301
                           
                           
                           463
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           6
                           
                           
                           24,301
                           
                           
                           463Collateral mortgage obligations
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1
                           
                           
                           2,515
                           
                           
                           350
                           
                           
                           1
                           
                           
                           2,515
                           
                           
                           35027
                           
                           $
                           50,099
                           
                           $
                           928
                           
                           
                           1
                           
                           $
                           2,515
                           
                           $
                           350
                           
                           
                           28
                           
                           $
                           52,614
                           
                           $
                           1,278As 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
                           
                           $
                           595 At December 31, 2010, the Company had 27 individual investments that
                  were in an unrealized loss position for less than 12 months. The
                  unrealized losses were primarily attributable to changes in interest
                  rates, rather than deterioration in credit quality. The majority of
                  these securities are government or agency securities currently rated
                  AA or AAA by Moody or Standard and Poor's, and therefore, pose
                  minimal credit risk. The Company considers the length of time and
                  extent to which the fair value of available-for-sale debt securities
                  have been less than cost to conclude that such securities were not
                  other-than-temporarily impaired. We also consider other factors such
                  as the financial condition of the issuer including credit ratings and
                  specific events affecting the operations of the issuer, volatility of
                  the security, underlying assets that collateralize the debt security,
                  and other industry and macroeconomic conditions. As the Company has
                  no intent to sell securities with unrealized losses and it is not
                  more-likely-than-not that the Company will be required to sell these
                  securities before recovery of amortized cost, we have concluded that
                  the securities are not impaired on an other-than-temporary basis. At December 31, 2010, we held one private label collateralized
                  mortgage obligation ("CMO") which has been in an unrealized loss
                  position for 12 months or longer, with a book value of $2.9 million
                  and a Standard and Poor's rating of BBB-. The CMO is collateralized
                  by single-family residences concentrated in Georgia and Florida, for
                  which approximately 41% of the underlying loans have limited
                  documents. The Company evaluates this security for
                  other-than-temporary impairment quarterly based on the Bloomberg
                  Default model which uses relevant assumptions such as prepayment
                  rate, default rate and loss severity in determining the expected
                  recovery of the contractual cash flows. The average prepayment rate,
                  default rate and severity used in the valuation were approximately
                  6%, 1%, and 38%, respectively. As prescribed by FASB ASC 320-10-35, the Company recognizes the
                  credit component of an other-than-temporary impairment ("OTTI") on
                  debt securities through earnings and the non-credit component in
                  other comprehensive income ("OCI") for those securities in which the
                  Company does not intend to sell the security and it is
                  more-likely-than-not that the Company will not be required to sell
                  the security in the foreseeable future. Although these are not classified as sub-prime obligations or
                  considered the "high risk" tranches, the majority of "structured"
                  investments within all credit markets have been impacted by
                  volatility and credit concerns and economic stresses throughout 2008
                  and 2009 and continuing through 2010. The result has been that the
                  market for these investments has become significantly less liquid and
                  the spread as compared to alternative investments has widened
                  dramatically. Due to this illiquidity, the Company has recorded a
                  liquidity discount in the form of an unrealized loss of $350,000
                  related to the private-label CMO based on input from a third party.
 70


Other investments are comprised of the following and are recorded at
                  cost which approximates fair value (dollars in thousands):  December 31, 2010
                           
                           
                           
                           
                           
                           December 31, 2009Federal Reserve Bank stock
                           
                           $
                           1,485
                           
                           
                           
                           
                           $
                           1,485Federal Home Loan Bank stock
                           
                           
                           6,333
                           
                           
                           
                           
                           
                           7,088Certificates of deposit
                           
                           
                           849
                           
                           
                           
                           
                           
                           99Investment in Trust Preferred subsidiaries
                           
                           
                           403
                           
                           
                           
                           
                           
                           403Investment receivable
                           
                           
                           -
                           
                           
                           
                           
                           
                           138$
                           9,070
                           
                           
                           
                           
                           $
                           9,213 All of the FHLB stock is used to collateralize advances with the FHLB. During 2010, the Company decided to sell a total of 45 securities for
                  $109.3 million in order to recognize the unrealized gains in its
                  investment portfolio. The sale of these securities resulted in
                  realized gains of $1.9 million and losses of $1.2 million. Included
                  in the securities sold was a private-label CMO which was sold in the
                  fourth quarter for $2.0 million for a total loss of $1.1 million;
                  however, $450,000 of other-than-temporary impairment was recorded for
                  the security prior to the sale. Of the securities sold, 5 securities
                  totaling $8.4 million were classified as held-to-maturity. In
                  conjunction with the sale of a significant portion of the investment
                  portfolio, the Company purchased $112.9 million of mortgage backed
                  and municipal securities. 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. In addition,
                  the Company sold its entire investment in Federal National Mortgage
                  Association ("FNMA") preferred stock during 2009, realizing a gain of
                  $35,000. Prior to the sale of the preferred stock, the Company
                  determined that the FNMA preferred stock had suffered an
                  other-than-temporary impairment as a result of the Government's
                  decision on September 7, 2008 to place the FNMA under conservatorship
                  and recorded OTTI of $1.9 million during 2008. Also, in 2008 the
                  Company sold 4 securities for a gain of $33,000. At December 31, 2010, $23.6 million of securities were pledged as
                  collateral for repurchase agreements from brokers, and approximately
                  $3.7 million was pledged to secure client deposits. 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. 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 79.6% of total loans at December 31,
                  2010. Commercial loans comprise 68.8% of total real estate loans and
                  consumer loans account for 31.2%. Commercial loans are further
                  categorized into owner occupied which represents 24.1% of total loans
                  and non-owner occupied of 28.7%. Commercial construction loans
                  represent only 2.0% 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 interest-only periods, etc.),
                  and loans with high loan-to-value ratios. As of December 31, 2010,
                  approximately $74.9 million, or 13.1% of our loans had loan-to-value
                  ratios which exceeded regulatory supervisory limits, of which 104
                  loans totaling approximately $31.3 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.
 71


The composition of net loans by major loan categories is as follows
                  (dollars in thousands):  December 31,2010
                           
                           
                           2009Real estate:CommercialOwner occupied
                           
                           $
                           137,873
                           
                           $
                           132,569Non-owner occupied
                           
                           
                           163,971
                           
                           
                           160,460Construction
                           
                           
                           11,344
                           
                           
                           22,741313,188
                           
                           
                           315,770Consumer:Residential
                           
                           
                           54,161
                           
                           
                           55,377Home equity
                           
                           
                           79,528
                           
                           
                           74,348Construction
                           
                           
                           8,569
                           
                           
                           7,940142,258
                           
                           
                           137,665Total real estate loans
                           
                           
                           455,446
                           
                           
                           453,435Commercial business
                           
                           
                           109,450
                           
                           
                           110,539Consumer - other
                           
                           
                           8,079
                           
                           
                           11,021Deferred origination fees, net
                           
                           
                           (583
                           )
                           
                           (725
                           )Gross loans
                           
                           
                           572,392
                           
                           
                           574,270Less allowance for loan losses
                           
                           
                           (8,386
                           )
                           
                           (7,760
                           )Loans, net
                           
                           $
                           564,006
                           
                           $
                           566,510 The composition of gross loans by rate type is as follows (dollars in
                  thousands):  December 31,2010
                           
                           
                           2009Variable rate loans
                           
                           $
                           287,225
                           
                           $
                           284,178Fixed rate loans
                           
                           
                           285,167
                           
                           
                           290,092$
                           572,392
                           
                           $
                           574,270
 72


The composition of loans on nonaccrual by major loan categories is as
                  follows (dollars in thousands):  December 31,2010
                           
                           
                           2009Loans on nonaccrual:Commercial
                           
                           $
                           2,125
                           
                           $
                           3,702Commercial real estate
                           
                           
                           6,015
                           
                           
                           4,910Consumer real estate
                           
                           
                           1,179
                           
                           
                           3,054Consumer other
                           
                           
                           7
                           
                           
                           75Total nonaccrual loans
                           
                           
                           9,326
                           
                           
                           11,741Total of nonperforming loans
                           
                           
                           9,326
                           
                           
                           11,741Real estate acquired in settlement of loans
                           
                           
                           5,629
                           
                           
                           3,704Total nonperforming assets
                           
                           $
                           14,955
                           
                           $
                           15,445Loans over 90 days past due (1)
                           
                           $
                           6,439
                           
                           $
                           4,686Nonperforming assets as a percentage of:Total assets
                           
                           
                           2.03
                           %
                           
                           2.15
                           %Gross loans
                           
                           
                           2.61
                           %
                           
                           2.69
                           %(1) Loans over 90 days are included in nonaccrual loans Foregone interest income on the non-accrual loans in 2010 was
                  approximately $376,000 and approximately $638,000 in 2009. The amount
                  of interest income recorded in 2010 for loans that were on nonaccrual
                  at December 31, 2010 was approximately $255,000, and was
                  approximately $305,000 in 2009. At December 31, 2010, approximately $113.1 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 9. 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. Activity within the allowance for loan losses account follows
                  (dollars in thousands):  Commercial
                           
                           
                           ConsumerCommercial
                           
                           
                           Real Estate
                           
                           
                           Real Estate
                           
                           
                           Consumer
                           
                           
                           Unallocated
                           
                           
                           TotalFor the year ended December 31, 2010Allowance for loan losses:Beginning Balance
                           
                           $
                           2,196
                           
                           $
                           4,008
                           
                           $
                           1,271
                           
                           $
                           274
                           
                           $
                           11
                           
                           $
                           7,760Charge-offs
                           
                           
                           (2,873
                           )
                           
                           (792
                           )
                           
                           (1,324
                           )
                           
                           (171
                           )
                           
                           
                           
                           
                           (5,160
                           )Recoveries
                           
                           
                           167
                           
                           
                           1
                           
                           
                           6
                           
                           
                           2
                           
                           
                           
                           
                           
                           176Net charge-offs
                           
                           
                           (2,706
                           )
                           
                           (791
                           )
                           
                           (1,318
                           )
                           
                           (169
                           )
                           
                           -
                           
                           
                           (4,984
                           )Provision
                           
                           
                           2,692
                           
                           
                           1,307
                           
                           
                           1,240
                           
                           
                           149
                           
                           
                           222
                           
                           
                           5,610Ending Balance
                           
                           $
                           2,182
                           
                           $
                           4,524
                           
                           $
                           1,193
                           
                           $
                           254
                           
                           $
                           233
                           
                           $
                           8,386Ending Balances:Individually evaluated for impairment
                           
                           $
                           773
                           
                           $
                           779
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           1,552Collectively evaluated for impairment
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           344
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           344Loans ReceivableEnding Balance - total
                           
                           $
                           109,450
                           
                           $
                           313,188
                           
                           $
                           142,258
                           
                           $
                           8,079
                           
                           $
                           (583
                           )
                           $
                           572,392Ending Balances:Individually evaluated for impairment
                           
                           $
                           2,125
                           
                           $
                           6,015
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           8,140Collectively evaluated for impairment
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           1,179
                           
                           $
                           7
                           
                           $
                           -
                           
                           $
                           1,186
 73


For the year ended December 31, 2009Allowance for loan losses:Beginning Balance
                           
                           $
                           1,864
                           
                           $
                           3,699
                           
                           $
                           1,084
                           
                           $
                           274
                           
                           $
                           85
                           
                           $
                           7,006Charge-offs
                           
                           
                           (1,640
                           )
                           
                           (1,351
                           )
                           
                           (540
                           )
                           
                           (134
                           )
                           
                           -
                           
                           
                           (3,665
                           )Recoveries
                           
                           
                           92
                           
                           
                           0
                           
                           
                           14
                           
                           
                           3
                           
                           
                           -
                           
                           
                           109Net charge-offs
                           
                           
                           (1,548
                           )
                           
                           (1,351
                           )
                           
                           (526
                           )
                           
                           -131
                           
                           
                           -
                           
                           
                           (3,556
                           )Provision
                           
                           
                           1,880
                           
                           
                           1,660
                           
                           
                           713
                           
                           
                           131
                           
                           
                           (74
                           )
                           
                           4,310Ending Balance
                           
                           $
                           2,196
                           
                           $
                           4,008
                           
                           $
                           1,271
                           
                           $
                           274
                           
                           $
                           11
                           
                           $
                           7,760Ending Balances:Individually evaluated for impairment
                           
                           $
                           777
                           
                           $
                           1,273
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           2,050Collectively evaluated for impairment
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           782
                           
                           $
                           164
                           
                           $
                           -
                           
                           $
                           946Loans ReceivableEnding Balance - total
                           
                           $
                           110,539
                           
                           $
                           315,770
                           
                           $
                           137,665
                           
                           $
                           11,021
                           
                           $
                           (725
                           )
                           $
                           574,270Ending Balances:Individually evaluated for impairment
                           
                           $
                           3,702
                           
                           $
                           4,909
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           8,611Collectively evaluated for impairment
                           
                           $
                           -
                           
                           $
                           -
                           
                           $
                           3,054
                           
                           $
                           75
                           
                           $
                           -
                           
                           $
                           3,129 The composition of past due loans by major loan categories is as
                  follows (dollars in thousands):  Greater30-59 Days
                           
                           
                           60-89 Days
                           
                           
                           than
                           
                           
                           Total
                           
                           
                           
                           
                           
                           TotalPast Due
                           
                           
                           Past Due
                           
                           
                           90 Days
                           
                           
                           Past Due
                           
                           
                           Current
                           
                           
                           LoansAs of December 31, 2010Commercial
                           
                           $
                           532
                           
                           $
                           646
                           
                           $
                           669
                           
                           $
                           1,847
                           
                           $
                           107,603
                           
                           $
                           109,450Commercial real estate:Construction
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1,377
                           
                           
                           1,377
                           
                           
                           9,967
                           
                           
                           11,344Other
                           
                           
                           2,093
                           
                           
                           2,170
                           
                           
                           4,118
                           
                           
                           8,381
                           
                           
                           293,463
                           
                           
                           301,844Consumer:Real estate
                           
                           
                           691
                           
                           
                           439
                           
                           
                           274
                           
                           
                           1,404
                           
                           
                           140,854
                           
                           
                           142,258Other
                           
                           
                           7
                           
                           
                           13
                           
                           
                           -
                           
                           
                           20
                           
                           
                           8,059
                           
                           
                           8,079Deferred origination fees, net
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (583
                           )
                           
                           (583
                           )$
                           3,323
                           
                           $
                           3,268
                           
                           $
                           6,438
                           
                           $
                           13,029
                           
                           $
                           559,363
                           
                           $
                           572,392As of December 31, 2009Commercial
                           
                           $
                           352
                           
                           $
                           499
                           
                           $
                           103
                           
                           $
                           954
                           
                           $
                           109,585
                           
                           $
                           110,539Commercial real estate:Construction
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1,483
                           
                           
                           1,483
                           
                           
                           21,258
                           
                           
                           22,741Other
                           
                           
                           938
                           
                           
                           1,671
                           
                           
                           2,346
                           
                           
                           4,955
                           
                           
                           288,074
                           
                           
                           293,029Consumer:Real estate
                           
                           
                           525
                           
                           
                           1,731
                           
                           
                           755
                           
                           
                           3,011
                           
                           
                           134,654
                           
                           
                           137,665Other
                           
                           
                           39
                           
                           
                           16
                           
                           
                           -
                           
                           
                           55
                           
                           
                           10,966
                           
                           
                           11,021Deferred origination fees, net
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (725
                           )
                           
                           (725
                           )$
                           1,854
                           
                           $
                           3,917
                           
                           $
                           4,687
                           
                           $
                           10,458
                           
                           $
                           563,812
                           
                           $
                           574,270
 74


The composition of our loan portfolio by risk rating and major loan
                  category is as follows (dollars in thousands):  Commercial
                           
                           
                           Commercial RealEstate - Construction
                           
                           
                           Commercial RealEstate - Other
                           
                           
                           ConsumerReal Estate
                           
                           
                           ConsumerOther
                           
                           
                           Total2010
                           
                           
                           2009
                           
                           
                           2010
                           
                           
                           2009
                           
                           
                           2010
                           
                           
                           2009
                           
                           
                           2010
                           
                           
                           2009
                           
                           
                           2010
                           
                           
                           2009
                           
                           
                           2010
                           
                           
                           2009Pass
                           
                           $
                           101,985
                           
                           $
                           97,910
                           
                           $
                           8,887
                           
                           $
                           17,737
                           
                           $
                           272,885
                           
                           $
                           268,963
                           
                           $
                           137,101
                           
                           $
                           131,312
                           
                           $
                           7,526
                           
                           $
                           10,486
                           
                           $
                           528,624
                           
                           $
                           526,408Special Mention
                           
                           
                           2,774
                           
                           
                           2,093
                           
                           
                           -
                           
                           
                           3,521
                           
                           
                           8,127
                           
                           
                           7,992
                           
                           
                           1,714
                           
                           
                           574
                           
                           
                           395
                           
                           
                           144
                           
                           
                           13,010
                           
                           
                           14,324Substandard
                           
                           
                           4,691
                           
                           
                           10,536
                           
                           
                           2,457
                           
                           
                           1,483
                           
                           
                           20,466
                           
                           
                           16,074
                           
                           
                           3,443
                           
                           
                           5,779
                           
                           
                           158
                           
                           
                           385
                           
                           
                           31,215
                           
                           
                           34,257Doubtful
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           126
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           126
                           
                           
                           -Loss
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           6
                           
                           
                           -
                           
                           
                           6Deferred origination fees
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (583
                           )
                           
                           (725
                           )$
                           109,258
                           
                           $
                           109,635
                           
                           $
                           11,344
                           
                           $
                           22,741
                           
                           $
                           301,844
                           
                           $
                           293,029
                           
                           $
                           142,258
                           
                           $
                           137,665
                           
                           $
                           8,079
                           
                           $
                           11,021
                           
                           $
                           572,392
                           
                           $
                           574,270 The composition of and information relative to impaired loans, by
                  major loan category is as follows (dollars in thousands):  Unpaid
                           
                           
                           
                           
                           
                           Average
                           
                           
                           InterestRecorded
                           
                           
                           Principal
                           
                           
                           Related
                           
                           
                           Recorded
                           
                           
                           IncomeInvestment
                           
                           
                           Balance
                           
                           
                           Allowance
                           
                           
                           Investment
                           
                           
                           RecognizedAs of December 31, 2010With no related allowance recorded:Commercial
                           
                           $
                           240
                           
                           $
                           490
                           
                           $
                           -
                           
                           $
                           514
                           
                           $
                           39Commercial real estate
                           
                           
                           3,622
                           
                           
                           6,450
                           
                           
                           -
                           
                           
                           2,577
                           
                           
                           15Consumer real estate
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1,397
                           
                           
                           -Consumer other
                           
                           
                           7
                           
                           
                           7
                           
                           
                           -
                           
                           
                           7
                           
                           
                           13,869
                           
                           
                           6,947
                           
                           
                           -
                           
                           
                           4,495
                           
                           
                           55With an related allowance recorded:Commercial
                           
                           
                           1,885
                           
                           
                           2,185
                           
                           
                           771
                           
                           
                           2,174
                           
                           
                           79Commercial real estate
                           
                           
                           2,393
                           
                           
                           2,672
                           
                           
                           772
                           
                           
                           2,861
                           
                           
                           82Consumer real estate
                           
                           
                           1,179
                           
                           
                           1,179
                           
                           
                           344
                           
                           
                           589
                           
                           
                           39Consumer other
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -5,457
                           
                           
                           6,036
                           
                           
                           1,887
                           
                           
                           5,624
                           
                           
                           200Total impaired loans:Commercial
                           
                           
                           2,125
                           
                           
                           2,675
                           
                           
                           771
                           
                           
                           2,688
                           
                           
                           118Commercial real estate
                           
                           
                           6,015
                           
                           
                           9,122
                           
                           
                           772
                           
                           
                           5,438
                           
                           
                           97Consumer real estate
                           
                           
                           1,179
                           
                           
                           1,179
                           
                           
                           344
                           
                           
                           1,986
                           
                           
                           39Consumer other
                           
                           
                           7
                           
                           
                           7
                           
                           
                           -
                           
                           
                           7
                           
                           
                           1$
                           9,326
                           
                           $
                           12,983
                           
                           $
                           1,887
                           
                           $
                           10,119
                           
                           $
                           255As of December 31, 2009With no related allowance recorded:Commercial
                           
                           $
                           788
                           
                           $
                           1,038
                           
                           $
                           -
                           
                           $
                           394
                           
                           $
                           43Commercial real estate
                           
                           
                           1,530
                           
                           
                           4,390
                           
                           
                           -
                           
                           
                           2,195
                           
                           
                           65Consumer real estate
                           
                           
                           2,793
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           83Consumer other
                           
                           
                           6
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           55,117
                           
                           
                           5,428
                           
                           
                           -
                           
                           
                           2,589
                           
                           
                           196With an related allowance recorded:Commercial
                           
                           
                           2,462
                           
                           
                           2,462
                           
                           
                           388
                           
                           
                           1,614
                           
                           
                           32Commercial real estate
                           
                           
                           3,332
                           
                           
                           3,446
                           
                           
                           700
                           
                           
                           4,600
                           
                           
                           60Consumer real estate
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           283
                           
                           
                           -Consumer other
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           7
                           
                           
                           -5,794
                           
                           
                           5,908
                           
                           
                           1,088
                           
                           
                           6,504
                           
                           
                           92Total impaired loans:Commercial
                           
                           
                           3,250
                           
                           
                           3,500
                           
                           
                           388
                           
                           
                           2,008
                           
                           
                           75Commercial real estate
                           
                           
                           4,862
                           
                           
                           7,836
                           
                           
                           700
                           
                           
                           6,795
                           
                           
                           125
 75


Unpaid
                        
                        
                        
                        
                        
                        Average
                        
                        
                        InterestRecorded
                        
                        
                        Principal
                        
                        
                        Related
                        
                        
                        Recorded
                        
                        
                        IncomeInvestment
                        
                        
                        Balance
                        
                        
                        Allowance
                        
                        
                        Investment
                        
                        
                        RecognizedConsumer real estate
                        
                        
                        2,793
                        
                        
                        -
                        
                        
                        -
                        
                        
                        283
                        
                        
                        83Consumer other
                        
                        
                        6
                        
                        
                        -
                        
                        
                        -
                        
                        
                        7
                        
                        
                        5$
                        10,911
                        
                        $
                        11,336
                        
                        $
                        1,088
                        
                        $
                        9,093
                        
                        $
                        288 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 31,2010
                           
                           
                           2009Land
                           
                           $
                           2,669
                           
                           $
                           2,669Buildings
                           
                           
                           10,764
                           
                           
                           10,783Leasehold Improvements
                           
                           
                           1,118
                           
                           
                           1,118Furniture and equipment
                           
                           
                           3,934
                           
                           
                           3,820Software
                           
                           
                           263
                           
                           
                           216Construction in process
                           
                           
                           152
                           
                           
                           -18,900
                           
                           
                           18,606Accumulated depreciation
                           
                           
                           (3,016
                           )
                           
                           (2,196
                           )Total property and equipment
                           
                           $
                           15,884
                           
                           $
                           16,410 At December 31, 2010, construction in process related to upfit costs
                  incurred on unfinished office space in our Columbia, South Carolina
                  regional office site. During the year ended December 31, 2009, we
                  capitalized interest of $62,000 related to the construction of the
                  Columbia regional office. We did not capitalize any interest during
                  the year ended December 31, 2010. Depreciation and amortization expense for the years ended December
                  31, 2010, 2009 and 2008 was $853,000, $724,000 and $541,000,
                  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
 76


NOTE 7. Other Real Estate Owned Other real estate owned is comprised of real estate held for
                  investment and real estate acquired in settlement of loans and is
                  included in other assets on the balance sheet. At both December 31,
                  2010 and 2009, real estate held for investment totaled $1.7 million
                  and consisted of one commercial property. The following summarizes
                  the activity in the real estate acquired in settlement of loans
                  portion of other real estate owned (dollars in thousands):  For the Years Ended December 31,2010
                           
                           
                           2009Balance, beginning of year
                           
                           $
                           3,704
                           
                           $
                           2,116Additions
                           
                           
                           3,433
                           
                           
                           4,552Sales
                           
                           
                           (940
                           )
                           
                           (962
                           )Write-downs
                           
                           
                           (569
                           )
                           
                           (302
                           )Transfer to property held for investment
                           
                           
                           -
                           
                           
                           (1,700
                           )Balance, end of year
                           
                           $
                           5,628
                           
                           $
                           3,704 NOTE 8. Deposits The following is a detail of the deposit accounts (dollars in thousands):  December 31,2010
                           
                           
                           2009Non-interest bearing
                           
                           $
                           46,816
                           
                           $
                           36,177Interest bearing:NOW accounts
                           
                           
                           136,926
                           
                           
                           48,975Money market accounts
                           
                           
                           100,555
                           
                           
                           87,801Savings
                           
                           
                           3,229
                           
                           
                           2,375Time, less than $100,000
                           
                           
                           69,347
                           
                           
                           72,832Time, $100,000 and over
                           
                           
                           179,423
                           
                           
                           245,924Total deposits
                           
                           $
                           536,296
                           
                           $
                           494,084 At December 31, 2010 and 2009, the Bank had approximately $86.4
                  million and $147.9 million, respectively, of time deposits that were
                  obtained outside of the Bank's primary market. Interest expense on
                  time deposits greater than $100,000 was $5.5 million, $7.3 million,
                  and $8.3 million for the years ended December 31, 2010, 2009, and
                  2008, respectively. At December 31, 2010 the scheduled maturities of certificates of
                  deposit are as follows (dollars in thousands):  2011
                           
                           $
                           159,9842012
                           
                           
                           64,7472013
                           
                           
                           19,5712014
                           
                           
                           4,0362015 and after
                           
                           
                           432$
                           248,770 NOTE 9. Federal Home Loan Bank Advances and Repurchase Agreements At December 31, 2010, the Bank had $122.7 million in FHLB advances
                  and related debt. Of the $122.7 million, FHLB advances represented
                  $103.5 million and securities sold under structured agreements to
                  repurchase represented $19.2 million. The FHLB advances are secured with approximately $113.1 million of
                  mortgage loans and $6.3 million of stock in the FHLB. On September 1,
                  2010, we restructured three of our FHLB advances totaling $37.5
                  million.  In accordance with accounting guidance, we determined that
                  the present value of the cash flows of the modified advances will not
                  change by more than 10% from the present value of the cash flows of
                  the original advances. Therefore, the modified FHLB advances are
                  considered to be a restructuring and no gain or loss was recorded in
                  the transaction.  The original FHLB advances had a weighted rate of
                  4.65% and an average remaining life of 18 months.  Under the modified
                  arrangements, the $37.5 million in FHLB advances have a weighted
                  average rate of 2.67% and an average remaining life of 43 months.
 77


Listed below is a summary of the terms and maturities of the advances
                  at December 31, 2010 (dollars in thousands). A majority of the Bank's
                  advances are callable and subject to repricing during 2011 at the
                  option of the FHLB.  Amount
                           
                           
                           Rate
                           
                           
                           Maturity$
                           20,000
                           
                           
                           2.61%
                           
                           
                           September 3, 20137,500
                           
                           
                           4.39%
                           
                           
                           May 12, 201410,000
                           
                           
                           3.05%
                           
                           
                           September 2, 20147,500
                           
                           
                           2.35%
                           
                           
                           September 2, 20147,000
                           
                           
                           4.21%
                           
                           
                           May 14, 20145,000
                           
                           
                           4.07%
                           
                           
                           October 11, 20167,500
                           
                           
                           4.38%
                           
                           
                           February 13, 20179,000
                           
                           
                           4.49%
                           
                           
                           July 11, 20175,000
                           
                           
                           4.25%
                           
                           
                           July 24, 201710,000
                           
                           
                           4.47%
                           
                           
                           February 15, 201915,000
                           
                           
                           4.75%
                           
                           
                           April 22, 2019$
                           103,500 At December 31, 2010 and 2009, the Bank had four structured debt
                  agreements secured by $23.6 million and $22.1 million, respectively, of various
                  investment securities. Each of these agreements have callable
                  features and are subject to repricing at the option of the seller.
                  Listed below is a summary of the terms and maturities of these
                  structured agreements to repurchase (dollars in thousands):  Amount
                           
                           
                           Rate
                           
                           
                           Maturity$
                           10,000
                           
                           
                           3.63%
                           
                           
                           September 18, 20172,000
                           
                           
                           3.65%
                           
                           
                           December 17, 20173,600
                           
                           
                           2.75%
                           
                           
                           March 14, 20183,600
                           
                           
                           2.55%
                           
                           
                           September 15, 2018$
                           19,200 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 at December 31,
                  2009 (dollars in thousands):  Amount
                           
                           
                           Rate
                           
                           
                           Maturity$
                           20,000
                           
                           
                           4.58%
                           
                           
                           May 5, 201020,000
                           
                           
                           4.90%
                           
                           
                           September 7, 20117,500
                           
                           
                           4.27%
                           
                           
                           May 10, 201210,000
                           
                           
                           4.42%
                           
                           
                           May 10, 20127,500
                           
                           
                           4.39%
                           
                           
                           May 12, 20147,000
                           
                           
                           4.21%
                           
                           
                           May 14, 20145,000
                           
                           
                           4.07%
                           
                           
                           October 11, 20167,500
                           
                           
                           4.38%
                           
                           
                           February 13, 20179,000
                           
                           
                           4.49%
                           
                           
                           July 11, 20175,000
                           
                           
                           4.25%
                           
                           
                           July 24, 201710,000
                           
                           
                           4.47%
                           
                           
                           February 15, 201915,000
                           
                           
                           4.75%
                           
                           
                           April 22, 2019$
                           123,500 NOTE 10. Note Payable The Company had a $4.3 million term note with Silverton Bridge Bank,
                  N.A. ("Silverton") at December 31, 2009, bearing interest at the
                  prime rate plus 0.5% with a floor rate of 4.0% and maturing on April
                  30, 2014. On August 10, 2010, the Company repaid the note payable
                  in full.
 78


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 3.40% at December 31, 2010. 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 junior subordinated debentures. The
                  debenture issuance cost, net of accumulated amortization, totaled
                  $45,000 at December 31, 2010 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, 2010, 2009
                  and 2008, 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 1.74% at December 31, 2010. 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, 2010, the Bank had four unused lines of credit to
                  purchase federal funds that totaled $30.5 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 $9.6 million in additional borrowings at
                  December 31, 2010. 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 one executive vice president. These agreements
                  include a) an incentive program, b) a stock option plan, c) a
                  one-year non-compete agreement upon termination and a severance
                  payment equal to one year of compensation. The total estimated
                  aggregate commitment is approximately $722,000. 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, 2010, 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 31,2011
                           
                           $
                           1,7262012
                           
                           
                           1,7402013
                           
                           
                           1,7592014
                           
                           
                           1,7742015
                           
                           
                           727Thereafter
                           
                           
                           2,005$
                           9,731 Lease expense for the years ended December 31, 2010, 2009, and 2008,
                  totaled $669,000, $710,000, and $663,000, respectively. The Bank may be subject to litigation and claims in the normal course
                  of business. As of December 31, 2010, management believes there is no
                  material litigation pending.
 79


NOTE 14. Income Taxes The components of income tax expense were as follows (dollars in thousands):  For the years ended December 31,2010
                           
                           
                           2009
                           
                           
                           2008Current income taxes:Federal
                           
                           $
                           1,238
                           
                           $
                           (85
                           )
                           $
                           2,144State
                           
                           
                           60
                           
                           
                           9
                           
                           
                           71Total current tax expense
                           
                           
                           1,298
                           
                           
                           (76
                           )
                           
                           2,215Deferred income tax expense (benefit) and change in valuation allowance
                           
                           
                           (1,105
                           )
                           
                           421
                           
                           
                           (1,589
                           )Income tax expense
                           
                           $
                           193
                           
                           $
                           345
                           
                           $
                           626 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 31,2010
                           
                           
                           2009
                           
                           
                           2008Tax expense at statutory rate
                           
                           $
                           368
                           
                           $
                           600
                           
                           $
                           843Effect of state income taxes
                           
                           
                           40
                           
                           
                           6
                           
                           
                           47Exempt income and other
                           
                           
                           (215
                           )
                           
                           (261
                           )
                           
                           (264
                           )Income tax expense
                           
                           $
                           193
                           
                           $
                           345
                           
                           $
                           626 The components of the deferred tax assets and liabilities are as
                  follows (dollars in thousands):  December 31,2010
                           
                           
                           2009Deferred tax assets:Allowance for loan losses
                           
                           $
                           2,812
                           
                           $
                           2,509Net deferred loan fees
                           
                           
                           198
                           
                           
                           246Deferred compensation
                           
                           
                           279
                           
                           
                           232Unrealized loss on securities available for sale
                           
                           
                           364
                           
                           
                           -Sale of real estate owned
                           
                           
                           82
                           
                           
                           88Other
                           
                           
                           285
                           
                           
                           1,2724,020
                           
                           
                           4,347Deferred tax liabilities:Property and equipment
                           
                           $
                           929
                           
                           $
                           526Unrealized gain on securities available for sale
                           
                           
                           -
                           
                           
                           249Other
                           
                           
                           97
                           
                           
                           861,026
                           
                           
                           861Net deferred tax asset
                           
                           $
                           2,994
                           
                           $
                           3,486 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.
 80


A summary of loan transactions with directors, including their
                  affiliates and executive officers is as follows (dollars in
                  thousands):  For the years ended December 31,2010
                           
                           
                           2009Balance, beginning of year
                           
                           $
                           17,769
                           
                           $
                           17,254New loans
                           
                           
                           15,194
                           
                           
                           13,932Less loan payments
                           
                           
                           (14,816
                           )
                           
                           (13,417
                           )Balance, end of year
                           
                           $
                           18,147
                           
                           $
                           17,769 Deposits by officers and directors and their related interests at
                  December 31, 2010 and 2009, were $2.7 million and $3.0 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 $1,000 and $19,000 to the
                  company for the years ended December 31, 2010 and 2009, 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 $4,924. 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 $30,000,
                  $33,000, and $20,000 for these services during 2010, 2009, and 2008,
                  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 three installments of approximately $189,000 in January of
                  2010, 2009 and 2008, respectively. 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, 2010, unfunded commitments to extend credit were
                  approximately $86.4 million, of which $9.5 million is at fixed rates
                  and $76.9 million is at variable rates. 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. 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, 2010 and 2009, there was a $2.8 million and $5.5
                  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 property. Since most of the letters of
                  credit are expected to expire without being drawn upon, they do not
                  necessarily represent future
 81


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 for the years ended December 31, 2010, 2009, and 2008
                  amounted to $192,000, $149,000, and $152,000, 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, 2010, the Company had an accrued benefit
                  obligation of $820,000. The Company incurred expenses related to this
                  plan of $128,000, $295,000, and $189,000 in 2010, 2009, and 2008,
                  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 and expired on January 10,
                  2010. There were 73,493 warrants outstanding at December 31, 2009.
                  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 the Plan any awards remaining
                  and granted after March 2010 are accounted for as non-qualified stock
                  options. As of January 2011, all available options under the Plan
                  have been granted. On May 18, 2010, the Company adopted the 2010 Incentive Plan in order
                  to attract and retain highly qualified personnel who will contribute
                  to the Company's success. The Plan makes available for issuance
                  302,500 stock options (adjusted for the 10% stock dividend in 2011).
                  The options may be exercised at an option price per share based on
                  the fair market value and determined on the date of grant and expire
                  10 years from the grant date. A summary of the status of the stock option plan and changes for the
                  years ended December 31, are presented below:  2010
                           
                           
                           2009
                           
                           
                           2008Shares
                           
                           
                           Weightedaverageexerciseprice
                           
                           
                           AggregateIntrinsicValue
                           
                           
                           Shares
                           
                           
                           Weightedaverageexerciseprice
                           
                           
                           AggregateIntrinsicValue
                           
                           
                           Shares
                           
                           
                           Weightedaverageexerciseprice
                           
                           
                           AggregateIntrinsicValueOutstanding at beginning of year
                           
                           
                           373,081
                           
                           $
                           8.08
                           
                           
                           
                           
                           
                           306,531
                           
                           $
                           8.51
                           
                           
                           
                           
                           
                           294,954
                           
                           $
                           7.96Granted
                           
                           
                           184,250
                           
                           
                           6.86
                           
                           
                           
                           
                           
                           66,550
                           
                           
                           6.15
                           
                           
                           
                           
                           
                           32,450
                           
                           
                           12.27Exercised
                           
                           
                           19,663
                           
                           
                           5.51
                           
                           
                           
                           
                           
                           -
                           
                           
                           -
                           
                           
                           
                           
                           
                           19,058
                           
                           
                           5.88Forfeited or expired
                           
                           
                           (183,563
                           )
                           
                           6.47
                           
                           
                           
                           
                           
                           -
                           
                           
                           -
                           
                           
                           
                           
                           
                           (1,815
                           )
                           
                           14.87Outstanding at end of year
                           
                           
                           354,105
                           
                           $
                           8.51
                           
                           $
                           72,075
                           
                           
                           373,081
                           
                           $
                           8.08
                           
                           $
                           121,786
                           
                           
                           306,531
                           
                           $
                           8.51
                           
                           $
                           934,117Options exercisable at year-end
                           
                           
                           113,540
                           
                           
                           
                           
                           $
                           72,075
                           
                           
                           277,794
                           
                           
                           
                           
                           $
                           121,786
                           
                           
                           292,574
                           
                           
                           
                           
                           $
                           934,117Shares available for grant
                           
                           
                           362,148
                           
                           
                           
                           
                           
                           
                           
                           
                           60,335
                           
                           
                           
                           
                           
                           
                           
                           
                           126,885 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
                  2010, 2009 and 2008; risk-free interest rate of 3.25% for 2010, 2.59%
                  for 2009, and 3.72% for 2008; 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 2010 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, 2010. This amount changes based on the
                  fair market value of the Company's stock. In 2006, the Company adopted a restricted stock plan for the benefit
                  of the directors, officers and employees. At December 31, 2010 and
                  2009, 12,100 shares (adjusted for the stock dividends in 2006 and
                  2011) of stock were authorized under
 82


the restricted stock plan, of which 9,350 shares were available to be
                  granted. The 2010 Incentive Plan which the Company adopted in May
                  2010 included a provision for the issuance of 66,000 shares of
                  restricted stock (adjusted for the 10% stock dividend in 2011). There
                  were no shares of restricted stock awarded during 2010 or 2009. Shares of restricted stock granted to employees under the stock plans
                  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, 2010 and 2009 (adjusted
                  for the stock dividend in 2011) is as follows:  2010
                           
                           
                           2009Restricted Shares
                           
                           
                           WeightedAverageGrant-DateFair Value
                           
                           
                           Restricted Shares
                           
                           
                           WeightedAverageGrant-DateFair ValueNonvested at beginning of year
                           
                           
                           688
                           
                           $
                           19.66
                           
                           
                           1,375
                           
                           $
                           19.66Granted
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -Vested
                           
                           
                           688
                           
                           
                           19.66
                           
                           
                           687
                           
                           
                           19.66Forfeited
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -Nonvested at end of year
                           
                           
                           -
                           
                           $
                           -
                           
                           
                           688
                           
                           $
                           19.66 NOTE 19. Dividends The ability of the Company to pay cash dividends is dependent upon
                  receiving cash in the form of dividends from the Bank. The dividends
                  that may be paid by the Bank to the Company are subject to legal
                  limitations and regulatory capital requirements. The approval of the
                  Office of the Comptroller of the Currency ("OCC") is required if the
                  total of all 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. 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. In addition, the
                  Company must currently obtain preapproval of the Federal Reserve
                  before paying dividends. On January 18, 2011, the company's Board of Directors approved a 10
                  percent stock dividend to the company's shareholders.  The record
                  date was January 28, 2011 and the distribution date was February 14,
                  2011.  Earnings per share and average shares outstanding have been
                  adjusted to reflect the stock dividend in our Consolidated Statements
                  of Income. 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, 2010, that the Company and
                  Bank exceed all well capitalized requirements to which they
                  are subject. On June 8, 2010, the Bank entered into a formal agreement (the
                  "Formal Agreement") with its primary regulator, the OCC. The Formal
                  Agreement seeks to enhance the Bank's existing practices and
                  procedures in the areas of credit risk management, credit
                  underwriting, liquidity, and funds management. In addition, the OCC
                  has established Individual Minimum Capital Ratio levels of Tier 1 and
                  total capital for the Bank that are higher than the minimum and well
                  capitalized ratios applicable to all banks.
 83


Specifically, we must maintain total risk-based capital of at least
                  12%, Tier 1 capital of at least 10%, and a leverage ratio of at least
                  9%. The Board of Directors and management of the Bank have
                  aggressively worked to improve these practices and procedures and
                  believe the Company is currently in compliance with substantially all
                  of the requirements of the Formal Agreement. See "Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations" for more discussion of the Formal Agreement. As of December 31, 2010, our capital ratios exceed these ratios and
                  we remain "well capitalized." However, if we fail to maintain these
                  required capital levels, then the OCC may deem noncompliance to be an
                  unsafe and unsound banking practice which may make the Bank subject
                  to a capital directive, a consent order, or such other administrative
                  actions or sanctions as the OCC considers necessary.  It is uncertain
                  what actions, if any, the OCC would take with respect to
                  noncompliance with these ratios, what action steps the OCC might
                  require the Bank to take to remedy this situation, and whether such
                  actions would be successful. The following table summarizes the capital amounts and ratios of the
                  Bank and the regulatory minimum requirements at December 31, 2010 and
                  2009 (dollars in thousands).  Actual
                           
                           
                           OCC RequiredCapital RatioMinimum
                           
                           
                           For capitaladequacy purposesMinimum
                           
                           
                           To be well capitalizedunder promptcorrectiveaction provisionsMinimumAmount
                           
                           
                           Ratio
                           
                           
                           Amount
                           
                           
                           Ratio
                           
                           
                           Amount
                           
                           
                           Ratio
                           
                           
                           Amount
                           
                           
                           RatioAs of December 31, 2010Total Capital (to risk weighted assets)
                           
                           $
                           78,659
                           
                           
                           13.2
                           %
                           
                           71,487
                           
                           
                           12.0
                           %
                           
                           47,658
                           
                           
                           8.0
                           %
                           
                           59,572
                           
                           
                           10.0
                           %Tier 1 Capital (to risk weighted assets)
                           
                           
                           71,201
                           
                           
                           12.0
                           %
                           
                           59,572
                           
                           
                           10.0
                           %
                           
                           23,829
                           
                           
                           4.0
                           %
                           
                           35,743
                           
                           
                           6.0
                           %Tier 1 Capital (to average assets)
                           
                           
                           71,201
                           
                           
                           9.6
                           %
                           
                           66,895
                           
                           
                           9.0
                           %
                           
                           29,731
                           
                           
                           4.0
                           %
                           
                           37,164
                           
                           
                           5.0
                           %As of December 31, 2009Total Capital (to risk weighted assets)
                           
                           $
                           77,393
                           
                           
                           12.8
                           %
                           
                           N/A
                           
                           
                           N/A
                           
                           
                           48,215
                           
                           
                           8.0
                           %
                           
                           60,268
                           
                           
                           10.0
                           %Tier 1 Capital (to risk weighted assets)
                           
                           
                           69,857
                           
                           
                           11.6
                           %
                           
                           N/A
                           
                           
                           N/A
                           
                           
                           24,107
                           
                           
                           4.0
                           %
                           
                           36,161
                           
                           
                           6.0
                           %Tier 1 Capital (to average assets)
                           
                           
                           69,857
                           
                           
                           9.6
                           %
                           
                           N/A
                           
                           
                           N/A
                           
                           
                           29,028
                           
                           
                           4.0
                           %
                           
                           36,285
                           
                           
                           5.0
                           % NOTE 21. Selected Condensed Quarterly Financial Data (Unaudited) Following is a summary of operations by quarter (dollars in
                  thousands, except share data):  2010
                           
                           
                           Quarters endedMarch 31
                           
                           
                           June 30
                           
                           
                           September 30
                           
                           
                           December 31Interest income
                           
                           $
                           8,857
                           
                           $
                           8,942
                           
                           $
                           8,992
                           
                           $
                           8,738Interest expense
                           
                           
                           4,076
                           
                           
                           4,045
                           
                           
                           3,761
                           
                           
                           3,435Net interest income
                           
                           
                           4,781
                           
                           
                           4,897
                           
                           
                           5,231
                           
                           
                           5,303Provision for loan losses
                           
                           
                           1,400
                           
                           
                           2,300
                           
                           
                           1,275
                           
                           
                           635Noninterest income
                           
                           
                           570
                           
                           
                           1,585
                           
                           
                           87
                           
                           
                           129Noninterest expenses
                           
                           
                           4,008
                           
                           
                           4,111
                           
                           
                           3,596
                           
                           
                           4,175Income (loss) before income tax expense
                           
                           
                           (57
                           )
                           
                           71
                           
                           
                           447
                           
                           
                           622Income tax expense (benefit)
                           
                           
                           (75
                           )
                           
                           (23
                           )
                           
                           110
                           
                           
                           181Net income
                           
                           
                           18
                           
                           
                           94
                           
                           
                           337
                           
                           
                           441Preferred stock dividends
                           
                           
                           216
                           
                           
                           216
                           
                           
                           216
                           
                           
                           217Dividend accretion
                           
                           
                           124
                           
                           
                           116
                           
                           
                           116
                           
                           
                           116Net income(loss) available to common shareholders
                           
                           $
                           (322
                           )
                           $
                           (238
                           )
                           $
                           5
                           
                           $
                           108Earnings (loss) per common shareBasic
                           
                           $
                           (0.09
                           )
                           $
                           (0.07
                           )
                           $
                           0.00
                           
                           $
                           0.03Diluted
                           
                           $
                           (0.09
                           )
                           $
                           (0.07
                           )
                           $
                           0.00
                           
                           $
                           0.03Weighted average common shares outstandingBasic
                           
                           
                           3,441,396
                           
                           
                           3,457,499
                           
                           
                           3,457,499
                           
                           
                           3,457,499Diluted
                           
                           
                           3,441,396
                           
                           
                           3,457,499
                           
                           
                           3,458,498
                           
                           
                           3,458,636
 84


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
                           
                           
                           414
                           
                           
                           519
                           
                           
                           533
                           
                           
                           377Noninterest expenses
                           
                           
                           3,429
                           
                           
                           3,964
                           
                           
                           3,865
                           
                           
                           3,793Income before income tax expense
                           
                           
                           696
                           
                           
                           499
                           
                           
                           533
                           
                           
                           36Income tax expense (benefit)
                           
                           
                           209
                           
                           
                           144
                           
                           
                           109
                           
                           
                           (117
                           )Net income
                           
                           
                           487
                           
                           
                           355
                           
                           
                           424
                           
                           
                           153Preferred stock dividends
                           
                           
                           78
                           
                           
                           216
                           
                           
                           218
                           
                           
                           218Dividend accretion
                           
                           
                           42
                           
                           
                           127
                           
                           
                           127
                           
                           
                           128Net income(loss) available to common shareholders
                           
                           $
                           367
                           
                           $
                           12
                           
                           $
                           79
                           
                           $
                           (193
                           )Earnings (loss) per common shareBasic
                           
                           $
                           0.11
                           
                           $
                           0.00
                           
                           $
                           0.03
                           
                           $
                           (0.06
                           )Diluted
                           
                           $
                           0.11
                           
                           $
                           0.00
                           
                           $
                           0.03
                           
                           $
                           (0.06
                           )Weighted average common shares outstandingBasic
                           
                           
                           3,349,349
                           
                           
                           3,349,349
                           
                           
                           3,353,854
                           
                           
                           3,340,458Diluted
                           
                           
                           3,359,326
                           
                           
                           3,350,315
                           
                           
                           3,420,678
                           
                           
                           3,340,458 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.
 85


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, 2010, 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 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, 2010:Securities available for sale:State and political subdivisions
                           
                           $
                           -
                           
                           $
                           11,166
                           
                           $
                           -Mortgage-backed securities
                           
                           
                           -
                           
                           
                           50,101
                           
                           
                           2,516Other investments
                           
                           
                           -
                           
                           
                           -
                           
                           
                           9,070Total
                           
                           $
                           -
                           
                           $
                           61,267
                           
                           $
                           11,586As 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
 86


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, 2010 to December 31, 2010, for all Level 3 assets that are
                  measured at fair value on a recurring basis (dollars in thousands).  Collateralized mortgage obligations
                           
                           
                           Other investmentsBeginning balance
                           
                           $
                           6,658
                           
                           $
                           9,213Total realized and unrealized gains or losses:Included in earnings
                           
                           
                           (1,093
                           )
                           
                           -Included in other comprehensive income
                           
                           
                           -
                           
                           
                           -Purchases
                           
                           
                           -
                           
                           
                           750Sales
                           
                           
                           (2,007
                           )
                           
                           (755
                           )Principal reductions
                           
                           
                           (1,042
                           )
                           
                           (138
                           )Transfers in and/or out of Level 3
                           
                           
                           -
                           
                           
                           -Ending Balance
                           
                           $
                           2,516
                           
                           $
                           9,070
 87


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 79.6% 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, 2010 and 2009 (dollars in
                  thousands).  Quoted market price in active markets(Level 1)
                           
                           
                           Significant otherobservable inputs(Level 2)
                           
                           
                           Significantunobservable inputs(Level 3)2010Impaired loans
                           
                           $
                           -
                           
                           $
                           6,588
                           
                           $
                           -Other real estate owned
                           
                           
                           -
                           
                           
                           3,887
                           
                           
                           1,742  Quoted market price in active markets(Level 1)
                           
                           
                           Significant otherobservable inputs(Level 2)
                           
                           
                           Significantunobservable inputs(Level 3)2009Impaired loans
                           
                           $
                           -
                           
                           $
                           9,823
                           
                           $
                           -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.
 88


The estimated fair values of the Company's financial instruments at
                  December 31, 2010 and December 31, 2009 are as follows (dollars in
                  thousands):  December 31, 2010
                           
                           
                           December 31, 2009CarryingAmount
                           
                           
                           FairValue
                           
                           
                           CarryingAmount
                           
                           
                           FairValueFinancial Assets:Cash and cash equivalents
                           
                           $
                           53,850
                           
                           $
                           53,850
                           
                           $
                           12,082
                           
                           $
                           12,082Investment securities available for sale
                           
                           
                           63,783
                           
                           
                           63,783
                           
                           
                           76,195
                           
                           
                           76,195Investment securities held to maturity
                           
                           
                           -
                           
                           
                           -
                           
                           
                           9,225
                           
                           
                           9,516Other investments
                           
                           
                           9,070
                           
                           
                           9,070
                           
                           
                           9,213
                           
                           
                           9,213Loans, net
                           
                           
                           564,006
                           
                           
                           575,803
                           
                           
                           566,510
                           
                           
                           575,396Bank owned life insurance
                           
                           
                           14,528
                           
                           
                           14,528
                           
                           
                           13,974
                           
                           
                           13,974Financial Liabilities:Deposits
                           
                           
                           536,296
                           
                           
                           489,525
                           
                           
                           494,084
                           
                           
                           461,744Federal Home Loan Bank advances and related debt
                           
                           
                           122,700
                           
                           
                           140,493
                           
                           
                           142,700
                           
                           
                           163,818Note payable
                           
                           
                           -
                           
                           
                           -
                           
                           
                           4,250
                           
                           
                           4,603Junior subordinated debentures
                           
                           
                           13,403
                           
                           
                           2,563
                           
                           
                           13,403
                           
                           
                           4,139 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 31,2010
                           
                           
                           2009AssetsCash and cash equivalents
                           
                           $
                           586
                           
                           $
                           5,824Investment in subsidiaries
                           
                           
                           70,898
                           
                           
                           70,744Other assets
                           
                           
                           1,141
                           
                           
                           978Total assets
                           
                           $
                           72,625
                           
                           $
                           77,546Liabilities and Shareholders' EquityAccounts payable and accrued expenses
                           
                           $
                           6
                           
                           $
                           52Notes Payable
                           
                           
                           -
                           
                           
                           4,250Junior subordinated debentures
                           
                           
                           13,403
                           
                           
                           13,403Shareholders' equity
                           
                           
                           59,216
                           
                           
                           59,841Total liabilities and shareholders' equity
                           
                           $
                           72,625
                           
                           $
                           77,546 Condensed Statements of Income  For the years ended December 31,2010
                           
                           
                           2009
                           
                           
                           2008RevenuesInterest income
                           
                           $
                           11
                           
                           $
                           122
                           
                           $
                           7Total revenue
                           
                           
                           11
                           
                           
                           122
                           
                           
                           7ExpensesInterest expense
                           
                           
                           452
                           
                           
                           645
                           
                           
                           1,140Other expenses
                           
                           
                           245
                           
                           
                           119
                           
                           
                           70Total expenses
                           
                           
                           697
                           
                           
                           764
                           
                           
                           1,210Income tax benefit
                           
                           
                           233
                           
                           
                           218
                           
                           
                           409Loss before equity in undistributed net income of subsidiaries
                           
                           
                           (453
                           )
                           
                           (424
                           )
                           
                           (794
                           )Equity in undistributed net income of subsidiaries
                           
                           
                           1,343
                           
                           
                           1,843
                           
                           
                           2,646Net income
                           
                           $
                           890
                           
                           $
                           1,419
                           
                           $
                           1,852
 89


Condensed Statements of Cash Flows  For the years ended December 31,2010
                           
                           
                           2009
                           
                           
                           2008Operating activitiesNet income
                           
                           $
                           890
                           
                           $
                           1,419
                           
                           $
                           1,852Adjustments to reconcile net income to net cash used foroperating activitiesEquity in undistributed net income of subsidiaries
                           
                           
                           (1,343
                           )
                           
                           (1,843
                           )
                           
                           (2,646
                           )Compensation expense related to stock options and restricted stock grants
                           
                           
                           245
                           
                           
                           118
                           
                           
                           70Decrease (increase) in other assets
                           
                           
                           (163
                           )
                           
                           (239
                           )
                           
                           (385
                           )Increase (decrease) in accounts payable and accrued expenses
                           
                           
                           (47
                           )
                           
                           (59
                           )
                           
                           95Net cash used for operating activities
                           
                           
                           (418
                           )
                           
                           (604
                           )
                           
                           (1,014
                           )Investing activitiesInvestment in subsidiaries
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (6,975
                           )Net cash used for investing activities
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (6,975
                           )Financing activitiesIncrease (decrease) in note payable
                           
                           
                           (4,250
                           )
                           
                           (10,750
                           )
                           
                           6,980Proceeds from the issuance of preferred stock
                           
                           
                           -
                           
                           
                           15,856
                           
                           
                           -Proceeds from the issuance of stock warrant
                           
                           
                           -
                           
                           
                           1,418
                           
                           
                           -Cash dividend on preferred stock
                           
                           
                           (865
                           )
                           
                           (620
                           )
                           
                           -Proceeds from the exercise of stock options and warrants
                           
                           
                           295
                           
                           
                           301
                           
                           
                           603Net cash provided by (used for) financing activities
                           
                           
                           (4,820
                           )
                           
                           6,205
                           
                           
                           7,583Net increase (decrease) in cash and cash equivalents
                           
                           
                           (5,238
                           )
                           
                           5,601
                           
                           
                           (406
                           )Cash and cash equivalents, beginning of year
                           
                           
                           5,824
                           
                           
                           223
                           
                           
                           629Cash and cash equivalents, end of year
                           
                           $
                           586
                           
                           $
                           5,824
                           
                           $
                           223 NOTE 24. Subsequent Event On February 10, 2011, the Company sold a $1.3 million piece of
                  residential real estate which was held in other real estate owned.
                  The Company accepted an offer on the property for $1.15 million which
                  was less than the appraised value, and subsequently recorded a
                  $261,000 loss on the property. On January 18, 2011, the Company's Board of Directors approved a 10
                  percent stock dividend to the Company's shareholders.  The record
                  date was January 28, 2011 and the distribution date was February 14,
                  2011.  Earnings per share and average shares outstanding have been
                  adjusted to reflect the stock dividend in our financial statements
                  and accompanying footnotes.
 90


Item 9. Changes in and Disagreements with Accountants on Accounting
                        and Financial Disclosure None. Item 9A. 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 Principal
                  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 Principal Financial
                  Officer have concluded that our current disclosure controls and
                  procedures are effective as of December 31, 2010. There have been no
                  significant changes in our internal controls over financial reporting
                  during the fourth fiscal quarter ended December 31, 2010 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, 2010
                  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, 2010. 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 2010 that was not so
                  disclosed.
 91


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
                  17, 2011 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
                  17, 2011 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 17, 2011 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 17, 2011 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
                  17, 2011 and is incorporated herein by reference. Item 15. Exhibits, Financial Statement Schedules  (a)
                           
                           
                           (1)
                           
                           
                           Financial StatementsThe following consolidated financial statements are located in Item 8
                              of this report.Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2010 and 2009Consolidated Statements of Income for the years ended December 31,
                              2010, 2009 and 2008Consolidated Statements of Changes in Shareholders' Equity and
                              Comprehensive Income (Loss) for the years ended December 31, 2010,
                              2009 and 2008Consolidated Statements of Cash Flows for the years ended December
                              31, 2010, 2009 and 2008Notes 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).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).*
 92


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
                        
                        
                        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).*10.9
                        
                        
                        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).*10.10
                        
                        
                        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).*10.11
                        
                        
                        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).*10.12
                        
                        
                        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).*10.13
                        
                        
                        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).*10.14
                        
                        
                        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).*10.15
                        
                        
                        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).*10.16
                        
                        
                        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).*10.17
                        
                        
                        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).*10.18
                        
                        
                        Form of Waiver, executed by each of Messrs. 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).*10.19
                        
                        
                        Form of Letter Amendment, executed by each of Messrs. 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).*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 Principal Financial Officer.32
                        
                        
                        Section 1350 Certifications.99.1
                        
                        
                        Certification of the Chief Executive Officer Pursuant to Section
                           111(b)(4) of the Emergency Economic Stabilization Act of 2008.99.2
                        
                        
                        Certification of the Principal Financial Officer Pursuant to Section
                           111(b)(4) of the Emergency Economic Stabilization Act of 2008. *        Management contract or compensatory plan or arrangement
                  required to be filed as an Exhibit to this Annual Report on Form 10-K.
 93


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 4, 2011
                           
                           
                           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/F. Justin Strickland
                           
                           
                           
                           
                           
                           President, (Principal Financial Officer)
                           
                           
                           March 4, 2011F. Justin Strickland/s/Andrew B. Cajka, Jr.
                           
                           
                           
                           
                           
                           Director
                           
                           
                           February 24, 2011Andrew B. Cajka, Jr./s/Mark A. Cothran
                           
                           
                           
                           
                           
                           Director
                           
                           
                           March 4, 2011Mark A. Cothran/s/Leighton M. Cubbage
                           
                           
                           
                           
                           
                           Director
                           
                           
                           March 4, 2011Leighton M. Cubbage/s/David G. Ellison
                           
                           
                           
                           
                           
                           Director
                           
                           
                           March 4, 2011David G. Ellison/s/Anne S. Ellefson
                           
                           
                           
                           
                           
                           Director
                           
                           
                           March 4, 2011Anne S. Ellefson/s/Fred Gilmer, Jr.
                           
                           
                           
                           
                           
                           Director
                           
                           
                           March 4, 2011Fred Gilmer, Jr./s/Tecumseh Hooper, Jr.
                           
                           
                           
                           
                           
                           Director
                           
                           
                           February 24, 2011Tecumseh Hooper, Jr./s/Rudolph G. Johnstone, III, M.D.
                           
                           
                           
                           
                           
                           Director
                           
                           
                           March 4, 2011Rudolph G. Johnstone, III, M.D./s/James B. Orders, III
                           
                           
                           
                           
                           
                           Director, Chairman
                           
                           
                           March 4, 2011James B. Orders, III/s/William B. Sturgis
                           
                           
                           
                           
                           
                           Director
                           
                           
                           February 24, 2011William B. Sturgis/s/R. Arthur Seaver, Jr.
                           
                           
                           
                           
                           
                           Director, Chief Executive Officer
                           
                           
                           March 4, 2011R. Arthur Seaver, Jr.
                           
                           
                           
                           
                           
                           (Principal Executive Officer)
 94


EXHIBIT INDEX  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 Principal Financial Officer.32
                           
                           
                           Section 1350 Certifications.99.1
                           
                           
                           Certification of the Chief Executive Officer Pursuant to Section
                              111(b)(4) of the Emergency Economic Stabilization Act of 2008.99.2
                           
                           
                           Certification of the Principal Financial Officer Pursuant to Section
                              111(b)(4) of the Emergency Economic Stabilization Act of 2008. *            Management contract or compensatory plan or arrangement
                  required to be filed as an Exhibit to this Annual Report on Form 10-K.
 95