Southern First Bancshares (SFST) 10-Q 2012 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2012
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from                      to
Commission file number 000-27719

Southern First Bancshares, Inc.

(Exact name of registrant as specified in its charter)

South Carolina	58-2459561
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
100 Verdae Boulevard, Suite 100
Greenville, S.C.	29606
(Address of principal executive offices)	(Zip Code)

864-679-9000
(Registrant's telephone number, including area code)

Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yesx 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 preceding12 months (or for such shorter period that the registrant was required to submit and post such files).
Yesx   Noo

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

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o(Do not check if a smaller reporting company)	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). Yeso No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 3,841,812 shares of common stock, par value $0.01 per share, were issued and outstanding as of May 1, 2012.

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
March 31, 2012 Form 10-Q

INDEX

PART I – FINANCIAL INFORMATION		Page
Item 1.	Financial Statements
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss)	6
	Consolidated Statements of Cash Flows	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42
Item 4.	Controls and Procedures	42
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	42

PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

	March 31,		December 31,
(dollars in thousands, except share data)	2012		2011
	(Unaudited)		(Audited)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$    10,295		7,417
Interest-bearing deposits with banks	16,498		15,588
Federal funds sold and securities purchased under agreements to resell	19,580		-
Total cash and cash equivalents	46,373		23,005
Investment securities:
Investment securities available for sale	70,691		100,660
Other investments, at cost	7,924		7,924
Total investment securities	78,615		108,584
Loans	607,925		598,634
Less allowance for loan losses	(9,196	)	(8,925	)
Loans, net	598,729		589,709
Bank owned life insurance	18,252		18,093
Property and equipment, net	17,302		17,342
Deferred income taxes	3,003		2,951
Other assets	7,732		8,061
Total assets	$  770,006		767,745
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits	$  566,722		562,912
Federal Home Loan Bank advances and repurchase agreements	122,700		122,700
Junior subordinated debentures	13,403		13,403
Other liabilities	4,175		6,191
Total liabilities	707,000		705,206
Shareholders' equity:
Preferred stock, par value $.01 per share, 10,000,000 shares authorized, 17,299 shares issued and outstanding	16,669		16,596
Common stock, par value $.01 per share, 10,000,000 shares authorized, 3,841,812 and 3,820,830 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively	38		38
Nonvested restricted stock	(77	)	(16	)
Additional paid-in capital	39,759		39,546
Accumulated other comprehensive income	900		1,041
Retained earnings	5,717		5,334
Total shareholders' equity	63,006		62,539
Total liabilities and shareholders' equity	$  770,006		767,745

See notes to consolidated financial statements that are an integral part of these consolidated statements. Additional paid in capital, retained earnings and common shares outstanding as of December 31, 2011 have been adjusted to reflect the ten percent stock dividend issued in 2012.

3

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

	For the three months ended March 31,
(dollars in thousands, except share data)	2012	2011
Interest income
Loans	$            7,986	8,123
Investment securities	557	454
Federal funds sold	14	28
Total interest income	8,557	8,605
Interest expense
Deposits	1,262	1,977
Borrowings	1,166	1,227
Total interest expense	2,428	3,204
Net interest income	6,129	5,401
Provision for loan losses	1,200	725
Net interest income after provision for loan losses	4,929	4,676
Noninterest income
Loan fee income	200	144
Service fees on deposit accounts	181	138
Income from bank owned life insurance	159	132
Gain on sale of investment securities	72	-
Other income	225	181
Total noninterest income	837	595
Noninterest expenses
Compensation and benefits	2,425	2,065
Occupancy	583	539
Real estate owned activity	278	531
Data processing and related costs	514	435
Insurance	352	403
Marketing	194	170
Professional fees	180	142
Other	253	221
Total noninterest expenses	4,779	4,506
Income before income tax expense	987	765
Income tax expense	299	228
Net income	688	537
Preferred stock dividend	216	216
Discount accretion (1)	73	68
Net income available to common shareholders (1)	$              399	253
Earnings per common share (1)
Basic	$             0.10	0.07
Diluted	$             0.10	0.06
Weighted average common shares outstanding
Basic	3,838,747	3,813,368
Diluted	3,879,830	3,901,399

See notes to consolidated financial statements that are an integral part of these consolidated statements. Earnings per share and common shares outstanding for the 2011 period have been adjusted to reflect the ten percent stock dividend issued in 2012.

(1) See Note 1 to financial statements for information related to a correction of an error.

4

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

	For the three months ended March 31,
(dollars in thousands)	2012		2011
Net income	$ 688		537
Other comprehensive income (loss):
Unrealized gain (loss) on securities available for sale:
Unrealized holding gain (loss) arising during the period, pretax	(139	)	174
Tax (expense) benefit	46		(59	)
Reclassification to realized gain	(72	)	-
Tax expense	24		-
Other comprehensive income (loss)	(141	)	115
Comprehensive income	$ 547		652

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

5

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Unaudited)

	Common stock					Preferred stock					Nonvested restricted						Additional paid-in				Accumulated other comprehensive income				Retained
(dollars in thousands, except share data)	Shares		Amount			Shares	Amount				stock						capital				(loss)				earnings					Total
December 31, 2010 (1)	3,457,877			$	35	17,299		$	16,317			$	-					$	36,729			$	(707	)		$	6,842				$	59,216
Net income	-		-			-	-				-						-				-				537					537
Preferred stock transactions:
Cash dividends on Series T preferred stock	-		-			-	-				-						-				-				(216			)		(216			)
Discount accretion	-		-			-	68				-						-				-				(68			)		-
Proceeds from exercise of stock options	13,236		-			-	-				-						77				-				-					77
Issuance of restricted stock	2,500		-			-	-				(20					)	20				-				-					-
Cash in lieu of fractional shares	-		-			-	-				-						-				-				(1			)		(1			)
Amortization of deferred compensation on restricted stock	-		-			-	-				1						-				-				-					1
Compensation expense related to stock options, net of tax	-		-			-	-				-						67				-				-					67
Other comprehensive income	-		-			-	-				-						-				115				-					115
March 31, 2011(1)	3,473,613	$	35			17,299	16,385			$	(19					)	36,893			$	(592			)	7,094				$	59,796
December 31, 2011	3,820,830	$	38			17,299	16,596			$	(16					)	39,546			$	1,041				5,334				$	62,539
Net income	-		-			-	-				-						-				-				688					688
Preferred stock transactions:
Cash dividends on Series T preferred stock	-		-			-	-				-						-				-				(216			)		(216			)
Discount accretion	-		-			-	73				-						-				-				(73			)		-
Proceeds from exercise of stock options	9,075		-			-	-				-						57				-				-					57
Stock dividend on stock options and restricted stock (10%)	1,907		-			-	-				-						14				-				(14			)		-
Issuance of restricted stock	10,000		-			-	-				(67					)	67				-				-					-
Cash in lieu of fractional shares	-		-			-	-				-						-				-				(2			)		(2			)
Amortization of deferred compensation on restricted stock	-		-			-	-				6						-				-				-					6
Compensation expense related to stock options, net of tax	-		-			-	-				-						75				-				-					75
Other comprehensive income (loss)																					(141			)	-					(141			)
March 31, 2012	3,841,812			$	38	17,299		$	16,669					$	(77	)		$	39,759			$	900			$	5,717				$	63,006

See notes to consolidated financial statements that are an integral part of these consolidated statements. Common shares outstanding as of December 31, 2010 and 2011 have been adjusted to reflect the ten percent stock dividends issued in 2011 and 2012.

(1) See Note 1 to financial statements for information related to a correction of an error.

6

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	For the three months ended March 31,
(dollars in thousands)	2012		2011
Operating activities
Net income	$    688		$    537
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan losses	1,200		725
Depreciation and other amortization	233		216
Accretion and amortization of securities discounts and premium, net	304		274
Gain on sale of investment securities	(72	)	-
Loss on sale and write-down of real estate owned	256		512
Compensation expense related to stock options and grants	81		68
Increase in cash surrender value of bank owned life insurance	(159	)	(132	)
(Increase) decrease in deferred tax asset	21		(333	)
Decrease in other assets, net	375		142
Decrease in other liabilities, net	(2,016	)	(689	)
Net cash provided by operating activities	911		1,320
Investing activities
Increase (decrease) in cash realized from:
Origination of loans, net	(11,276	)	(7,885	)
Purchase of property and equipment	(193	)	(165	)
Purchase of investment securities:
Available for sale	(2,591	)	-
Payments and maturity of investment securities:
Available for sale	4,373		3,565
Proceeds from sale of investment securities	27,742		-
Proceeds from sale of real estate owned	753		1,243
Net cash provided by (used for) investing activities	18,808		(3,242	)
Financing activities
Increase (decrease) in cash realized from:
Increase in deposits, net	3,810		23,758
Cash dividend on preferred stock	(216	)	(216	)
Cash in lieu of fractional shares	(2	)	(1	)
Proceeds from the exercise of stock options and warrants	57		77
Net cash provided by financing activities	3,649		23,618
Net increase in cash and cash equivalents	23,368		21,696
Cash and cash equivalents at beginning of the period	23,005		53,850
Cash and cash equivalents at end of the period	46,373		75,546
Supplemental information
Cash paid for
Interest	$  2,814		$  3,317
Income taxes	279		525
Schedule of non-cash transactions
Real estate acquired in settlement of loans	1,056		-
Unrealized gain (loss) on securities, net of income taxes	(93	)	115

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

7

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – Nature of Business and Basis of Presentation

Business activity

Southern First Bancshares, Inc. (the "Company") is a South Carolina corporation that owns all of the capital stock of Southern First Bank, N.A. (the "Bank") and all of the stock of Greenville First Statutory Trust I and II (collectively, the "Trusts"). On July 2, 2007, the Company and Bank changed their names to Southern First Bancshares, Inc. and Southern First Bank, N.A., respectively. The Bank is a national bank organized under the laws of the United States located in Greenville County, South Carolina and operates as Greenville First Bank in Greenville County. 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 non-consolidated entities organized for the sole purpose of issuing trust preferred securities.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 (Registration Number 000-27719) as filed with the Securities and Exchange Commission on March 9, 2012. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 810, "Consolidation," the financial statements related to the special purpose subsidiaries, the Trusts, have not been consolidated.

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, other real estate owned, fair value of financial instruments, evaluating other-than-temporary-impairment of investment securities and valuation of deferred tax assets.

Correction of an Error

During the third quarter of 2011, the Company determined that it had been accounting for its preferred stock and related discount accretion in error since the issuance of the preferred stock in February 2009. All prior period amounts related to preferred stock, discount accretion, net income (loss) to common shareholders and earnings (loss) per common share have been restated. The error was not material to the interim or annual financial statements. Correction of this error also required reclassifications within shareholders' equity that increased preferred stock, decreased additional paid in capital, and decreased retained earnings.

The tables below quantify the differences between the amounts filed and restated for the respective periods presented in this Quarterly Report on Form 10-Q.

8

	March 31, 2011
(dollars in thousands)	As filed	As restated
Preferred stock	$14,846	16,385
Additional paid-in capital	37,903	36,893
Retained earnings	7,623	7,094
	$60,372	60,372
	Three months ended March 31, 2011
(dollars in thousands)	As filed	As restated
Net income	$     537	537
Preferred stock dividend	216	216
Discount accretion	113	68
Net income (loss) to common shareholders	$     208	253
Earnings (loss) per common share
Basic	$     0.06	0.07
Diluted	$     0.06	0.06

Reclassifications

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

Formal Agreement with the Office of the Comptroller of the Currency

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. The Board of Directors and management of the Bank have aggressively worked to address the findings of the exam 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.

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 there have been any subsequent events since the balance sheet date and determined that no subsequent events occurred requiring accrual or disclosure.

Recently Adopted Accounting Pronouncements

The following is a summary of recently adopted authoritative pronouncements that could impact the accounting, reporting, and/or disclosure of financial information by the Company.

The Comprehensive Income topic of the ASC was amended in June 2011. The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders' equity and requires consecutive presentation of the statement of net income and other comprehensive income. The amendments were applicable to the Company on January 1, 2012 and have been applied retrospectively. In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements. Companies should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the amendments while FASB redeliberates future requirements.

9

NOTE 2 – Investment Securities

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

	March 31, 2012
	Amortized	Gross Unrealized		Fair
(dollars in thousands)	Cost	Gains	Losses	Value
Available for sale
State and political subdivisions	$16,855	819	-	17,674
Mortgage-backed securities:
FHLMC	13,097	250	17	13,330
FNMA	38,931	306	26	39,211
GNMA	443	33	-	476
Total mortgage-backed securities	52,471	589	43	53,017
Total investment securities available for sale	$69,326	1,408	43	70,691
	December 31, 2011
	Amortized	Gross Unrealized		Fair
	Cost	Gains	Losses	Value
Available for sale
State and political subdivisions	$17,390	860	2	18,248
Mortgage-backed securities:
FHLMC	22,549	325	31	22,843
FNMA	58,631	441	72	59,000
GNMA	514	55	-	569
Total mortgage-backed securities	81,694	821	103	82,412
Total investment securities available for sale	$99,084	1,681	105	100,660

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

(dollars in thousands)	March 31, 2012	December 31, 2011
Federal Reserve Bank stock	$1,485	1,485
Federal Home Loan Bank stock	5,937	5,937
Certificates of deposit with other banks	99	99
Investment in Trust Preferred securities	403	403
Total other investments	$7,924	7,924

Contractual maturities and yields on our investment securities at March 31, 2012 and December 31, 2011 are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. We had no securities with maturities less than one year at March 31, 2012 or December 31, 2011.

								March 31, 2012
		One to Five Years			Five to Ten Years			Over Ten Years			Total
(dollars in thousands)		Amount	Yield		Amount	Yield		Amount	Yield		Amount	Yield
Available for Sale
State and political subdivisions	$	-	-	%	5,777	2.81	%	11,897	3.34	%	17,674	3.17	%
Mortgage-backed securities		-	-	%	-	-	%	53,017	2.53	%	53,017	2.53	%
Total	$	-	-	%	5,777	2.81	%	64,914	2.68	%	70,691	2.69	%

10

	December 31, 2011
	One to Five Years						Five to Ten Years		Over Ten Years		Total
	Amount		Yield			Amount		Yield	Amount	Yield	Amount	Yield
Available for Sale
State and political subdivisions	$	527		1.35	%		5,845	2.81%	11,876	3.34%	18,248	3.11%
Mortgage-backed securities		—		—	%		11,318	1.89%	71,094	2.29%	82,412	2.24%
Total	$	527		1.35	%		17,163	2.19%	82,970	2.44%	100,660	2.39%

The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities at March 31, 2012 and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

																	March 31, 2012
	Less than 12 months									12 months or longer							Total
(dollars in thousands)	#			Fair value			Unrealized losses		#			Fair value		Unrealized losses		#			Fair value				Unrealized losses
Available for sale
Mortgage-backed
FHLMC		1		$	2,174		$	17			—		—		—			1		$	2,174		$	17
FNMA		3			7,059			26			—		—		—			3			7,059			26
Total		4		$	9,233		$	43			—		—		—			4		$	9,233		$	43
																	December 31, 2012
	Less than 12 months									12 months or longer							Total
(dollars in thousands)	#		Fair value			Unrealized losses			#			Fair value		Unrealized losses		#			Fair value			Unrealized losses
Available for sale
State and political subdivisions		1		$	500		$	2			—		—		—			1		$	500		$	2
Mortgage-backed
FHLMC		1			2,602			31			—		—		—			1			2,602			31
FNMA		8			19,775			72			—		—		—			8			19,775			72
Total		10		$	22,877		$	105			—		—		—			10		$	22,877		$	105

11

NOTE 3 – Loans and Allowance for Loan Losses

The following table summarizes the composition of our loan portfolio.

		March 31, 2012				December 31, 2011
(dollars in thousands)		Amount		% of Total		Amount		% of Total
Commercial
Owner occupied RE	$	151,275		24.9	%	149,426		25.0	%
Non-owner occupied RE		165,215		27.2	%	164,776		27.5	%
Construction		20,573		3.4	%	17,882		3.0	%
Business		111,579		18.3	%	111,939		18.7	%
Total commercial loans		448,642		73.8	%	444,023		74.2	%
Consumer
Real estate		65,529		10.8	%	57,906		9.7	%
Home equity		80,606		13.3	%	82,664		13.8	%
Construction		5,173		0.8	%	5,570		0.9	%
Other		8,671		1.4	%	9,081		1.5	%
Total consumer loans		159,979		26.3	%	155,221		25.9	%
Deferred origination fees, net		(696	)	(0.1	)%	(610	)	(0.1	)%
Total gross loans, net of deferred fees		607,925		100.0	%	598,634		100.0	%
Less—allowance for loan losses		(9,196	)			(8,925	)
Total loans, net	$	598,729				589,709

Maturities and Sensitivity of Loans to Changes in Interest Rates

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

				March 31, 2012
(dollars in thousands)		One year or less		After one but within five years		After five years		Total
Commercial
Owner occupied RE	$	25,997		79,733		45,545		151,275
Non-owner occupied RE		48,469		104,066		12,680		165,215
Construction		8,087		6,122		6,364		20,573
Business		63,435		44,021		4,123		111,579
Total commercial loans		145,988		233,942		68,712		448,642
Consumer
Real estate		13,313		21,638		30,578		65,529
Home equity		15,691		19,780		45,135		80,606
Construction		3,937		-		1,236		5,173
Other		4,834		3,259		578		8,671
Total consumer loans		37,775		44,677		77,527		159,979
Deferred origination fees, net		(210	)	(319	)	(167	)	(696	)
Total gross loans, net of deferred fees	$	183,553		278,300		146,072		607,925
Loans maturing after one year with:
Fixed interest rates								254,326
Floating interest rates								170,046

12

				December 31, 2011
		One year or less		After one but within five years		After five years			Total
Commercial
Owner occupied RE	$	28,095		85,114		36,217			149,426
Non-owner occupied RE		49,123		105,276		10,377			164,776
Construction		6,295		4,007		7,580			17,882
Business		60,248		47,594		4,097			111,939
Total commercial loans		143,761		241,991		58,271			444,023
Consumer
Real estate		16,198		20,022		21,686			57,906
Home equity		15,221		21,369		46,074			82,664
Construction		5,470		-		100			5,570
Other		4,910		3,482		689			9,081
Total consumer		41,799		44,873		68,549			155,221
Deferred origination fees, net		(189	)	(292	)	(129	)		(610	)
Total gross loan, net of deferred fees	$	185,371		286,572		126,691			598,634
Loans maturing after one year with:
Fixed interest rates								$	240,767
Floating interest rates									172,496

Portfolio Segment Methodology

Commercial

Commercial loans are assessed for estimated losses by grading each loan using various risk factors identified through periodic reviews. We apply historic grade-specific loss factors to each funded loan. In the development of our statistically derived loan grade loss factors, we observe historical losses over a relevant period for each loan grade. These loss estimates are adjusted as appropriate based on additional analysis of external loss data or other risks identified from current economic conditions and credit quality trends. The allowance also includes an amount for the estimated impairment on nonaccrual commercial loans and commercial loans modified in a troubled debt restructuring ("TDR"), whether on accrual or nonaccrual status.

Consumer

For consumer loans, we determine the allowance on a collective basis utilizing forecasted losses to represent our best estimate of inherent loss. We pool loans, generally by product types with similar risk characteristics. In addition, we establish an allowance for consumer loans that have been modified in a TDR, whether on accrual or nonaccrual status.

Credit Quality Indicators

Commercial

We manage a consistent process for assessing commercial loan credit quality by monitoring our loan grading trends and past due statistics. All loans are subject to individual risk assessment. Our categories include Pass, Special Mention, Substandard, Doubtful, and Loss, each of which is defined by banking regulatory agencies. Delinquency statistics are also an important indicator of credit quality in the establishment of our allowance for credit losses.

13

The tables below provide a breakdown of outstanding commercial loans by risk category.

					March 31, 2012
(dollars in thousands)		Owner occupied RE	Non-owner occupied RE	Construction	Business	Total
Pass	$	142,097	138,771	14,926	103,254	399,048
Special Mention		4,271	14,254	-	3,056	21,581
Substandard		4,907	12,190	5,647	5,269	28,013
Doubtful		-	-	-	-	-
Loss		-	-	-	-	-
	$	151,275	165,215	20,573	111,579	448,642
					December 31, 2011
		Owner occupied RE	Non-owner occupied RE	Construction	Business	Total
Pass	$	139,907	138,535	12,830	104,009	395,281
Special Mention		4,294	12,733	-	2,323	19,350
Substandard		5,225	13,508	5,052	5,607	29,392
Doubtful		-	-	-	-	-
Loss		-	-	-	-	-
	$	149,426	164,776	17,882	111,939	444,023

The following tables provide past due information for outstanding commercial loans and include loans on nonaccrual status.

					March 31, 2012
(dollars in thousands)		Owner occupied RE	Non-owner occupied RE	Construction	Business	Total
Current	$	148,581	157,176	19,462	108,362	433,581
30-59 days past due		135	6,037	64	690	6,926
60-89 days past due		-	886	-	445	1,331
Greater than 90 Days		2,559	1,116	1,047	2,082	6,804
	$	151,275	165,215	20,573	111,579	448,642
					December 31, 2011
		Owner occupied RE	Non-owner occupied RE	Construction	Business	Total
Current	$	145,089	161,922	16,566	107,713	431,290
30-59 days past due		20	646	2	172	841
60-89 days past due		3,007	294	-	790	4,090
Greater than 90 Days		1,310	1,914	1,314	3,264	7,802
	$	149,426	164,776	17,882	111,939	444,023

Consumer

We manage a consistent process for assessing consumer loan credit quality by monitoring our loan grading trends and past due statistics. All loans are subject to individual risk assessment. Our categories include Pass, Special Mention, Substandard, Doubtful, and Loss, each of which is defined by banking regulatory agencies. Delinquency statistics are also an important indicator of credit quality in the establishment of our allowance for credit losses.

14

The tables below provide a breakdown of outstanding consumer loans by risk category.

					March 31, 2012
(dollars in thousands)		Real estate	Home equity	Construction	Other	Total
Pass	$	63,136	76,949	5,173	8,237	153,495
Special Mention		311	2,141	-	62	2,514
Substandard		2,082	1,516	-	372	3,970
Doubtful		-	-	-	-	-
Loss		-	-	-	-	-
	$	65,529	80,606	5,173	8,671	159,979
					December 31, 2011
		Real estate	Home equity	Construction	Other	Total
Pass	$	55,076	79,129	5,570	8,641	148,416
Special Mention		526	2,142	-	65	2,733
Substandard		2,304	1,393	-	375	4,072
Doubtful		-	-	-	-	-
Loss		-	-	-	-	-
	$	57,906	82,664	5,570	9,081	155,221

The following tables provide past due information for outstanding consumer loans and include loans on nonaccrual status.

					March 31, 2012
(dollars in thousands)		Real estate	Home equity	Construction	Other	Total
Current	$	64,870	79,662	5,173	8,666	158,371
30-59 days past due		169	601	-	5	775
60-89 days past due		-	80	-	-	80
Greater than 90 Days		490	263	-	-	753
	$	65,529	80,606	5,173	8,671	159,979
					December 31, 2011
		Real estate	Home equity	Construction	Other	Total
Current	$	56,854	82,229	5,570	9,076	153,729
30-59 days past due		344	80	-	5	429
60-89 days past due		-	-	-	-	-
Greater than 90 Days		708	355	-	-	1,063
	$	57,906	82,664	5,570	9,081	155,221

Nonperforming assets

Nonperforming assets include real estate acquired through foreclosure or deed taken in lieu of foreclosure and loans on nonaccrual status. The following table shows our nonperforming assets and the related percentage of nonperforming assets to total assets and gross loans. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received.

15

(dollars in thousands)		March 31, 2012		December 31, 2011
Commercial
Owner occupied RE	$	1,090		1,061
Non-owner occupied RE		699		1,745
Construction		1,048		1,314
Business		514		503
Consumer
Real estate		618		476
Home equity		263		386
Construction		-		-
Other		-		-
Nonaccruing troubled debt restructurings		5,812		4,779
Total nonaccrual loans, including nonaccruing TDRs		10,044		10,264
Other real estate owned		3,733		3,686
Total nonperforming assets	$	13,777		13,950
Nonperforming assets as a percentage of:
Total assets		1.79	%	1.82	%
Gross loans		2.27	%	2.33	%
Total loans over 90 days past due	$	7,558		8,865
Loans over 90 days past due and still accruing		-		-
Accruing troubled debt restructurings		6,660		7,429

Impaired Loans

The table below summarizes key information for impaired loans. Our impaired loans include loans on nonaccrual status and loans modified in a TDR, whether on accrual or nonaccrual status. These impaired loans may have estimated impairment which is included in the allowance for loan losses. Our commercial impaired loans are evaluated individually to determine the related allowance for loan losses while our consumer impaired loans are evaluated on a collective basis.

			March 31, 2012
			Recorded investment
				Impaired loans
		Unpaid		with related	Related
		Principal	Impaired	allowance for	allowance for
(dollars in thousands)		Balance	loans	loan losses	loan losses
Commercial
Owner occupied RE	$	4,751	4,751	4,596	1,041
Non-owner occupied RE		4,111	3,864	1,860	788
Construction		5,065	2,323	1,275	413
Business		3,816	3,766	3,690	1,845
Total commercial		17,743	14,704	11,421	4,087
Consumer
Real estate		1,573	1,473	618	93
Home equity		294	294	294	44
Construction		-	-	-	-
Other		233	233	-	-
Total consumer		2,100	2,000	912	137
Total	$	19,843	16,704	12,333	4,224

16

			December 31, 2011
			Recorded investment
				Impaired loans
		Unpaid		with related	Related
		Principal	Impaired	allowance for	allowance for
		Balance	loans	loan losses	loan losses
Commercial
Owner occupied RE	$	5,070	5,070	4,922	870
Non-owner occupied RE		4,685	3,638	985	578
Construction		4,056	2,068	1,597	498
Business		4,904	4,604	4,459	1,807
Total commercial		18,715	15,380	11,963	3,753
Consumer
Real estate		1,694	1,694	839	126
Home equity		386	386	386	58
Construction		-	-	-	-
Other		233	233	-	-
Total consumer		2,313	2,313	1,225	184
Total	$	21,028	17,693	13,188	3,937

The following table provides the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans after impairment by portfolio segment and class.

		Three months ended March 31,		Year ended December 31,
		2012		2011
		Average	Recognized	Average	Recognized
		recorded	interest	recorded	interest
(dollars in thousands)		investment	income	investment	income
Commercial
Owner occupied RE	$	4,911	73	3,521	220
Non-owner occupied RE		3,751	29	2,520	281
Construction		2,196	23	1,425	81
Business		4,186	4	3,331	207
Total commercial		15,044	129	10,797	789
Consumer
Real estate		1,584	11	1,729	64
Home equity		340	-	399	-
Construction		-	-	-	-
Other		233	4	38	13
Total consumer		2,157	15	2,166	77
Total	$	17,201	144	12,963	866

Allowance for Loan Losses

The allowance for loan loss is management's estimate of credit losses inherent in the loan portfolio. 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.

17

We have an established process to determine the adequacy of the allowance for loan losses that assesses the losses inherent in our portfolio. While we attribute portions of the allowance to specific portfolio segments, the entire allowance is available to absorb credit losses inherent in the total loan portfolio. Our process involves procedures to appropriately consider the unique risk characteristics of our commercial and consumer loan portfolio segments. For each portfolio segment, impairment is measured collectively for groups of smaller loans with similar characteristics and individually for larger impaired loans. Our allowance levels are influenced by loan volumes, loan grade migration or delinquency status, historic loss experience and other economic conditions.

While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowances based on their judgments about information available to them at the time of their examination.

The following table summarizes the activity related to our allowance for loan losses:

	Three months ended March 31,
(dollars in thousands)	2012		2011
Balance, beginning of period	$         8,925		8,386
Provision for loan losses	1,200		725
Loan charge-offs:
Commercial
Owner occupied RE	(129	)	-
Non-owner occupied RE	(143	)	-
Construction	-		-
Business	(561	)	(481	)
Total commercial	(833	)	(481	)
Consumer
Real estate	(102	)	-
Home equity	(7	)	(75	)
Construction	-		-
Other	-		(168	)
Total consumer	(109	)	(243	)
Total loan charge-offs	(942	)	(724	)
Loan recoveries:
Commercial
Owner occupied RE	4		-
Non-owner occupied RE	-		-
Business	9		-
Construction	-		-
Total commercial	13		-
Consumer
Real estate	-		-
Home equity	-		1
Construction	-		-
Other	-		-
Total consumer	-		1
Total recoveries	13		1
Net loan charge-offs	(929	)	(723	)
Balance, end of period	$         9,196		8,388
Net charge-offs to average loans (annualized)	0.62	%	0.51	%
Allowance for loan losses to gross loans	1.51	%	1.45	%
Allowance for loan losses to nonperforming loans	91.55	%	76.56	%

18

The following tables summarize the activity in the allowance for loan losses by our commercial and consumer portfolio segments.

				Three months ended March 31, 2012
(dollars in thousands)		Commercial		Consumer		Unallocated		Total
Balance, beginning of period	$	8,061		864		-		8,925
Provision		1,164		36		-		1,200
Loan charge-offs		(833	)	(109	)	-		(942	)
Loan recoveries		13		-				13
Net loan charge-offs		(820	)	(109	)	-		(929	)
Balance, end of period	$	8,405		791		-		9,196
				Year ended December 31, 2011
		Commercial		Consumer		Unallocated		Total
Balance, beginning of period	$	6,706		1,447		233		8,386
Provision		5,584		(81	)	(233	)	5,270
Loan charge-offs		(4,434	)	(504	)	-		(4,938	)
Loan recoveries		205		2				207
Net loan charge-offs		(4,229	)	(502	)	-		(4,731	)
Balance, end of period	$	8,061		864		-		8,925

The following table disaggregates our allowance for loan losses and recorded investment in loans by impairment methodology.

						March 31, 2012
		Allowance for loan losses			Recorded investment in loans
(dollars in thousands)		Commercial	Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	4,087	-	4,087	14,704	-	14,704
Collectively evaluated		4,271	838	5,109	433,938	159,979	593,917
Total	$	8,358	838	9,196	448,642	159,979	608,621
						December 31, 2011
		Allowance for loan losses			Recorded investment in loans
		Commercial	Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	3,753	-	3,753	15,380	-	15,380
Collectively evaluated		4,308	864	5,172	428,643	155,221	583,864
Total	$	8,061	864	8,925	444,023	155,221	599,244

NOTE 4 – Troubled Debt Restructurings

At March 31, 2012 we had 36 loans totaling $12.5 million and at December 31, 2011 we had 42 loans totaling $12.2 million, which we considered as TDRs. The Company considers a loan to be a TDR when the debtor experiences financial difficulties and the Company provides concessions such that we will not collect all principal and interest in accordance with the original terms of the loan agreement. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing challenges in the current economic environment.

Our policy with respect to accrual of interest on loans restructured in a TDR follows relevant supervisory guidance. That is, if a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms; continued accrual of interest at the restructured interest rate is likely. If a borrower was materially delinquent on payments prior to the restructuring, but shows capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual going forward. Lastly, if the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status. We will continue to closely monitor these loans and will cease accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms. If, after previously being classified as a TDR, a loan is restructured a second time, then the loan is automatically placed on nonaccrual status.

19

In the determination of the allowance for loan losses, management considers TDRs on commercial loans and subsequent defaults in these restructurings by measuring impairment, on a loan by loan basis, based on 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, less costs to sell, if the loan is collateral dependent. Consumer loans, which we typically consider to be homogeneous, are collectively evaluated for impairment.

The following table summarizes the concession at the time of modification and the recorded investment in our TDRs before and after their modification during the three months ended March 31, 2012.

	For the three months ended March 31, 2012
							Pre-modification			Post-modification
	Renewals	Reduced	Converted	Maturity	Total		outstanding			outstanding
	deemed a	or deferred	to interest	date	number		recorded			recorded
(dollars in thousands)	concession	payments	only	extensions	of loans		investment			investment
Commercial
Owner occupied RE	-	-	-	-	-	$		-	$		-
Non-owner occupied RE	-	1	-	-	1		820			820
Construction	-	-	-	-	-		-			-
Business	-	-	-	-	-		-			-
Consumer
Real estate	-	-	-	-	-		-			-
Home equity	-	-	-	-	-		-			-
Construction	-	-	-	-	-		-			-
Other	-	-	-	-	-		-			-
Total loans	-	1	-	-	1	$		820	$		820

The following table summarizes the TDRs that are more than 30 days past due, and have subsequently defaulted during the three months ended March 31, 2012.

	For the three months ended March 31, 2012
	Number of	Recorded
(dollars in thousands)	Loans	Investment
Commercial
Owner occupied RE	2	1,746
Non-owner occupied RE	1	819
Construction	-	-
Business	-	-
Consumer
Real estate	-	-
Home equity	-	-
Construction	-	-
Other	-	-
Total loans	3	2,565

NOTE 5 – Fair Value Accounting

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

20

Level 1 - Quoted market price in active markets

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

Level 2 - Significant other observable inputs

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

Level 3 - Significant unobservable inputs

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

Following is a description of valuation methodologies used for assets recorded at fair value.

Investment Securities

Securities available for sale are valued on a recurring basis at quoted market prices where available.  If quoted market prices are not available, fair values are based on quoted market prices of comparable securities.  Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange or U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds.  Level 2 securities include mortgage-backed securities and debentures issued by government sponsored entities, municipal bonds and corporate debt securities.  In certain cases where there is limited activity or less transparency around inputs to valuations, securities are classified as Level 3 within the valuation hierarchy. Securities held to maturity are valued at quoted market prices or dealer quotes similar to securities available for sale.  The carrying value of Other Investments, such as Federal Reserve Bank and Federal Home Loan Bank ("FHLB") 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 the 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 March 31, 2012, 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.

21

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 real estate owned activity.

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.

				March 31, 2012
(dollars in thousands)		Level 1	Level 2	Level 3	Total
Assets
Securities available for sale
State and political subdivisions	$	-	17,674	-	17,674
Mortgage-backed securities		-	53,017	-	53,017
Other investments		-	-	7,924	7,924
Total assets measured at fair value on a recurring basis	$	-	70,691	7,924	78,615
				December 31, 2011
		Level 1	Level 2	Level 3	Total
Assets
Securities available for sale
State and political subdivisions	$	-	18,248	-	18,248
Mortgage-backed securities		-	82,412	-	82,412
Other investments		-	-	7,924	7,924
Total assets measured at fair value on a recurring basis	$	-	100,660	7,924	108,584

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

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 85% of loans as of March 31, 2012. Loans which are deemed to be impaired are valued net of the allowance for loan losses, and other real estate owned is valued at the lower of cost or net realizable 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 tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis.

				As of March 31, 2012
(dollars in thousands)		Level 1	Level 2	Level 3	Total
Assets
Impaired loans	$	-	11,282	1,198	12,480
Other real estate owned		-	2,897	836	3,733
Total assets measured at fair value on a nonrecurring basis		-	14,179	2,034	16,213
				As of December 31, 2011
		Level 1	Level 2	Level 3	Total
Assets
Impaired loans	$	-	12,318	1,438	13,756
Other real estate owned		-	2,461	1,225	3,686
Total assets measured at fair value on a nonrecurring basis		-	14,779	2,663	17,442

22

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows:

	Valuation Technique	Significant Unobservable Inputs
Other investments	Carrying Value	None
Impaired loans	Appraised Value/ Discounted Cash Flows	Appraisals and/or sales of comparable properties/
Other real estate owned	Appraised Value/ Comparable Sales	Appraisals and/or sales of comparable properties/ Independent quotes

Fair Value of Financial Instruments

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

The 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.

Deposits -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.

Junior subordinated debentures - Fair value for junior subordinated debentures 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.

23

The estimated fair values of the Company's financial instruments at March 31, 2012 and December 31, 2011 are as follows:

				March 31, 2012
(dollars in thousands)		Carrying Amount	Fair Value	Level 1	Level 2	Level 3
Financial Assets:
Cash and cash equivalents	$	46,373	46,373	46,373	-	-
Investment securities available for sale		70,691	70,691	-	70,691	-
Other investments		7,924	7,924	-	-	7,924
Loans, net		598,729	609,680	-	11,282	598,398
Bank owned life insurance		18,252	18,252	-	-	18,252
Financial Liabilities:
Deposits		566,722	547,686	-	547,686	-
FHLB and other borrowings		122,700	140,057	-	140,057	-
Junior subordinated debentures		13,403	4,109	-	4,109	-
				December 31, 2011
Financial Assets:
Cash and cash equivalents	$	23,005	23,005	23,005	-	-
Investment securities available for sale		100,660	100,660	-	100,660	-
Other investments		7,924	7,924	-	-	7,924
Loans, net		589,709	603,416	-	12,318	591,098
Bank owned life insurance		18,093	18,093	-	-	18,093
Financial Liabilities:
Deposits		562,912	521,930	-	521,930	-
FHLB and other borrowings		122,700	141,411	-	141,411	-
Junior subordinated debentures		13,403	4,212	-	4,212	-

NOTE 6 – Preferred Stock Issuance

On February 27, 2009, as part of the Treasury Department's Capital Purchase Program ("CPP"), the Company entered into a Letter Agreement and a Securities Purchase Agreement (collectively, the "CPP Purchase Agreement") with the Treasury Department, 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 399,970.34 shares of the Company's common stock for an aggregate purchase price of $17.3 million in cash. The Series T Preferred Stock qualifies as Tier 1 capital and is entitled to cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. The Company must consult with the 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 $6.487 per share of the common stock. The fair value allocation of the $17.3 million between the shares of Series T Preferred Stock and the CPP Warrant resulted in $15.9 million allocated to the shares of Series T Preferred Stock and $1.4 million allocated to the CPP Warrant.

NOTE 7 – Earnings Per Common Share and Stock Dividend

On January 17, 2012, the Company's Board of Directors approved a ten percent stock dividend to the Company's shareholders. The record date for shareholders entitled to receive the stock dividend was February 3, 2012 and the distribution date was February 17, 2012. Certain amounts in our Consolidated Balance Sheets, including common shares outstanding, have been adjusted for the prior period to reflect the stock dividend. In addition, earnings per share and average shares outstanding in our Consolidated Statements of Income have been adjusted for the prior period to reflect the stock dividend.

The following schedule reconciles the numerators and denominators of the basic and diluted earnings per share computations for the three month periods ended March 31, 2012 and 2011. 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 March 31, 2012 and 2011, 79,002 and 87,967 options, respectively, were anti-dilutive in the calculation of earnings per share as their exercise price exceeded the fair market value.

24

			Three months ended March 31,
(dollars in thousands, except share data)			2012		2011
Numerator:
Net income		$	688	$	537
Less:	Preferred stock dividend		216		216
	Discount accretion (1)		73		68
Net income available to common shareholders (1)		$	399	$	253
Denominator:
Weighted-average common shares outstanding - basic			3,838,747		3,813,368
Common stock equivalents			41,083		88,031
Weighted-average common shares outstanding - diluted			3,879,830		3,901,399
Earnings per common share (1):
Basic		$	0.10	$	0.07
Diluted		$	0.10	$	0.06

(1) See Note 1 to financial statements for information related to a correction of an error.

Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion reviews our results of operations for the three month period ended March 31, 2012 as compared to the three month period ended March 31, 2011 and assesses our financial condition as of March 31, 2012 as compared to December 31, 2011. You should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements and the related notes and the consolidated financial statements and the related notes for the year ended December 31, 2011 included in our Annual Report on Form 10-K for that period. Results for the three month period ended March 31, 2012 are not necessarily indicative of the results for the year ending December 31, 2012 or any future period.

Discussion of forward-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 under Item 1A- Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2011, as well as the following:

•   changes in political conditions and the legislative or regulatory environment, including the effect of the recent financial reform legislation on the banking and financial services industries;

•   general economic conditions in the U.S., including the possibility of a prolonged period of limited economic growth; disruptions to the credit and financial markets; and contractions or limited growth in consumer spending or consumer credit;

•   reduced earnings due to higher credit losses, including losses in the sectors of our loan portfolio secured by real estate, may be greater than expected due to economic factors, including, but notlimited to, declining real estate values, increasing interest rates, increasing unemployment, 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 high concentration of our real estate-basedloans collateralized by realestate in a weak commercial real estate market;

•   our ability to comply with our Formal Agreement and potential regulatory actions if we fail to comply;

25

•   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 margins;

•   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 in deposit flows;

•   changes in technology;

•   changes in monetary and tax policies;

•   adequacy of the level of our allowance for loan losses;

•   the rate of delinquencies and amount of loans charged-off;

•   the rate of loan growth;

•   adverse changes in asset quality and resulting credit risk-related losses and expenses;

•   loss of consumer confidence and economic disruptions resulting from terrorist activities;

•   changes in the securities markets; and

•   other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission (the "SEC").

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.

These risks are exacerbated by the developments over the last three years in local, national and international financial markets, and we are unable to predict what effect these uncertain market conditions will continue to have on our Company. Beginning in 2008 and continuing into 2012, the capital and credit markets have experienced sever levels of volatility and disruption. There can be no assurance that these challenging developments will not materially and adversely affect our business, financial condition and results of operations.

OVERVIEW

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., respectively. Since we opened our Bank in January 2000, we have experienced growth in total assets, loans, deposits, and shareholders' equity.

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

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

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.

Economic conditions, competition, and the monetary and fiscal policies of the Federal government significantly affect most financial institutions, including the Bank. Lending and deposit activities and fee income generation are influenced by levels of

26

business spending and investment, consumer income, consumer spending and savings, capital market activities, and competition among financial institutions, as well as customer preferences, interest rate conditions and prevailing market rates on competing products in our market areas.

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 our filings with the SEC.

Effect of Economic Trends

The twelve months ended December 31, 2011 and the first three months of 2012 continue to reflect the tumultuous economic conditions which have negatively impacted our clients' liquidity and credit quality. 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.

Liquidity in the debt markets remains low in spite of efforts by the U.S. 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.

In response to the challenges facing the financial services sector, beginning in 2008 a multitude of new regulatory and governmental actions have been announced, including the EESA, the Troubled Asset Relief Program (the "TARP"), the American Recovery and Reinvestment Act of 2009 (the "Recovery Act"), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and related economic recovery programs. Some of the more recent actions include those described in Part I. Item 1. Business - Supervision and Regulation of our Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the SEC.

In addition, on April 5, 2012, the U.S. President signed the Jumpstart Our Business Startup Act (the "JOBS Act"), which is intended to stimulate economic growth by helping smaller and emerging growth companies access the U.S. capital markets. The JOBS Act amends various provisions of, and adds new sections to, the Securities Act of 1933 and the Securities Exchange Act of 1934, as well as provisions of the Sarbanes-Oxley Act of 2002. In addition, under the JOBS Act, a bank or bank holding company is permitted to have 2,000 shareholders before being subject to public company requirements and to deregister from the SEC when its shareholder count falls below 1,200. The SEC has been directed to issue rules implementing these amendments by April 5, 2013. We are currently evaluating the effects that these amendments, as well as the full JOBS Act, will have on the Company.

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 TARP, the Recovery Act, the Dodd-Frank Act, the JOBS Act or any governmental program on the financial markets.

The weak economic conditions are expected to continue into 2012. 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.

EARNINGS REVIEW

Our net income was $688,000 and $537,000 for the three months ended March 31, 2012 and 2011, respectively, an increase of $151,000. After our dividend payment to the U.S. Treasury as preferred shareholder, net income to common shareholders was $399,000, or diluted earnings per share ("EPS") of $0.10, for the first quarter of 2012 as compared to net income to common shareholders of $253,000, or diluted EPS of $0.06 for the same period in 2011. The increase in net income resulted primarily from an increase in net interest income and an increase in noninterest income, partially offset by increases in the provision for loan losses and noninterest expense.

27

Net Interest Income and Margin

Our level of net interest income is determined by the level of earning assets and the management of our net interest margin. For the three month period ended March 31, 2012, our net interest income was $6.1 million, a 13.5% increase over net interest income of $5.4 million for the same period in 2011. In comparison, our average earning assets increased $26.6 million during the first quarter of 2012 compared to the first quarter of 2011, while our interest bearing liabilities decreased by $3.5 million during the same period. The increase in average earning assets is primarily related to an increase in average loans while the decrease in average interest-bearing liabilities is a result of a decrease in time deposits, specifically, out-of-market certificates of deposit which decreased $39.8 million.

Our net interest margin on a tax-equivalent basis increased from 3.18% for the three months ended March 31, 2011 to 3.45% for the three months ended March 31, 2012. The increase in net interest margin during the three month periods ended March 31, 2012 compared to the prior year is driven primarily by reduced costs related to our deposits and borrowings rather than from increased interest income. While we do not expect our loan yields to change significantly in the near future, we do anticipate our future deposit costs to continue to decrease as we have approximately $69.6 million of retail CDs scheduled to mature and reprice in the next six months combined with maturities of $22.0 million of wholesale CDs which we do not anticipate replacing.

We have included a number of tables to assist in our description of various measures of our financial performance. For example, the "Average Balances, Income and Expenses, Yields and Rates" table reflects the average balance of each category of our assets and liabilities as well as the yield we earned or the rate we paid with respect to each category during the three month periods ended March 31, 2012 and 2011. A review of this table shows that our loans typically provide higher interest yields than do other types of interest-earning assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio. Similarly, the "Rate/Volume Analysis" table demonstrates the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables to illustrate our interest rate sensitivity with respect to interest-earning accounts and interest-bearing accounts. Finally, we have included various tables that provide detail about our investment securities, our loans, our deposits, and other borrowings.

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

Average Balances, Income and Expenses, Yields and Rates

						For the Three Months Ended March,
		2012							2011
(dollars in thousands)		Average Balance		Income/ Expense	Yield/ Rate(1)				Average Balance		Income/ Expense	Yield/ Rate(1)
Interest-earning assets
Federal funds sold	$	21,447	$	14	0.26		%	$	49,017	$	28	0.23	%
Investment securities, taxable		82,137		424	2.08		%		59,870		360	2.44	%
Investment securities, nontaxable (2)		18,135		215	4.76		%		11,327		152	5.43	%
Loans		601,740		7,986	5.34		%		576,598		8,123	5.71	%
Total interest-earning assets		723,459		8,639	4.80		%		696,812		8,663	5.04	%
Noninterest-earning assets		44,152							42,189
Total assets	$	767,611						$	739,001
Interest-bearing liabilities
NOW accounts	$	153,317		272	0.71		%	$	137,465		439	1.30	%
Savings & money market		119,854		134	0.45		%		99,712		204	0.83	%
Time deposits		210,875		856	1.63		%		251,192		1,334	2.15	%
Total interest-bearing deposits		484,046		1,262	1.05		%		488,369		1,977	1.64	%
Note payable and other borrowings		123,547		1,070	3.48		%		122,700		1,141	3.77	%
Junior subordinated debentures		13,403		96	2.88		%		13,403		86	2.60	%
Total interest-bearing liabilities		620,996		2,428	1.57		%		624,472		3,204	2.08	%
Noninterest-bearing liabilities		82,866							54,607
Shareholders' equity		63,749							59,922
Total liabilities and shareholders' equity	$	767,611						$	739,001
Net interest spread					3.23		%					2.96	%
Net interest income (tax equivalent) / margin			$	6,211	3.45		%			$	5,459	3.18	%
Less: tax-equivalent adjustment (2)				82							58
Net interest income			$	6,129						$	5,401

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

28

Our net interest margin, on a tax-equivalent basis, was 3.45% for the three months ended March 31, 2012 compared to 3.36% for the fourth quarter of 2011 and 3.18% for the first quarter of 2011. The 27 basis point increase in net interest margin during the first quarter of 2012 was driven primarily by a 51 basis point reduction in the cost of our interest bearing liabilities compared to the same period in 2011.

Despite the $26.6 million increase in interest-earning assets during the first quarter of 2012, as compared to the same quarter in 2011, our interest income decreased by $48,000 or 24 basis points. The decline in yield on our interest earning assets was driven primarily by reduced yields on our investment securities and loan portfolio. Although we transitioned a portion of our low-yielding federal funds sold into investment securities which yield a higher rate, the yield earned on these investments has declined in the past twelve months. In addition, our loan balances increased by $25.1 million as compared to the same period in 2011 while our loan yield decreased by 37 basis points. The decrease in loan yield was driven primarily by loans being originated or renewed at market rates which are lower than those in the past.

Our interest expense also decreased during the first quarter of 2012 as compared to the first quarter of 2011 due to lower rates on our interest-bearing liabilities. While our average interest-bearing liabilities decreased by $3.5 million during the first quarter of 2012, compared to the same period in 2011, the rate on these liabilities decreased by 51 basis points. In effect, our interest-bearing liabilities continue to reprice downward at a faster rate than our interest-earning assets. In addition, as of March 31, 2012, over half of our FHLB advances were at fixed interest rates, while all of our other borrowings, including notes payable and junior subordinated debt, had variable interest rates.

Our net interest spread was 3.23% for the three months ended March 31, 2012 compared to 2.96% for the same period in 2011. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The 51 basis point reduction in rate on our interest-bearing liabilities, partially offset by a 24 basis point decline in yield on our earning assets, resulted in a 27 basis point increase in our net interest spread for the 2012 period.

Rate/Volume Analysis

Net interest income can be analyzed in terms of the impact of changing interest rates and changing volume. The following table sets 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.

		Three Months Ended
		March 31, 2012 vs. 2011								March 31, 2011 vs. 2010
		Increase (Decrease) Due to								Increase (Decrease) Due to
(dollars in thousands)		Volume		Rate		Rate/ Volume		Total		Volume		Rate		Rate/ Volume		Total
Interest income
Loans	$	216		(339	)	(14	)	(137	)	(43	)	208		(1	)	164
Investment securities		197		(67	)	(27	)	103		(202	)	(299	)	68		(433	)
Federal funds sold		(16	)	4		(2	)	(14	)	18		-		(1	)	17
Total interest income		397		(402	)	(43	)	(48	)	(227	)	(91	)	66		(252	)
Interest expense
Deposits		84		(766	)	(33	)	(715	)	145		(533	)	(33	)	(421	)
Note payable and other		7		(77	)	(1	)	(71	)	(263	)	(228	)	38		(453	)
Junior subordinated debt		-		10		-		10		-		2		-		2
Total interest expense		91		(833	)	(34	)	(776	)	(118	)	(759	)	5		(872	)
Net interest income	$	306		431		(9	)	728		(109	)	668		61		620

29

Net interest income, the largest component of our income, was $6.1 million for the three month period ended March 31, 2012 and $5.4 million for the three months ended March 31, 2011. Average interest-earning assets increased by $26.6 million during the first quarter of 2012 compared to the same period in 2011 while average interest-bearing liabilities decreased $3.5 million. While our average interest-earning assets increased by $26.6 million during the 2012 period, the primary driver of the increase in net interest income was the decrease in rates on our interest-bearing liabilities which effectively reduced interest expense by $833,000 for the three months ended March 31, 2012.

Provision for Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged as an expense on our consolidated 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 - 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 three months ended March 31, 2012 and 2011, we incurred a noncash expense related to the provision for loan losses of $1.2 million and $725,000, respectively, resulting in an allowance for loan losses of $9.2 million and $8.4 million for the 2012 and 2011 periods, respectively. The increased provision for loan losses during the 2012 period relates primarily to the specific allowance required on our impaired loans. The $9.2 million allowance represented 1.51% of gross loans at March 31, 2012 while the $8.4 million allowance was 1.45% of gross loans at March 31, 2011.

During the past twelve months, our loan balances increased by $28.4 million, while the amount of our nonperforming and past due loans declined. Factors such as these are also considered in determining the amount of loan loss provision necessary to maintain our allowance for loan losses at an adequate level.

Noninterest Income

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

		Three months ended March 31,
(dollars in thousands)		2012	2011
Loan fee income	$	200	144
Service fees on deposit accounts		181	138
Income from bank owned life insurance		159	132
Gain on sale of investment securities		72	-
Other income		225	181
Total noninterest income	$	837	595

Noninterest income increased $242,000, or 40.1%, in the first quarter of 2012 as compared to the same period in 2011. The increase in total noninterest income during the 2012 period resulted primarily from the following:

•       Loan fee income increased 38.9%, or $56,000, resulting primarily from increased mortgage origination fee income.

•       Service fees on deposit accounts increased $43,000, or 31.2%, primarily related to increased NSF fee income, and additional income from service charges on our checking, money market, and savings accounts.

30

•       Income from bank owned life insurance increased $27,000 due to income earned on $3.0 million of additional life insurance policies purchased during the third quarter of 2011.

•       A gain on sale of investment securities for $72,000 was recognized during the 2012 period, compared to no gain during the first quarter of 2011.

•       Other income increased by 24.3%, or $44,000, due primarily to rental income received from tenants at our Columbia, South Carolina headquarters building.

The Dodd-Frank Act calls for new limits on interchange transaction fees that banks receive from merchants via card networks like Visa, Inc. and MasterCard, Inc. when a customer uses a debit card. In June 2011, the Federal Reserve approved the final rule which caps an issuer's base fee at 21 cents per transaction and allows an additional 5 basis point charge per transaction to help cover fraud losses. Although the rule technically does not apply to institutions with less than $10 billion in assets, such as the Bank, there is concern that the price controls may harm community banks, which could be pressured by the marketplace to lower their own interchange rates. Our ATM/Debit card fee income is included in other noninterest income and was $108,000 and $92,000 for the three months ended March 31, 2012 and 2011, respectively. We will continue to monitor the regulations as they are implemented and will review our policies, products and procedures to insure full compliance but also attempt to minimize any negative impact on our operations.

Noninterest expenses

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

		Three months ended March 31,
(dollars in thousands)		2012	2011
Compensation and benefits	$	2,425	2,065
Occupancy		583	539
Real estate owned activity		278	531
Data processing and related costs		514	435
Insurance		352	403
Marketing		194	170
Professional fees		180	142
Other		253	221
Total noninterest expense	$	4,779	4,506

Noninterest expense increased $273,000, or 6.1%, during the first quarter of 2012 as compared to the same period in 2011. Our efficiency ratio, excluding gains on sale of investment securities and real estate owned activity, was 65.3% for the first quarter of 2012 compared to 66.7% for the same period in 2011. The improvement in the efficiency ratio relates primarily to the increase in net interest income and noninterest income, excluding the gain on sale of securities.

The increase in total noninterest expense resulted primarily from the following:

•       Compensation and benefits expense increased 17.4%, or $360,000, relating primarily to increases in incentive compensation expense and benefits expense. Base compensation increased by $189,000 due primarily to the cost of eight additional employees in the areas of client services and deposit and loan operations, as well as annual salary increases, while incentive compensation expense increased by $37,000 during the 2012 period. In addition, benefit expense increased $140,000 during the same period, compared to the first quarter of the prior year, due primarily to increases in payroll taxes, insurance, and retirement plan expenses.

•       Occupancy expenses increased $44,000, or 8.2%, driven by increased utilities and repairs and maintenance expenses.

•       Data processing and related costs increased 18.2%, or $79,000, primarily related to the costs of new services we offer, such as mobile banking, and the increased number of clients and accounts we service.

•       Professional fees increased $38,000, or 26.8%, driven by increased legal expenses as well as audit and accounting fees.

•       Other noninterest expenses increased 14.5%, or $32,000, primarily related to increased travel, education, collection, and office supplies expenses.

Offsetting the increases in noninterest expense was a $253,000, or 47.6%, reduction in real estate owned expenses due primarily to a lower loss recorded on the sale of property, and a $51,000, or 12.7%, decrease in insurance expense relating to

31

a reduction in the quarterly FDIC assessment as a result of the change in the assessment calculation. The assessment base changed to an asset based calculation effective for the second quarter of 2011.

We incurred income tax expense of $299,000 for the three months ended March 31, 2012 as compared to $228,000 during the same period in 2011. The increase in income tax expense during the first quarter of 2012 was primarily a result of the increase in our net income.

Balance Sheet Review

At March 31, 2012, we had total assets of $770.0 million, consisting principally of $598.7 million in net loans, $78.6 million in investment securities, $46.4 million in cash and cash equivalents, and $18.3 million in bank owned life insurance. Our liabilities at March 31, 2012 totaled $707.0 million, which consisted principally of $566.7 million in deposits, $122.7 million in FHLB advances and repurchase agreements, and $13.4 million in junior subordinated debentures. At March 31, 2012, our shareholders' equity was $63.0 million.

At December 31, 2011, we had total assets of $767.8 million, consisting principally of $589.7 million in net loans, $108.6 million in investment securities, $23.0 million in cash and cash equivalents, and $18.1 million in bank owned life insurance. Our liabilities at December 31, 2011 totaled $705.2 million, consisting principally of $562.9 million in deposits, $122.7 million in FHLB advances and repurchase agreements, and $13.4 million in junior subordinated debentures. At December 31, 2011, our shareholders' equity was $62.5 million.

Federal Funds Sold

At March 31, 2012, our federal funds sold were $19.6 million, or 2.5% of total assets. At December 31, 2011, we had no short-term investments in federal funds sold on an overnight basis.

Investment Securities

At March 31, 2012, the $78.6 million in our investment securities portfolio represented approximately 10.2% of our total assets. We held municipal securities, and mortgage-backed securities with a fair value of $70.7 million and an amortized cost of $69.3 million for an unrealized gain of $1.4 million. During the first quarter of 2012, we developed a need for additional liquidity as we experienced increased loan demand and as a result sold $27.7 million of our mortgage-backed securities and state and municipal obligations, recording a net gain on sale of investment securities of $72,000.

At December 31, 2011, the $108.6 million in our investment securities portfolio represented approximately 14.1% of our total assets. We held municipal securities, and mortgage-backed securities with a fair value of $100.7 million and an amortized cost of $99.1 million for an unrealized gain of $1.7 million.

Loans

Since loans typically provide higher interest yields than other types of interest earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. Average loans for the three months ended March 31, 2012 and 2011 were $601.7 million and $576.6 million, respectively. Before the allowance for loan losses, total loans outstanding at March 31, 2012 and December 31, 2011 were $607.9 and $598.6 million, respectively.

The principal component of our loan portfolio is loans secured by real estate mortgages. As of March 31, 2012, our loan portfolio included $488.4 million, or 80.3%, of real estate loans. As of December 31, 2011, real estate loans made up 79.9% of our loan portfolio and totaled $478.2 million. Most of our real estate loans are secured by residential or commercial property. We obtain a security interest in real estate, in addition to any other available collateral. 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 to coincide with the appropriate regulatory guidelines. We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral. 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. Home equity lines of credit totaled $80.6 million as of March 31, 2012, of which approximately 37% were in a first lien position, while the remaining balance was second liens. The average loan had a balance of approximately $88,000 and a loan to value of 74.5%. Further, 0.69% of our total home equity lines of credit were over 30 days past due.

32

Following is a summary of our loan composition at March 31, 2012 and December 31, 2011. The increases in commercial and consumer real estate loans are related to our focus to continue to originate high quality owner-occupied and consumer real estate loans.

		March 31, 2012					December 31, 2011
(dollars in thousands)		Amount		% of Total			Amount		% of Total
Commercial
Owner occupied RE	$	151,275		24.9	%	$	149,426		25.0	%
Non-owner occupied RE		165,215		27.2	%		164,776		27.5	%
Construction		20,573		3.4	%		17,882		3.0	%
Business		111,579		18.3	%		111,939		18.7	%
Total commercial loans		448,642		73.8	%		444,023		74.2	%
Consumer
Real estate		65,529		10.8	%		57,906		9.7	%
Home equity		80,606		13.3	%		82,664		13.8	%
Construction		5,173		0.8	%		5,570		0.9	%
Other		8,671		1.4	%		9,081		1.5	%
Total consumer loans		159,979		26.3	%		155,221		25.9	%
Deferred origination fees, net		(696	)	(0.1	)%		(610	)	(0.1	)%
Total gross loans, net of deferred fees		607,925		100.0	%		598,634		100.0	%
Less—allowance for loan losses		(9,196	)				(8,925	)
Total loans, net	$	598,729				$	589,709

Nonperforming assets

Following is a summary of our nonperforming assets, including nonaccruing TDRs.

(dollars in thousands)		March 31, 2012		December 31, 2011
Commercial	$	3,351		4,623
Consumer		881		862
Nonaccruing troubled debt restructurings		5,812		4,779
Total nonaccrual loans		10,044		10,264
Other real estate owned		3,733		3,686
Total nonperforming assets	$	13,777	$	13,950

At March 31, 2012 nonperforming assets were $13.8 million, or 1.79% of total assets and 2.27% of gross loans. Comparatively, nonperforming assets were $14.0 million, or 1.82% of total assets and 2.33% of gross loans at December 31, 2011. Nonaccrual loans decreased $220,000 to $10.0 million at March 31, 2012 from $10.3 million at December 31, 2011. Nonaccrual loans at March 31, 2012 include five loan relationships which were put on nonaccrual status during the first three months of 2012 In addition, two loans were returned to accrual status or paid off and another six loans were charged-off or moved to other real estate owned during the first three months of 2011. The amount of foregone interest income on the nonaccrual loans in the first three months of 2012 was approximately $152,000.

Nonperforming assets include other real estate owned which increased by $47,000 from December 31, 2011. During the first three months of 2012 we sold one property for $1.0 million and added three new properties for $1.1 million. In addition, we incurred write-downs totaling $52,000 on three of our properties. The balance at March 31, 2012 includes seven commercial properties totaling $2.3 million and five residential properties for $1.4 million. Most of these properties are located in the Upstate of South Carolina. We believe that these properties are appropriately valued at the lower of cost or market as of March 31, 2012. 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.

33

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 uncollectability 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 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. Periodically, we adjust the amount of the allowance based on changing circumstances.

Following is a summary of the activity in the allowance for loan losses.

		Three months ended March 31,				Year ended
(dollars in thousands)		2012		2011		December 31, 2011
Balance, beginning of period	$	8,925		8,386		8,386
Provision		1,200		725		5,270
Loan charge-offs		(942	)	(724	)	(4,938	)
Loan recoveries		13		1		207
Net loan charge-offs		(929	)	(723	)	(4,731	)
Balance, end of period	$	9,196		8,388		8,925

The allowance for loan losses was $9.2 million and $8.4 million at March 31, 2012 and 2011, respectively, or 1.51% and 1.45% of outstanding loans, respectively. At December 31, 2011, our allowance for loan losses was $8.9 million, or 1.49% of outstanding loans, and we had net loans charged-off of $4.7 million for the year ended December 31, 2011.

During the three months ended March 31, 2012, we charged-off $942,000 of loans and recorded $13,000 of recoveries on loans previously charged-off, for net charge-offs of $929,000, or 0.62% of average loans. Comparatively, we charged-off $724,000 of loans and recorded $1,000 of recoveries on loans previously charged-off, resulting in net charge-offs of $723,000, or 0.51% of average loans for the first quarter of 2011. The increased level of charge-offs during the 2012 period resulted primarily from four commercial and one consumer relationships which comprised $858,000 million of the charge-offs for the quarter.

We increased the allowance for loan losses during the first three months of 2012 based on the loans evaluated for specific reserves in our commercial portfolio. As of March 31, 2012, $16.7 million of loans were evaluated for specific reserves compared to $17.7 million at December 31, 2011. Based on these evaluations, the allowance for loan losses includes specific reserves of $4.1 million and $3.9 million, at March 31, 2012 and December 31, 2011, respectively.

In addition, at March 31, 2012 and 2011, the allowance for loan losses represented 91.6% and 76.6% of the total amount of nonperforming loans, respectively. A significant portion, or 80%, of nonperforming loans at March 31, 2012 is secured by real estate. Our nonperforming loans have been written down to approximately 76% of their original nonperforming balance. We have evaluated the underlying collateral on these loans and believe that the collateral on these loans is sufficient to minimize future losses. Based on the level of coverage on nonperforming loans and analysis of our loan portfolio, we believe the allowance for loan losses of $9.2 million as of March 31, 2012 to be adequate.

Our impaired loans include loans on nonaccrual status and TDRs, whether on accrual or nonaccrual status. For loans that are also classified as impaired, an allowance is established when the fair value (discounted cash flows, collateral value, or observable market price) of the impaired loan less costs to sell, 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, among other factors. 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, without limitation, 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

34

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 loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

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.

As a general practice, most of our loans are originated with relatively short maturities of less than 10 years. 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, at March 31, 2012, approximately 80% of our loans are collateralized by real estate and approximately 88% 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 at renewal, or in the case of an impaired loan, 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 March 31, 2012, we do not have any impaired real estate loans carried at a value in excess of the appraised value. We typically charge-off a portion or create a specific reserve for impaired loans when we do not expect repayment to occur as agreed upon under the original terms of the loan agreement.

For commercial loans, we generally fully charge off or charge collateralized loans down to net realizable value when management determines the loan to be uncollectible; repayment is deemed to be protracted beyond reasonable time frames; the loan has been classified as a loss by either our internal loan review process or our banking regulatory agencies; the customer has filed bankruptcy and the loss becomes evident owing to a lack of assets; or the loan is 120 days past due unless both well-secured and in the process of collection. For consumer loans, we generally charge down to net realizable value when the loan is 180 days past due.

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. In the past, we have chosen to obtain a portion of our certificates of deposits from areas outside of our market in order to obtain longer term deposits than are readily available in our local market. 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 related inherent risk.

Our retail deposits represented $531.7 million, or 93.8%, of total deposits at March 31, 2012, while our out-of-market, or brokered, deposits represented $35.0 million, or 6.2%, of total deposits. At December 31, 2011, retail deposits represented $517.1 million, or 91.9%, of our total deposits and brokered CDs were $45.8 million, representing 8.1% of our total deposits.As our wholesale deposits have matured during the past 12 months, we have successfully replaced them with local deposits. While wholesale deposits decreased $10.8 million during the first quarter of 2012, our retail deposits have increased $14.6 million. We anticipate being able to continue 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% and 106% at March 31, 2012 andDecember 31, 2011, respectively.

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

35

		Three months ended March 31,
		2012			2011
(dollars in thousands)		Amount	Rate		Amount	Rate
Noninterest bearing demand deposits	$	77,975	-	%	50,234	-	%
Interest bearing demand deposits		153,317	0.71	%	137,465	1.30	%
Money market accounts		114,842	0.46	%	96,460	0.85	%
Savings accounts		5,012	0.14	%	3,252	0.23	%
Time deposits less than $100,000		69,474	1.28	%	72,923	1.71	%
Time deposits greater than $100,000		141,401	1.81	%	178,269	2.33	%
Total deposits	$	562,021	0.90	%	538,603	1.49	%

The $63.7 million increase in average transaction accounts and the $36.9 million decrease in time deposits of $100,000 or more for the three months ended March 31, 2012 compared to the 2011 period is a result of our intense focus to replace our out-of-market deposits with local deposits and the nationwide trend of increasing deposits due to economic uncertainty.

Core deposits, which exclude out-of-market deposits and time deposits of $100,000 or more, provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were $430.1 million and $413.1 million at March 31, 2012 and December 31, 2011, respectively. Included in time deposits greater than $100,000 at March 31, 2012 is $22.0 million of wholesales CDs scheduled to mature within the next 12 months at a weighted average rate of 2.41%. We currently have no plans to renew these wholesale deposits.

All of our time deposits are certificates of deposits. The maturity distribution of our time deposits of $100,000 or more at March 31, 2012 was as follows:

(dollars in thousands)		March 31, 2012
Three months or less	$	47,202
Over three through six months		17,155
Over six through twelve months		44,245
Over twelve months		27,670
Total	$	136,272

The Dodd-Frank Act also permanently raised 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 coverage limit applies per depositor, per insured depository institution for each account ownership category.

Capital Resources

Total shareholders' equity at March 31, 2012 was $63.0 million. At December 31, 2011, total shareholders' equity was $62.5 million. The $467,000 increase from December 31, 2011 is primarily related to net income of $688,000 during the three month period ended March 31, 2012, offset partially by a decrease in the unrealized gain on our security portfolio.

On February 27, 2009, as part of the CPP, the Company entered into the CPP Purchase Agreement with the Treasury, pursuant to which we sold 17,299 shares of our Series T Preferred Stock and the CPP Warrant to purchase 399,970.34 shares of our common stock (adjusted for the stock dividends in 2011 and 2012) 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 $6.487 per share of the common stock (adjusted for the stock dividends in 2011 and 2012).

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 assets) annualized for the three months ended March 31, 2012 and the year ended December 31, 2011. Since our inception, we have not paid cash dividends.

36

	March 31, 2012		December 31, 2011
Return on average assets	0.36	%	0.28	%
Return on average equity	4.34	%	3.40	%
Return on average common equity	3.40	%	2.10	%
Average equity to average assets ratio	8.30	%	8.12	%
Tangible common equity to assets ratio	6.02	%	5.98	%

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

At both the holding company and bank level, we are subject to various regulatory capital requirements administered by the federal banking agencies. To be considered "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 March 31, 2012, 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 an additional capital directive, consent order, or such other administrative action or sanction 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.

In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, now officially identified by the Basel Committee as "Basel III". Basel III, if implemented by the U.S. banking agencies and fully phased-in, would require certain bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity. Although Basel III is intended to be implemented by participating countries for large, internationally active banks, its provisions are likely to be considered by U.S. banking regulators in developing new regulations applicable to other banks in the United States, including those developed pursuant to directives in the Dodd-Frank Act. The U.S. banking agencies have indicated informally that they expect final adoption of implementing regulations in 2012. Notwithstanding its release of the Basel III framework as a final framework, the Basel Committee is considering further amendments to Basel III, including the imposition of additional capital surcharges on globally systemically important financial institutions. In addition to Basel III, the Dodd-Frank Act requires or permits the Federal banking agencies to adopt regulations affecting banking institutions' capital requirements in a number of respects, including potentially more stringent capital requirements for systemically important financial institutions. Requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact our net income and return on equity.

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

									March 31, 2012
		Actual			OCC Required Capital Ratio Minimum			For capital adequacy purposes Minimum			To be well capitalized under prompt corrective action provisions Minimum
(dollars in thousands)		Amount	Ratio		Amount	Ratio		Amount	Ratio		Amount	Ratio
Total Capital (to risk weighted assets)	$	81,467	13.15	%	74,332	12.0	%	49,555	8.0	%	61,944	10.0	%
Tier 1 Capital (to risk weighted assets)		73,706	11.90	%	61,944	10.0	%	24,777	4.0	%	37,166	6.0	%
Tier 1 Capital (to average assets)		73,706	9.62	%	68,966	9.0	%	30,651	4.0	%	38,314	5.0	%

37

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

					March 31, 2012
		Actual			For capital adequacy purposes Minimum			To be well capitalized under prompt corrective action provisions Minimum
(dollars in thousands)		Amount	Ratio		Amount	Ratio		Amount	Ratio
Total Capital (to risk weighted assets)	$	82,868	13.38	%	49,555	8.0	%	N/A	N/A
Tier 1 Capital (to risk weighted assets)		75,107	12.13	%	24,777	4.0	%	N/A	N/A
Tier 1 Capital (to average assets)		75,107	9.78	%	30,722	4.0	%	N/A	N/A

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 money to a client as long as the client has not violated any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At March 31, 2012, unfunded commitments to extend credit were $103.3 million, of which $20.4 million was at fixed rates and $82.9 million was at variable rates. At December 31, 2011, unfunded commitments to extend credit were $98.9 million, of which approximately $17.6 million was at fixed rates and $81.3 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.

At March 31, 2012 there was a $2.6 million commitment under letters of credit. At December 31, 2011 there was a $2.5 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 customers. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.

Except as disclosed in this 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.

38

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

As of March 31, 2012, the following table summarizes the forecasted impact on net interest income using a base case scenario given upward and downward movements in interest rates of 100, 200, and 300 basis points based on forecasted assumptions of prepayment speeds, nominal interest rates and loan and deposit repricing rates. Estimates are based on current economic conditions, historical interest rate cycles and other factors deemed to be relevant, However, underlying assumptions may be impacted in future periods which were not know to management at the time of the issuance of the Consolidated Financial Statements. Therefore, management's assumptions may or may not prove valid. No assurance can be given that changing economic conditions and other relevant factors impacting our net interest income will not cause actual occurrences to differ from underlying assumptions.

Interest rate scenario	Change in net interest income from base
Up 300 basis points	2.83	%
Up 200 basis points	(2.20	)%
Up 100 basis points	(1.64	)%
Base	-
Down 100 basis points	(0.07	)%
Down 200 basis points	(1.46	)%
Down 300 basis points	(3.04	)%

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 March 31, 2012 and December 31, 2011, our liquid assets, consisting of cash and due from banks and federal funds sold, amounted to $46.4 million and $23.0 million, or 6.0% and 3.0% of total assets, respectively. Our investment securities at March 31, 2012 and December 31, 2011 amounted to $78.6 million and $108.6 million, or 10.2% and 14.1% 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, loan payoffs, and from additional borrowings. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. We maintain three federal funds purchased lines of credit with correspondent banks totaling $30.5 million for which there were no borrowings against the lines of credit at March 31, 2012.

We are also a member of the FHLB, from which applications for borrowings can be made. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. The unused borrowing capacity currently available from the FHLB at March 31, 2012 was $6.0 million, based on the Bank's $5.9 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 $22.0 million of wholesale CDs that mature during 2012 of which we have no plans to renew. We believe that our existing stable base of core deposits, borrowings from the FHLB, and short-term repurchase agreements will enable us to successfully meet our long-term liquidity needs. However, as short-term liquidity needs arise, we have the ability to sell a portion

39

of our investment securities portfolio to meet those needs. During the first quarter of 2012, we developed a need for additional liquidity as we experienced increased loan demand and as a result sold $27.7 million of our mortgage-backed securities and state and municipal obligations, recording a net gain on sale of investment securities of $72,000.

As a result of the Treasury's CPP, we received $17.3 million of capital on February 27, 2009 in exchange for 17,299 shares of preferred stock. This additional capital should allow us to remain well-capitalized and provide additional liquidity on our balance sheet.

Critical Accounting Policies

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to our audited consolidated financial statements as of December 31, 2011, as filed in our Annual Report on Form 10-K.

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. Our Critical Accounting Policies are the allowance for loan losses, fair value of financial instruments, other-than-temporary impairment analysis, other real estate owned, and income taxes. 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.

Accounting, Reporting, and Regulatory Matters

Recently Issued Accounting Standards

The following is a summary of recent authoritative pronouncements that affect accounting, reporting, and disclosure of financial information by us:

In April 2011, the criteria used to determine effective control of transferred assets in the Transfers and Servicing topic of the ASC was amended by ASU 2011-03. The requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion were removed from the assessment of effective control. The other criteria to assess effective control were not changed. The amendments were effective for the Company on January 1, 2012 and had no effect on the financial statements.

ASU 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the ASC by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. The amendments were effective for the Company beginning January 1, 2012 and had no effect on the financial statements.

The Balance Sheet topic of the ASC was amended in December 2011 for companies with financial instruments and derivative instruments that offset or are subject to a master netting agreement. The amendments require disclosure of both gross information and net information about instruments and transactions eligible for offset or subject to an agreement similar to a master netting agreement. The amendments are effective for reporting periods beginning on or after January 1, 2013 and must be provided retrospectively for all comparative periods presented. The Company does not expect these amendments to have a material effect on its financial statements.

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

Recent Regulatory Developments

On June 8, 2010, the Bank entered into the Formal Agreement with its primary regulator, the OCC. The Formal Agreement is based on the findings of the OCC during their on-site examination of the Bank as of March 31, 2009.  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. Specifically, under the terms of the Formal Agreement, the Bank is required to (i) protect its interest in assets criticized by the OCC; (ii) develop, implement, and adhere to a written program to reduce the high level of credit risk; (iii) obtain credit information on all loans lacking such information and ensure proper collateral documentation is in place; (iv) engage the services of an independent appraiser to provide updated appraisals for certain loans where the most recent appraisal is more than 12 months old; (v) update and implement written policies/programs addressing loan policy,

40

allowance for loan and lease losses, and other real estate owned; (vi) continue to improve its liquidity position and maintain adequate sources of funding; (vii) obtain prior written determination of no supervisory objection from the OCC before accepting, renewing, or rolling over brokered deposits in excess of 25% of total deposits; (viii) update and adhere to its profit plan designed to improve the condition of the Bank; and (ix) submit periodic reports to the OCC regarding various aspects of the foregoing actions.

The Formal Agreement requires the establishment of certain plans and programs within various time periods.   After having completed the following through March 31, 2012, management believes that the Bank is in compliance with substantially all of the conditions established in the Formal Agreement. However, no assurance can be given that the OCC will concur with management's assessment. In addition, the Formal Agreement requires that various reports be submitted to the OCC on a quarterly basis until the Formal Agreement is terminated.

•       The Bank has established a compliance committee of its Board of Directors to oversee management's response to all sections of the Formal Agreement.   The committee consists of all 11 members of the Bank's Board of Directors and meets at least monthly to receive written progress reports from management on the results and status of actions needed to achieve full compliance with each article of the Formal Agreement.

•       Policies and procedures were revised or established and approved relating to the following issues:

(1)   Loan policies and procedures.

(2)   Criticized asset policy, procedures and specific program.

(3)   Policies related to managing OREO.

(4)   Procedures for maintaining an adequate allowance for loan losses.

(5)   Appraisal policy to ensure appraisals conform to appraisal standards and regulations.

•       Current and satisfactory credit information was obtained on all loans lacking such information to ensure proper collateral documentation is in place.

•       We received and evaluated current independent appraisals or updated appraisals on loans secured by certain properties.

•       The Bank's liquidity position was enhanced. We reduced our level of brokered deposits to comply with the OCC agreed upon levels.

•       A profit plan was updated to improve the financial condition of the Bank.

If the Bank does not satisfy and maintain adherence with each of the requirements listed above, the Bank will not be in compliance with the Formal Agreement.  Failure to comply with the Formal Agreement could result in regulators taking additional enforcement actions against the Bank.  The Bank's ability to meet the goals set forth in the Formal Agreement is contingent in part upon the stabilization of the local real estate markets and on its financial performance.

In addition, we have agreed with the OCC that the Bank will maintain total risk-based capital ratio of at least 12%, Tier 1 capital of at least 10%, and a leverage ratio of at least 9%. As of September 30, 2011, our capital ratios exceed these ratios and we remain "well capitalized." See "Management's Discussion and Analysis - Results of Operations - Capital Resources" for more discussion of the Minimum Capital Ratio levels established by the OCC and our capital ratios as of March 31, 2012.

Recent Legislative and Regulatory Initiatives to Address Financial and Economic Crises

Markets in the United States and elsewhere have experienced extreme volatility and disruption over the past three plus years. These circumstances have exerted significant downward pressure on prices of equity securities and virtually all other asset classes, and have resulted in substantially increased market volatility, severely constrained credit and capital markets, particularly for financial institutions, and an overall loss of investor confidence. Loan portfolio performances have deteriorated at many institutions resulting from, among other factors, a weak economy and a decline in the value of the collateral supporting their loans. Dramatic slowdowns in the housing industry, due in part to falling home prices and increasing foreclosures and unemployment, have created strains on financial institutions. Many borrowers are now unable to repay their loans, and the collateral securing these loans has, in some cases, declined below the loan balance.

In response to the challenges facing the financial services sector, beginning in 2008 a multitude of new regulatory and governmental actions have been announced, including the EESA, the TARP, the Recovery Act, the Dodd-Frank Act, the JOBS Act and related economic recovery programs. Some of the more recent actions include those described in Part I. Item 1. Business - Supervision and Regulation of our Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the SEC. 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.

41

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk and Interest Rate Sensitivity and - Liquidity Risk.

Item 4. 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 (Principal Executive Officer) and Chief Financial Officer (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 (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) have concluded that our current disclosure controls and procedures are effective as of March 31, 2012. There have been no significant changes in our internal controls over financial reporting during the fiscal quarter ended March 31, 2012 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.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS.

There are no material pending legal proceedings to which the company is a party or of which any of its property is the subject.

Item 1A RISK FACTORS.

Not applicable

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

Not applicable

Item 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable

Item 4. MINE SAFETY DISCLOSURES.

Not applicable

Item 5. OTHER INFORMATION.

Not applicable

Item 6. EXHIBITS.

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

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

32        Section 1350 Certifications.

101      The following materials from the Quarterly Report on Form 10-Q of Southern First Bancshares, Inc. for the quarter ended March 31, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statement of Changes in Shareholders' Equity and Comprehensive Income (Loss), (v) Consolidated Statements of Cash Flows and (vi) Notes to Unaudited Consolidated Financial Statements.(1)

(1)        As provided in Rule 406T of Regulation S-T, this information shall not be deemed "filed" or part of a registration statement or prospectus for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those sections.

42

SIGNATURES

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

	SOUTHERN FIRST BANCSHARES, INC.
	Registrant
Date: May 10, 2012	/s/R. Arthur Seaver, Jr.
	R. Arthur Seaver, Jr.
	Chief Executive Officer (Principal Executive Officer)
Date: May 10, 2012	/s/Michael D. Dowling
	Michael D. Dowling
	Chief Financial Officer (Principal Financial and Accounting Officer)

43

INDEX TO EXHIBITS

Exhibit Number	Description
31.1	Rule 13a-14(a) Certification of the Principal Executive Officer.
31.2	Rule 13a-14(a) Certification of the Principal Financial Officer.
32	Section 1350 Certifications.
101	The following materials from the Quarterly Report on Form 10-Q of Southern First Bancshares, Inc. for the quarter ended March 31, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statement of Changes in Shareholders' Equity and Comprehensive Income (Loss), (v) Consolidated Statements of Cash Flows and (vi) Notes to Unaudited Consolidated Financial Statements.(1)
(1)	As provided in Rule 406T of Regulation S-T, this information shall not be deemed "filed" or part of a registration statement or prospectus for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those sections.

44