Unless
the context indicates otherwise, all references in this Form 10-K to “we,” “us,” and “our”
refer to GrandSouth Bancorporation and our wholly owned subsidiary, GrandSouth Bank, except that in the discussion of our capital
stock and related matters, these terms refer solely to GrandSouth Bancorporation and not to the Bank. All references to the “Company”
refer to GrandSouth Bancorporation only, and all references to the “Bank” refer to GrandSouth Bank only.
General
Overview
GrandSouth Bancorporation
was incorporated in 2000 under the laws of South Carolina and is a bank holding company registered under the Bank Holding Company
Act of 1956. The Company’s primary purpose is to serve as the holding company for the Bank. On October 2, 2000, pursuant
to a Plan of Exchange approved by the shareholders of the Bank, all of the outstanding shares of capital stock of the Bank were
exchanged for shares of the Company, and the Company became the owner of all of the outstanding capital stock of the Bank.
The Company
has one non-bank subsidiary, GrandSouth Capital Trust I (“GrandSouth Trust”), a Delaware statutory trust that was
formed to facilitate the issuance of trust preferred securities. GrandSouth Trust is not consolidated in the Company’s financial
statements.
GrandSouth Bank
is a South Carolina state-chartered commercial bank, which was incorporated and commenced operations in 1998. The Bank’s
business consists primarily of accepting deposits from individuals and small businesses and investing those deposits, together
with funds generated from operations and borrowings, primarily in loans secured by real estate, including commercial real estate
loans, one-to-four family residential mortgage loans, construction and development loans, and home equity loans and lines of credit.
In addition, we originate commercial business loans and invest in investment securities. We also provide specialty floor plan
lending to small auto dealerships through a separate division of the Bank under the trade name “CarBucks.” We offer
a variety of deposit accounts, including savings accounts, certificates of deposit, money market accounts, commercial and regular
checking accounts, and individual retirement accounts. The Bank has eight retail offices located across South Carolina.
We have two
reportable segments—(i) the Bank, excluding CarBucks (“Core Bank”), and (ii) CarBucks, as described below. These
reportable segments represent the distinct product lines that we offer and are viewed separately by our management for strategic
planning purposes.
Core
Bank. Our primary business is to provide traditional deposit and lending products
and services to our commercial and retail banking clients through the Bank.
CarBucks.
Our CarBucks segment provides specialty floor plan lending to small auto dealerships in over 20 states through a separate division
of the Bank.
Market
Area
The Bank was
organized for the primary purpose of promoting home ownership through mortgage and commercial lending, financed by locally gathered
deposits and currently operates eight branches across South Carolina. South Carolina is in the southern region of the United States,
which is one of the fastest growing areas in the country. Greenville, South Carolina, where we are headquartered, is the largest
city in the Greenville-Anderson, South Carolina Metropolitan Statistical Area (the “Greenville Market”), and the upstate
of South Carolina and is our primary target market.
From 2011 to
2021, the combined population of the Greenville Market grew at a compound annual growth rate of 1.05% to 937,813. Median household
income in the Greenville Market was $60,877 in 2021. FDIC insured deposits in the Greenville Market increased by 12.7% from 2020
to 2021, totaling $23.5 billion at June 30, 2021, the latest date for which such data is available, of which 3.4%, or $789.0 million,
were held by the Bank. Data obtained through S&P Global Market Intelligence projects population growth in the Greenville Market
of 2.8% from 2021 to 2027.
The Greenville
Market is economically diverse with major industries including the automobile industry, health and pharmaceuticals, manufacturing,
and academic institutions. Located adjacent to major transportation corridors such as Interstates 85 and 26 and centrally located
between Charlotte, North Carolina and Atlanta, Georgia, the Greenville Market is consistently recognized nationally as an area
for business growth and relocation. Data obtained through S&P Global Market Intelligence projects population growth in the
Greenville Market of 4.2% from 2020 to 2026.
In addition
to the Greenville Market, we also focus on the Charleston-North Charleston, South Carolina Metropolitan Statistical Area (the
“Charleston Market”) and the Columbia, South Carolina Metropolitan Statistical Area (the “Midlands Market”).
From 2011 to
2021, the combined population of the Charleston Market grew at a compound annual growth rate of 1.94% to 823,428. Median household
income in the Charleston Market was $70,210 in 2021. FDIC insured deposits in the Charleston Market increased by 16.5% from 2020
to 2021, totaling $20.4 billion at June 30, 2021, the latest date for which such data is available. Data obtained through S&P
Global Market Intelligence projects population growth in the Charleston Market of 5.3% from 2021 to 2027.
The Charleston
Market is the home to the Port of Charleston, one of the busiest container ports along the Southeast and Gulf Coasts, as well
as a number of national and international manufacturers, including Boeing South Carolina and Robert Bosch LLC. The region also
benefits from a thriving tourism industry. In addition, a number of academic institutions are located within the region, including
the Medical University of South Carolina, The Citadel, and The College of Charleston, among others. The Charleston Market also
hosts military installations for the U.S. Navy, Marine Corps, Air Force, Army and Coast Guard.
From 2011 to
2021, the combined population of the Midlands Market grew at a compound annual growth rate of 1.07% to 849,200. Median household
income in the Midlands Market was $59,452 in 2021. FDIC insured deposits in the Midlands Market increased by 10.6% from 2020 to
2021, totaling $26.7 billion at June 30, 2021, the latest date for which such data is available.
The Midlands
Market is located in the center of the state between the Upstate region and the coastal cities of Charleston and Myrtle Beach.
The area’s central location has contributed greatly to its commercial appeal and growth, and the market benefits from a
diverse economy composed of advanced manufacturing, healthcare, technology, shared services, logistics, and energy. The largest
employers in the Midlands Market include the U.S. Army’s Fort Jackson, the University of South Carolina, Prisma Health,
Blue Cross Blue Shield, and Lexington Medical Center. Data obtained through S&P Global Market Intelligence projects population
growth in the Midlands Market of 5.32% from 2021 to 2027.
Competition
The banking
business is highly competitive. Competition among financial institutions is based on interest rates offered on deposit accounts,
interest rates charged on loans, other credit and service charges relating to loans, the quality and scope of the services rendered,
the convenience of banking facilities, and, in the case of loans to commercial borrowers, relative lending limits. We compete
with commercial banks, credit unions, savings institutions, mortgage banking firms, consumer finance companies, securities brokerage
firms, insurance companies, money market funds and other mutual funds, as well as super-regional, national and international financial
institutions that operate offices in our market areas and elsewhere.
We compete with
these institutions both in attracting deposits and in making loans. In addition, we have to attract our customer base from other
existing financial institutions and from new residents. Many of our competitors are well-established, larger financial institutions,
such as Bank of America, TD Bank, Wells Fargo and Truist Bank. These institutions offer some services, such as extensive and established
branch networks, that we do not provide. In addition, many of our nonbank competitors are not subject to the same extensive federal
regulations that govern bank holding companies and federally insured banks.
We believe the
financial services industry will likely continue to become more competitive as further technological advances enable more financial
institutions to provide expanded financial services without having a physical presence in our markets. Because larger competitors
have advantages in attracting business from larger corporations, we do not generally compete for that business. Instead, we concentrate
our efforts on attracting the business of individuals and small- to medium- size businesses. With regard to such accounts, we
generally compete on the basis of customer service and responsiveness to customer needs, the convenience of our offices and hours,
and the availability and pricing of our products and services.
We believe our
commitment to quality and personalized banking services through our culture is a factor that contributes to our competitiveness
and success.
Segment
Information
Reference is
made to Note 20 “Reportable Segments” to the consolidated financial statements included under Item 8 -“Financial
Statements and Supplementary Data.”
Lending
Activities
General
We emphasize
a range of lending services, including real estate, commercial and consumer loans.
To address the
risks inherent in making loans, our management maintains an allowance for loan losses based on, among other things, periodic and
regular evaluation of individual loans, the overall risk characteristics of the various portfolio segments, evaluation of loan
loss experience, the amount of past due and nonperforming loans, current and anticipated economic changes and the values of certain
loan collateral. Based upon such factors, management makes various assumptions and judgments about the ultimate collectability
of the loan portfolio and provides an allowance for loan losses to cover the estimated losses inherent in the loan portfolio.
However, because there are certain risks that cannot be precisely quantified, management’s judgment of the allowance is
approximate and imprecise. The adequacy and methodology of the allowance for loan losses is subject to regulatory examination
and compared to a peer group of financial institutions identified by the regulatory agencies.
Real
Estate Loans
A major component
of our loan portfolio is loans secured by first or second mortgages on residential and commercial real estate. These loans generally
consist of commercial real estate loans, construction and development loans and residential real estate loans (including home
equity and second mortgage loans). These loans include interest rates that may be fixed or adjustable and are generally charged
origination fees. We seek to manage credit risk in the commercial real estate portfolio by emphasizing loans on owner-occupied
office and retail buildings where the loan-to-value ratio, established by independent appraisals, generally does not exceed 85
to 90%. The loan-to-value ratio for first and second residential real estate loans and for construction loans generally does not
exceed 80 to 90%. In addition, we may require personal guarantees by the principal owner(s) of the property serving as collateral
for a real estate loan.
The principal
economic risk associated with all loans, including real estate loans, is the creditworthiness of our borrowers. The ability of
a borrower to repay a real estate loan depends upon several economic factors, including employment levels and fluctuations in
the value of real estate. In the case of a real estate construction loan, there is generally no income from the underlying property
during the construction period. In the case of a real estate purchase loan, the borrower may be unable to repay the loan at the
end of the loan term and may thus be forced to refinance the loan at a higher interest rate, or, in certain cases, the borrower
may default as a result of its inability to refinance the loan. Each of these factors increases the risk of nonpayment by the
borrower.
We face additional
credit risks to the extent that we engage in making adjustable-rate mortgage loans (“ARMs”). In the case of an ARM,
as interest rates increase, the borrower’s required payments increase, thus increasing the potential for default. The marketability
of all real estate loans, including ARMs, is also generally affected by the prevailing level of interest rates.
Commercial
Loans
We make loans
for commercial purposes in various lines of business. The terms of these loans are structured on a case-by-case basis to best
serve customer-specific needs. Our commercial loans include both secured and unsecured loans for working capital (including inventory
and receivables), loans for business expansion (including acquisition of real estate and improvements), and loans for purchases
of equipment and machinery. Working capital loans typically have terms not exceeding one year and are usually secured by accounts
receivable, inventory or personal guarantees of the principals of the business. Loans for business expansion typically have terms
of five years or less and are secured by various business assets. Equipment loans are typically made for a term of five years
or less at either fixed or variable rates, with the loan fully amortized over the term and secured by the financed equipment.
The risks associated
with commercial loans vary with many economic factors, including the economy in our market area. The well-established banks in
our market area make proportionately more loans to medium- to large-sized businesses than we make. Many of our commercial loans
are made to small- to medium-sized businesses, which typically have shorter operating histories, and less sophisticated record-keeping
systems than larger entities. As a result, these smaller entities may be less able to withstand adverse competitive, economic
and financial conditions than larger borrowers. In addition, because payments on these commercial loans generally depend to a
large degree on the results of operations and management of the properties, repayment of such loans may be subject, to a greater
extent than other loans, to adverse conditions in the real estate market or the economy.
Through our
CarBucks division, we also provide financing for independent automobile dealers located in more than 20 states, primarily in the
southeastern United States, for the purpose of acquiring used automobile inventory. This type of “floor plan” inventory
financing provides commercial lines of credit to fund the purchase of specific units of inventory and allows borrowers to hold
the inventory for sale for periods of up to 180 days. There is little concentration in the customer base either geographically
or by account. We monitor this portfolio by maintaining title of inventory until the unit is sold and perform frequent field audits
to verify that the underlying collateral remains unsold and on each dealer’s lot. Yields on this type of financing are significantly
higher than other forms of commercial lending, which partially offset the higher historical losses and overhead required for monitoring.
We currently seek to limit our total exposure to this type of lending to 175% of the Bank’s Tier 1 capital. Because loans
to finance automobile inventory for independent automobile dealers are secured by used motor vehicles these loans are subject
to adverse conditions in the automobile market including risks associated with declining values.
Consumer
Loans
We make a variety
of loans to individuals for personal and household purposes, including secured and unsecured installment and term loans, home
equity loans and lines of credit and unsecured revolving lines of credit such as credit cards. The secured installment and term
loans to consumers generally consist of loans to purchase automobiles, boats, recreational vehicles, mobile homes and household
furnishings, with the collateral for each loan being the purchased property. The underwriting criteria for home equity loans and
lines of credit is generally the same as a first mortgage loan as described above. These loans typically mature 15 years or less
after origination, unless renewed or extended.
Consumer loans
generally involve greater credit risk than other loans because of the type and nature of the underlying collateral or because
of the absence of collateral. Consumer loan repayments are dependent on the borrower’s continuing financial stability and
are likely to be adversely affected by job loss, divorce and illness. Furthermore, the application of various federal and state
laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans in
the case of default. In most cases, any repossessed collateral will not provide an adequate source of repayment of the outstanding
loan balance. Although the underwriting process for consumer loans includes a comparison of the value of the collateral, if any,
to the proposed loan amount, we cannot predict the extent to which the borrower’s ability to pay, and the value of the collateral,
will be affected by prevailing economic and other conditions.
Loan
Approval and Review
Our loan approval
policies provide for various levels of officer lending authority, which are determined by our board of directors. When the amount
of aggregate loans to a single borrower exceeds an individual officer’s lending authority, the loan request is considered
and approved by an officer with a higher lending limit, the management loan committee, or the board of directors. We will not
make loans to any director or executive officer of the Bank unless the loan is approved by the Bank’s board of directors,
or a committee thereof. Other officer and employee loans are approved by the Chief Credit Officer. These loans will be made on
terms not materially more favorable to such person than would be available to a person not affiliated with the Bank.
Our lending
activities are subject to a variety of lending limits imposed by federal law. In general, the Bank is subject to a legal limit
on loans to a single borrower equal to 15% of the Bank’s capital and unimpaired surplus. Based upon the capitalization of
the Bank at December 31, 2021, the maximum amount we could lend to one borrower is $20.6 million. However, our internal lending
limit at December 31, 2021 is $12.3 million and may vary based on our assessment of specific lending relationships. The board
of directors will adjust the internal lending limit as deemed necessary to continue to mitigate risk and serve the Bank’s
clients. The Bank’s legal lending limit will increase or decrease in response to increases or decreases in the Bank’s
level of capital. We are able to sell participations in our larger loans to other financial institutions, which allows us to manage
the risk involved in these loans and to meet the lending needs of our clients requiring extensions of credit in excess of these
limits.
Deposit
Products and Other Sources of Funds
General
Deposits traditionally
have been our primary source of funds for our investment and lending activities. Our primary outside borrowing source is the Federal
Home Loan Bank (“FHLB”) of Atlanta. We have in the past used both brokered deposits and internet generated deposits
to fund loan growth and to manage interest rate risk. Our additional sources of funds are scheduled loan payments, maturing investments,
loan prepayments, retained earnings, and income on other earning assets.
Deposits
We accept deposits
primarily from within our primary market area. We have also used brokered and internet deposits as a source of funds. We rely
on our competitive pricing and products, convenient locations and quality customer service to attract and retain deposits. Our
branch network is well established in our primary market area. We offer a variety of deposit accounts with a range of interest
rates and terms. Our deposit accounts consist of savings accounts, certificates of deposit, regular checking accounts, money market
accounts and individual retirement accounts.
Interest rates
paid, maturity terms, service fees and withdrawal penalties for our deposit accounts are revised on a periodic basis depending
on our current operating strategies, market interest rates, our liquidity requirements and our deposit growth goal. Our retail
customer deposits were $1.0 billion at December 31, 2021, or 97.9% of our total deposits.
Borrowings
Our borrowings
consist of advances from the FHLB and junior subordinated debentures. At December 31, 2021, FHLB advances totaled $5.0 million,
or 0.5%, of total liabilities, and subordinated debentures totaled $35.9 million, or 3.2% of total liabilities. At December 31,
2021, we had unused borrowing capacity with the FHLB of $30.7 million based on collateral pledged at that date. We had total additional
credit availability with the FHLB of $355.7 million as of December 31, 2021 if additional collateral was pledged. Advances from
the FHLB are secured by our investment in the common stock of the FHLB and approved loans in our one-to-four family residential
and commercial real estate loan portfolios.
Employees
As of December
31, 2021, we had 196 full-time and five part-time employees.
General
Corporate Information
Our principal
executive offices are located at 381 Halton Road, Greenville, South Carolina, and may be contacted via telephone at 864-770-1000.
Additional information can be found on our website at www.grandsouth.com. Information on our website or any other website is not
incorporated by reference herein and does not constitute a part of Annual Report on Form 10-K.
Available
Information
We file
annual, quarterly and current reports, proxy statements and other documents with the SEC. Our SEC filings will be available to
the public on the SEC’s Internet site at http://www.sec.gov. You may also obtain these documents, free of charge,
from the investor relations section of our website at http://www.grandsouth.com. No information contained on our website
is intended to be included as part of, or incorporated by reference into this Form 10-K.
SUPERVISION
AND REGULATION
Both the Company
and the Bank are subject to extensive state and federal banking laws and regulations that impose specific requirements or restrictions
on and provide for general regulatory oversight of virtually all aspects of our operations. These laws and regulations are generally
intended to protect depositors, not shareholders. Changes in applicable laws or regulations may have a material effect on our
business and prospects.
The following
discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such
laws and regulations on our operations. It is intended only to briefly summarize some material provisions. The following summary
is qualified by reference to the statutory and regulatory provisions discussed.
Legislative
and Regulatory Developments
Although the
2008 financial crisis has now passed, two legislative and regulatory responses—the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”) and the Basel III-based capital rules—will continue to have an impact
on our operations.
In addition,
newer regulatory developments implemented in response to the COVID-19 pandemic, including the Coronavirus Aid, Relief, and Economic
Security Act (the “CARES Act”) and the Consolidated Appropriations Act, 2021, which enhanced and expanded certain
provisions of the CARES Act, have had and will continue to have an impact on our operations.
The Dodd-Frank
Wall Street Reform and Consumer Protection Act
The Dodd-Frank
Act was signed into law in July 2010 and impacted financial institutions in numerous ways, including:
|
· |
The creation
of a Financial Stability Oversight Council responsible for monitoring and managing systemic risk; |
|
· |
Granting additional
authority to the Board of Governors of the Federal Reserve (the “Federal Reserve”) to regulate certain types of nonbank
financial companies; |
|
· |
Granting new
authority to the FDIC as liquidator and receiver; |
|
· |
Changing the
manner in which deposit insurance assessments are made; |
|
· |
Requiring regulators
to modify capital standards; |
|
· |
Establishing
the Consumer Financial Protection Bureau (the “CFPB”); |
|
· |
Capping interchange
fees that banks charge merchants for debit card transactions; |
|
· |
Imposing more
stringent requirements on mortgage lenders; and |
|
· |
Limiting banks’
proprietary trading activities. |
There are many
provisions in the Dodd-Frank Act mandating regulators to adopt new regulations and conduct studies upon which future regulation
may be based. While some have been issued, many remain to be issued. Governmental intervention and new regulations could materially
and adversely affect our business, financial condition and results of operations.
The
Economic Growth, Regulatory Relief, and Consumer Protection Act
On May 24, 2018,
former President Trump signed into law this major financial services reform bill. The Economic Growth, Regulatory Relief, and
Consumer Protection Act (the “Reform Law”) modifies or eliminates certain requirements on community and regional banks
and nonbank financial institutions. For instance, under the Reform Act and related rule making:
|
· |
banks that
have less than $10 billion in total consolidated assets and total trading assets and trading liabilities of less than five percent
of total consolidated assets from Section 619 of the Dodd-Frank Act, known as the “Volcker Rule”, which prohibits
“proprietary trading” and the ownership or sponsorship of private equity or hedge funds that are referred to as “covered
funds”; |
|
· |
the asset threshold
for bank holding companies to qualify for treatment under the “Small Bank Holding Company and Savings and Loan Holding Company
Policy Statement” was raised from $1 billion to $3 billion, which exempts these institutions (including the Company) from
certain regulatory requirements including the Basel III capital rules; |
|
· |
a new “community
bank leverage ratio” was adopted, which is applicable to certain banks and bank holding companies with total assets of less
than $10 billion (as described below under “Basel Capital Standards”); and |
|
· |
banks with
up to $3 billion in total consolidated assets may be examined by their federal banking regulator every 18 months (as opposed to
every 12 months). |
Basel
Capital Standards
Regulatory capital
rules known as Basel III impose minimum capital requirements for bank holding companies and banks. The Basel III rules apply to
all national and state banks and savings and loan associations regardless of size and bank holding companies and savings and loan
holding companies other than “small bank holding companies,” generally holding companies with consolidated assets
of less than $3 billion. The Company is currently considered a “small bank holding company.” More stringent requirements
are imposed on “advanced approaches” banking organizations-those organizations with $250 billion or more in total
consolidated assets, $10 billion or more in total foreign exposures, or that have opted into the Basel II capital regime.
The Basel III
rules require the Bank to maintain the following minimum capital requirements:
|
· |
a new common
equity Tier 1 (“CET1”) risk-based capital ratio of 4.5%; |
|
· |
a Tier 1 risk-based
capital ratio of 6%; |
|
· |
a total risk-based
capital ratio of 8%; and |
|
· |
a leverage
ratio of 4%. |
Under Basel
III, Tier 1 capital includes two components: CET1 capital and additional Tier 1 capital. The highest form of capital, CET1 capital,
consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, otherwise referred
to as AOCI, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital is primarily
comprised of noncumulative perpetual preferred stock, Tier 1 minority interests and grandfathered trust preferred securities (as
discussed below). Tier 2 capital generally includes the allowance for loan losses up to 1.25% of risk-weighted assets, qualifying
preferred stock, subordinated debt and qualifying tier 2 minority interests, less any deductions in Tier 2 instruments of an unconsolidated
financial institution. Cumulative perpetual preferred stock is included only in Tier 2 capital, except that the Basel III rules
permit bank holding companies with less than $15 billion in total consolidated assets to continue to include trust preferred securities
and cumulative perpetual preferred stock issued before May 19, 2010 in Tier 1 Capital (but not in CET1 capital), subject to certain
restrictions. AOCI is presumptively included in CET1 capital and often would operate to reduce this category of capital.
When
implemented, Basel III provided a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations
to opt out of much of this treatment of AOCI. We made this opt-out election and, as a result, retained our pre-existing treatment
for AOCI.
In addition,
in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, under Basel III, a banking
organization must maintain a 2.5% “capital conservation buffer” on top of its minimum risk-based capital requirements.
This buffer must consist solely of CET1 capital, but the buffer applies to all three risk-based measurements (CET1, Tier 1 capital
and total capital). The 2.5% capital conservation buffer effectively results in the following minimum capital rations (taking
into account the capital conservation buffer): (i) a CET1 capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%,
and (iii) a total risk-based capital ratio of 10.5%.
On December
21, 2018, the federal banking agencies issued a joint final rule to revise their regulatory capital rules to (i) address the upcoming
implementation of a new credit impairment model, the Current Expected Credit Loss, or CECL model, an accounting standard under
generally accepted accounting principles in the United States of America (“GAAP”); (ii) provide an optional three-year
phase-in period for the day-one adverse regulatory capital effects that banking organizations are expected to experience upon
adopting CECL; and (iii) require the use of CECL in stress tests beginning with the 2020 capital planning and stress testing
cycle for certain banking organizations that are subject to stress testing. We are currently evaluating the impact the CECL model
will have on our accounting and expect to recognize a one-time cumulative-effect adjustment to our allowance for loan losses as
of the beginning of the first quarter of 2023, the first reporting period in which the new standard is effective. At this time,
we cannot yet reasonably determine the magnitude of such one-time cumulative adjustment, if any, or of the overall impact of the
new standard on our business, financial condition or results of operations.
In November
2019, the federal banking regulators published final rules under the Reform Law (discussed above) implementing a simplified measure
of capital adequacy for certain banking organizations that have less than $10 billion in total consolidated assets. Under the
final rules, which went into effect on January 1, 2020, depository institutions and depository institution holding companies that
have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater
than 9%, off-balance-sheet exposures of 25% or less of total consolidated assets and trading assets plus trading liabilities of
5% or less of total consolidated assets, are deemed “qualifying community banking organizations” and are eligible
to opt into the “community bank leverage ratio framework.” A qualifying community banking organization that elects
to use the community bank leverage ratio framework and that maintains a leverage ratio of greater than 9% is considered to have
satisfied the generally applicable risk-based and leverage capital requirements under the Basel III rules and, if applicable,
is considered to have met the “well capitalized” ratio requirements for purposes of its primary federal regulator’s
prompt corrective action rules, discussed below. We do not have any immediate plans to elect to use the community bank leverage
ratio framework but may make such an election in the future.
As of December
31, 2021, the Bank was well-capitalized, as defined by FDIC regulations. As of December 31, 2021, the Company had regulatory capital
in excess of the Federal Reserve’s requirements and met the Basel III rule requirements to be well-capitalized.
Legislative
and Regulatory Responses to the COVID-19 Pandemic
The COVID-19
pandemic has continued to cause extensive disruptions to the global economy, to businesses, and to the lives of individuals throughout
the world. On March 27, 2020, the CARES Act was signed into law. The CARES Act was a $2.2 trillion economic stimulus bill that
was intended to provide relief in the wake of the COVID-19 pandemic. There have also been a number of regulatory actions intended
to help mitigate the adverse economic impact of the COVID-19 pandemic on borrowers, including several mandates from the bank regulatory
agencies, requiring financial institutions to work constructively with borrowers affected by the COVID-19 pandemic. Although these
programs generally have expired, governmental authorities may take additional actions in the future to limit the adverse impact
of COVID-19 on borrowers and tenants.
The Paycheck
Protection Program (“PPP”), originally established under the CARES Act and extended under the Consolidated Appropriations
Act of 2021, authorized financial institutions to make federally-guaranteed loans to qualifying small businesses and non-profit
organizations. These loans carry an interest rate of 1% per annum and a maturity of two years for loans originated prior to June
5, 2020 and five years for loans originated on or after June 5, 2020. The PPP provides that such loans may be forgiven if the
borrowers meet certain requirements with respect to maintaining employee headcount and payroll and the use of the loan proceeds
after the loan is originated. The initial phase of the PPP, after being extended multiple times by Congress, expired on August
8, 2020. However, on January 11, 2021, the SBA reopened the PPP for First Draw PPP loans to small businesses and non-profit organizations
that did not receive a loan through the initial PPP phase. Further, on January 13, 2021, the SBA reopened the PPP for Second Draw
PPP loans to small businesses and non-profit organizations that did receive a loan through the initial PPP phase. The PPP program
ended in accordance with its terms on May 31, 2021, outstanding PPP loans continue to go through the process of either obtaining
forgiveness from the SBA or pursuing claims under the SBA guaranty.
The CARES
Act, as extended by certain provisions of the Consolidated Appropriations Act of 2021, also initially permitted banks to suspend
requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise had been characterized as
troubled debt restructurings and suspended any determination related thereto if (i) the borrower was not more than 30 days past
due as of December 31, 2019, (ii) the modifications were related to COVID-19, and (iii) the modification occurred between March
1, 2020 and the earlier of 60 days after the date of termination of the national emergency or January 1, 2022. Federal bank regulatory
authorities also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19.
Proposed
Legislation and Regulatory Action
From time to
time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory
agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions
or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes
and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase
or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks,
savings associations, credit unions, and other financial institutions. We cannot predict whether any such legislation will be
enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results
of operations of the Company. A change in statutes, regulations or regulatory policies applicable to the Company or the Bank could
have a material effect on the business of the Company.
GrandSouth
Bancorporation
We own 100%
of the outstanding capital stock of the Bank, and therefore we are considered to be a bank holding company registered under the
federal Bank Holding Company Act of 1956 (the “Bank Holding Company Act”). As a result, we are primarily subject to
the supervision, examination and reporting requirements of the Federal Reserve under the Bank Holding Company Act and its regulations
promulgated thereunder. Moreover, as a bank holding company of a bank located in South Carolina, we also are subject to the South
Carolina Banking and Branching Efficiency Act.
Permitted
Activities. Under the Bank Holding Company Act, a bank holding company is generally permitted
to engage in, or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in, the following
activities:
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banking or
managing or controlling banks; |
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furnishing
services to or performing services for our subsidiaries; and |
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any activity
that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking. |
Activities
that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of banking include:
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factoring accounts
receivable; |
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making, acquiring,
brokering or servicing loans and usual related activities; |
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leasing personal
or real property; |
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operating a
non-bank depository institution, such as a savings association; |
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trust company
functions; |
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financial and
investment advisory activities; |
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conducting
discount securities brokerage activities; |
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underwriting
and dealing in government obligations and money market instruments; |
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providing specified
management consulting and counseling activities; |
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performing
selected data processing services and support services; |
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acting as agent
or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and |
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performing
selected insurance underwriting activities. |
As
a bank holding company we also can elect to be treated as a “financial holding company,” which would allow us to engage
in a broader array of activities. In summary, a financial holding company can engage in activities that are financial in nature
or incidental or complimentary to financial activities, including insurance underwriting, sales and brokerage activities, providing
financial and investment advisory services, underwriting services and limited merchant banking activities. We have not sought
financial holding company status, but may elect such status in the future as our business matures. If we were to elect financial
holding company status, each insured depository institution we control would have to be well capitalized, well managed and have
at least a satisfactory rating under the Community Reinvestment Act as discussed below.
The Federal
Reserve has the authority to order a bank holding company or its subsidiaries to terminate any of these activities or to terminate
its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company’s continued
ownership, activity or control constitutes a serious risk to the financial safety, soundness or stability of it or any of its
bank subsidiaries.
Change
in Control. Two statutes, the Bank Holding Company Act and the Change in Bank Control
Act, together with regulations promulgated under them, require some form of regulatory review before any company may acquire “control”
of a bank or a bank holding company. Under the Bank Holding Company Act, control is deemed to exist if a company acquires 25%
or more of any class of voting securities of a bank holding company; controls the election of a majority of the members of the
board of directors; or exercises a controlling influence over the management or policies of a bank or bank holding company. In
guidance issued in 2008, the Federal Reserve has stated that it would not expect control to exist if a person acquires, in aggregate,
less than 33% of the total equity of a bank or bank holding company (voting and nonvoting equity), provided such person’s
ownership does not include 15% or more of any class of voting securities. Prior Federal Reserve approval is necessary before an
entity acquires sufficient control to become a bank holding company. Natural persons, certain non-business trusts, and other entities
are not treated as companies (or bank holding companies), and their acquisitions are not subject to review under the Bank Holding
Company Act. State laws generally, including South Carolina law, require state approval before an acquirer may become the holding
company of a state bank.
Under the Change
in Bank Control Act, a person or company is required to file a notice with the Federal Reserve if it will, as a result of the
transaction, own or control 10% or more of any class of voting securities or direct the management or policies of a bank or bank
holding company and either if the bank or bank holding company has registered securities or if the acquirer would be the largest
holder of that class of voting securities after the acquisition. For a change in control at the holding company level, both the
Federal Reserve and the subsidiary bank’s primary federal regulator must approve the change in control; at the bank level,
only the bank’s primary federal regulator is involved. Transactions subject to the Bank Holding Company Act are exempt from
Change in Control Act requirements. For state banks, state laws, including that of South Carolina, typically require approval
by the state bank regulator as well.
Acquisition
Activities. The primary purpose of a bank holding company is to control and manage banks.
The Bank Holding Company Act generally requires the prior approval of the Federal Reserve for any merger involving a bank
holding company or any acquisition by a bank holding company of another bank or bank holding company. In addition, the prior approval
of the FDIC is required for the Bank to merge with another bank or purchase the assets or assume the deposits of another bank.
In determining whether to approve a proposed bank acquisition, federal bank regulators will consider, among other factors, the
effect of the acquisition on competition, the public benefits expected to be received from the acquisition, the projected capital
ratios and levels on a post-acquisition basis, and the acquiring institution’s record of addressing the credit needs of
the communities it serves, including the needs of low and moderate income neighborhoods, consistent with the safe and sound operation
of the bank, under the Community Reinvestment Act.
On
July 9, 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy. Among other initiatives,
the Executive Order encouraged the federal banking agencies to review their current merger oversight practices under the Bank
Holding Company Act and the Bank Merger Act and adopt a plan for revitalization of such practices. There are many steps that must
be taken by the agencies before any formal changes to the framework for evaluating bank mergers can be finalized and the prospects
for such action are uncertain at this time; however, the adoption of more expansive or prescriptive standards may have an
impact on our acquisition activities.
Source
of Strength. There are a number of obligations and restrictions imposed by law and regulatory
policy on bank holding companies with regard to their depository institution subsidiaries that are designed to minimize potential
loss to depositors and to the FDIC insurance funds in the event that the depository institution becomes in danger of defaulting
under its obligations to repay deposits. Under a policy of the Federal Reserve, a bank holding company is required to serve as
a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions
in circumstances where it might not do so absent such policy. Under the Federal Deposit Insurance Corporation Improvement Act
of 1991, to avoid receivership of its insured depository institution subsidiary, a bank holding company is required to guarantee
the compliance of any insured depository institution subsidiary that may become “undercapitalized” within the terms
of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an
amount equal to 5% of the institution’s total assets at the time the institution became undercapitalized, or (ii) the amount
which is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards
as of the time the institution fails to comply with such capital restoration plan.
The Federal
Reserve also has the authority under the Bank Holding Company Act to require a bank holding company to terminate any activity
or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination
that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository
institution of the bank holding company. Further, federal law grants federal bank regulatory authorities’ additional discretion
to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture
may aid the depository institution’s financial condition.
In addition,
the “cross guarantee” provisions of the Federal Deposit Insurance Act (the “FDIA”) require insured depository
institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the FDIC as a result
of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly
controlled insured depository institution in danger of default. The FDIC’s claim for damages is superior to claims of shareholders
of the insured depository institution or its holding company, but is subordinate to claims of depositors, secured creditors and
holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions.
The FDIA also
provides that amounts received from the liquidation or other resolution of any insured depository institution by any receiver
must be distributed (after payment of secured claims) to pay the deposit liabilities of the institution prior to payment of any
other general or unsecured senior liability, subordinated liability, general creditor or shareholder. This provision would give
depositors a preference over general and subordinated creditors and shareholders in the event a receiver is appointed to distribute
the assets of our Bank.
Any capital
loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain
other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank
holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
Capital
Requirements. The Federal Reserve imposes certain capital requirements on the bank holding
company under the Bank Holding Company Act, including a minimum leverage ratio and a minimum ratio of “qualifying”
capital to risk-weighted assets. These requirements are essentially the same as those that apply to the Bank and are described
above under “Basel III Capital Standards.” However, because the Company currently qualifies as a small bank holding
company, these capital requirements do not currently apply to the Company. Subject to certain restrictions, we are able to borrow
money to make a capital contribution to the Bank, and these loans may be repaid from dividends paid from the Bank to the Company.
Our ability to pay dividends depends on, among other things, the Bank’s ability to pay dividends to us, which is subject
to regulatory restrictions as described below in “GrandSouth Bank—Dividends.”
We are also
able to raise capital for contribution to the Bank by issuing securities without having to receive regulatory approval, subject
to compliance with federal and state securities laws.
Dividends.
Since the Company is a bank holding company, its ability to declare and pay dividends
is dependent on certain federal and state regulatory considerations, including the guidelines of the Federal Reserve. The Federal
Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s
policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention
by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial
condition. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength
to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods
of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks where necessary. Further, under the prompt corrective action regulations, the ability
of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies
could affect the ability of the Company to pay dividends or otherwise engage in capital distributions.
In addition,
since the Company is a legal entity separate and distinct from the Bank and does not conduct stand-alone operations, its ability
to pay dividends depends on the ability of the Bank to pay dividends to it, which is also subject to regulatory restrictions as
described below in “GrandSouth Bank – Dividends.”
South
Carolina State Regulation. As a South Carolina bank holding company under the South Carolina
Banking and Branching Efficiency Act, we are subject to limitations on sale or merger and to regulation by the South Carolina
Board of Financial Institutions (the “S.C. Board”). We are not required to obtain the approval of the S.C. Board prior
to acquiring the capital stock of a national bank, but we must notify them at least 15 days prior to doing so. We must receive
the S.C. Board’s approval prior to engaging in the acquisition of a South Carolina state chartered bank or another South
Carolina bank holding company.
GrandSouth
Bank
As a South Carolina
bank, deposits in the Bank are insured by the FDIC up to a maximum amount, which is currently $250,000 per depositor. The S.C.
Board and the FDIC regulate or monitor virtually all areas of the Bank’s operations, including:
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security devices
and procedures; |
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adequacy of
capitalization and loss reserves; |
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issuances of
securities; |
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interest rates
payable on deposits; |
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interest rates
or fees chargeable on loans; |
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establishment
of branches; |
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corporate reorganizations; |
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maintenance
of books and records; and |
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adequacy of
staff training to carry on safe lending and deposit gathering practices. |
These
agencies, and the federal and state laws applicable to the Bank’s operations, extensively regulate various aspects of our
banking business, including, among other things, permissible types and amounts of loans, investments and other activities, capital
adequacy, branching, interest rates on loans and on deposits, the maintenance of reserves on demand deposit liabilities, and the
safety and soundness of our banking practices.
All insured
institutions must undergo regular on-site examinations by their appropriate banking agency. The cost of examinations of insured
depository institutions and any affiliates may be assessed by the appropriate federal banking agency against each institution
or affiliate as it deems necessary or appropriate. Insured institutions are required to submit annual reports to the FDIC,
their federal regulatory agency, and state supervisor when applicable. The FDIC has developed a method for insured depository
institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible
and practicable, in any balance sheet, financial statement, report of condition or any other report of any insured depository
institution. The FDIC and the other federal banking regulatory agencies also have issued standards for all insured depository
institutions relating, among other things, to the following:
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information
systems and audit systems; |
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interest rate
risk exposure; and |
Prompt
Corrective Action. As an insured depository institution, the Bank is required to comply
with the capital requirements promulgated under the FDIA and the prompt corrective action regulations thereunder, which set forth
five capital categories, each with specific regulatory consequences. Under these regulations, the categories are:
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Well Capitalized
— The institution exceeds the required minimum level for each relevant capital measure. A well-capitalized institution (i)
has a total risk-based capital ratio of 10% or greater, (ii) has a Tier 1 risk-based capital ratio of 8% or greater, (iii) has
a common equity Tier 1 risk-based capital ratio of 6.5% or greater, (iv) has a leverage capital ratio of 5% or greater, and (v)
is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure. |
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Adequately
Capitalized — The institution meets the required minimum level for each relevant capital measure. No capital distribution
may be made that would result in the institution becoming undercapitalized. An adequately capitalized institution (i) has a total
risk-based capital ratio of 8% or greater, (ii) has a Tier 1 risk-based capital ratio of 6% or greater, (iii) has a common equity
Tier 1 risk-based capital ratio of 4.5% or greater, and (iv) has a leverage capital ratio of 4% or greater. |
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Undercapitalized
— The institution fails to meet the required minimum level for any relevant capital measure. An undercapitalized institution
(i) has a total risk-based capital ratio of less than 8%, (ii) has a Tier 1 risk-based capital ratio of less than 6%, (iii) has
a common equity Tier 1 risk-based capital ratio of less than 4.5% or greater, or (iv) has a leverage capital ratio of less than
4%. |
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Significantly
Undercapitalized — The institution is significantly below the required minimum level for any relevant capital measure. A
significantly undercapitalized institution (i) has a total risk-based capital ratio of less than 6%, (ii) has a Tier 1 risk-based
capital ratio of less than 4%, (iii) has a common equity Tier 1 risk-based capital ratio of less than 3% or greater, or (iv) has
a leverage capital ratio of less than 3%. |
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Critically
Undercapitalized — The institution fails to meet a critical capital level set by the appropriate federal banking agency.
A critically undercapitalized institution has a ratio of tangible equity to total assets that is equal to or less than 2%. |
If the FDIC
determines, after notice and an opportunity for hearing, that the Bank is in an unsafe or unsound condition, the regulator is
authorized to reclassify the Bank to the next lower capital category (other than critically undercapitalized) and require the
submission of a plan to correct the unsafe or unsound condition.
If a bank is
not well capitalized, it cannot accept brokered deposits without prior regulatory approval. Even if approved, rate restrictions
will govern the rate a bank may pay on brokered deposits. In addition, a bank that is not well capitalized cannot offer an effective
yield in excess of the interest paid on deposits of comparable size and maturity in such institution’s normal market area
for deposits accepted from within its normal market area, or the national rate paid on deposits of comparable size and maturity
for deposits accepted outside the bank’s normal market area. Moreover, the FDIC generally prohibits a depository institution
from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company
if the depository institution would thereafter be categorized as undercapitalized. Undercapitalized institutions are subject to
growth limitations (an undercapitalized institution may not acquire another institution, establish additional branch offices or
engage in any new line of business unless determined by the appropriate federal banking agency to be consistent with an accepted
capital restoration plan, or unless the FDIC determines that the proposed action will further the purpose of prompt corrective
action) and are required to submit a capital restoration plan. The agencies may not accept a capital restoration plan without
determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository
institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s
parent holding company must guarantee that the institution will comply with the capital restoration plan. The aggregate liability
of the parent holding company is limited to the lesser of an amount equal to 5.0% of the depository institution’s total
assets at the time it became categorized as undercapitalized or the amount that is necessary (or would have been necessary) to
bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it
fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is categorized as significantly
undercapitalized.
Significantly
undercapitalized categorized depository institutions may be subject to a number of requirements and restrictions, including orders
to sell sufficient voting stock to become categorized as adequately capitalized, requirements to reduce total assets, and cessation
of receipt of deposits from correspondent banks. The appropriate federal banking agency may take any action authorized for a significantly
undercapitalized institution if an undercapitalized institution fails to submit an acceptable capital restoration plan or fails
in any material respect to implement a plan accepted by the agency. A critically undercapitalized institution is subject to having
a receiver or conservator appointed to manage its affairs and for loss of its charter to conduct banking activities.
An insured depository
institution may not pay a management fee to a bank holding company controlling that institution or any other person having control
of the institution if, after making the payment, the institution would be undercapitalized. In addition, an institution cannot
make a capital distribution, such as a dividend or other distribution, that is in substance a distribution of capital to the owners
of the institution if following such a distribution the institution would be undercapitalized. Thus, if payment of such a management
fee or the making of such would cause a bank to become undercapitalized, it could not pay a management fee or dividend to the
bank holding company.
As of December
31, 2021, the Bank was deemed to be “well capitalized.”
Standards
for Safety and Soundness. The FDIA also requires the federal banking regulatory agencies
to prescribe, by regulation or guideline, operational and managerial standards for all insured depository institutions relating
to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; and (v) asset growth. The agencies also must prescribe standards for asset quality, earnings,
and stock valuation, as well as standards for compensation, fees and benefits. The federal banking agencies have adopted regulations
and Interagency Guidelines Prescribing Standards for Safety and Soundness to implement these required standards. These guidelines
set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. Under the regulations, if the FDIC determines that the Bank fails to
meet any standards prescribed by the guidelines, the agency may require the Bank to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDIC. The final regulations establish deadlines for the submission and
review of such safety and soundness compliance plans.
Insurance
of Accounts and Regulation by the FDIC. The Bank’s deposits are insured up to applicable
limits by the Deposit Insurance Fund of the FDIC. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance
for banks to $250,000 per account. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations
of and to require reporting by FDIC insured institutions. It also may prohibit any FDIC insured institution from engaging in any
activity the FDIC determines by regulation or order to pose a serious risk to the insurance fund.
As an FDIC-insured
bank, the Bank must pay deposit insurance assessments to the FDIC based on its average total assets minus its average tangible
equity. The Bank’s assessment rates are currently based on its risk classification (i.e., the level of risk it poses to
the FDIC’s deposit insurance fund). Institutions classified as higher risk pay assessments at higher rates than institutions
that pose a lower risk. In addition to ordinary assessments described above, the FDIC has the ability to impose special assessments
in certain instances.
In addition
to the ordinary assessments described above, the FDIC has the ability to impose special assessments in certain instances. For
example, under the Dodd-Frank Act, the minimum designated reserve ratio for the deposit insurance fund was increased to 1.35%
of the estimated total amount of insured deposits. On September 30, 2018, the deposit insurance fund reached 1.36%, exceeding
the statutorily required minimum reserve ratio of 1.35%. On reaching the minimum reserve ratio of 1.35%, FDIC regulations provided
for two changes to deposit insurance assessments: (i) surcharges on insured depository institutions with total consolidated assets
of $10 billion or more (large institutions) ceased; and (ii) small banks received assessment credits for the portion of their
assessments that contributed to the growth in the reserve ratio from between 1.15% and 1.35%, to be applied when the reserve ratio
is at or above 1.38%. Our final assessment credit was invoiced in December 2019. Assessment rates are expected to decrease if
the reserve ratio increases such that it exceeds 2%.
In addition,
FDIC insured institutions were required to pay a Financing Corporation (“FICO”) assessment to fund the interest on
bonds issued to resolve thrift failures in the 1980s, which expired between 2017 and 2019. The final FICO assessment was collected
in March 2019.
The FDIC may
terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that
the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the FDIC. It also may suspend deposit insurance temporarily
during the hearing process for the permanent termination of insurance if the institution has no tangible capital. If insurance
of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by the FDIC. Management is not aware of any practice,
condition or violation that might lead to termination of the Bank’s deposit insurance.
Transactions
with Affiliates and Insiders. The Company is a legal entity separate and distinct from
the Bank and its other subsidiaries. Various legal limitations restrict the Bank from lending or otherwise supplying funds to
the Company or its non-bank subsidiaries. The Company and the Bank are subject to Sections 23A and 23B of the Federal Reserve
Act and Federal Reserve Regulation W.
Section 23A
of the Federal Reserve Act places limits on the amount of loans or extensions of credit by a bank to any affiliate, including
its holding company, and on a bank’s investments in, or certain other transactions with, affiliates and on the amount of
advances to third parties collateralized by the securities or obligations of any affiliates of the bank. Section 23A also applies
to derivative transactions, repurchase agreements and securities lending and borrowing transactions that cause a bank to have
credit exposure to an affiliate. The aggregate of all covered transactions is limited in amount, as to any one affiliate, to 10%
of the Bank’s capital and surplus and, as to all affiliates combined, to 20% of the Bank’s capital and surplus. Furthermore,
within the foregoing limitations as to amount, each covered transaction must meet specified collateral requirements. The Bank
is forbidden to purchase low quality assets from an affiliate.
Section 23B
of the Federal Reserve Act, among other things, prohibits an institution from engaging in certain transactions with certain affiliates
unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries,
as those prevailing at the time for comparable transactions with nonaffiliated companies. If there are no comparable transactions,
a bank’s (or one of its subsidiaries’) affiliate transaction must be on terms and under circumstances, including credit
standards, that in good faith would be offered to, or would apply to, nonaffiliated companies. These requirements apply to all
transactions subject to Section 23A as well as to certain other transactions.
The affiliates
of a bank include any holding company of the bank, any other company under common control with the bank (including any company
controlled by the same shareholders who control the bank), any subsidiary of the bank that is itself a bank, any company in which
the majority of the directors or trustees also constitute a majority of the directors or trustees of the bank or holding company
of the bank, any company sponsored and advised on a contractual basis by the bank or an affiliate, and any mutual fund advised
by a bank or any of the bank’s affiliates. Regulation W generally excludes all non-bank and non-savings association subsidiaries
of banks from treatment as affiliates, except to the extent that the Federal Reserve decides to treat these subsidiaries as affiliates.
The Bank is
also subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders,
and their related interests. Extensions of credit include derivative transactions, repurchase and reverse repurchase agreements,
and securities borrowing and lending transactions to the extent that such transactions cause a bank to have credit exposure to
an insider. Any extension of credit to an insider (i) must be made on substantially the same terms, including interest rates and
collateral requirements, as those prevailing at the time for comparable transactions with unrelated third parties and (ii) must
not involve more than the normal risk of repayment or present other unfavorable features.
On December
22, 2020, the federal banking agencies issued an interagency statement extending the temporary relief from enforcement action
against banks or asset managers, which become principal shareholders of banks, with respect to certain extensions of credit by
banks that otherwise would violate Regulation O, provided the asset managers and banks satisfy certain conditions designed to
ensure that there is a lack of control by the asset manager over the bank. This relief has been extended and will expire on the
sooner of January 1, 2023, or the effective date of a final Federal Reserve rule having a revision to Regulation O that addresses
the treatment of extensions of credit by a bank to fund complex-controlled portfolio companies that are insiders of a bank.
Dividends.
A source of the Company’s cash flow, including cash flow to pay dividends to its
shareholders, is dividends it receives from the Bank. Statutory and regulatory limitations apply to the Bank’s payment of
dividends to the Company. As a South Carolina chartered bank, the Bank is subject to limitations on the amount of dividends that
it is permitted to pay. Unless otherwise instructed by the S.C. Board, the Bank is generally permitted under South Carolina state
banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval
of the S.C. Board. The FDIC also has the authority under federal law to enjoin a bank from engaging in what in its opinion constitutes
an unsafe or unsound practice in conducting its business, including the payment of a dividend under certain circumstances. The
Bank must also maintain the CET1 capital conservation buffer of 2.5% to avoid becoming subject to restrictions on capital distributions,
including dividends, as described above.
Branching.
Under current South Carolina law, the Bank may open branch offices throughout South Carolina
with the prior approval of the S.C. Board. In addition, with prior regulatory approval, the Bank is able to acquire existing banking
operations in South Carolina. Furthermore, federal legislation permits interstate branching, including out-of-state acquisitions
by bank holding companies, interstate branching by banks, and interstate merging by banks. The Dodd-Frank Act removes previous
state law restrictions on de novo interstate branching in states such as South Carolina. This change permits out-of-state banks
to open de novo branches in states where the laws of the state where the de novo branch to be opened would permit a bank chartered
by that state to open a de novo branch.
Community
Reinvestment Act. The Community Reinvestment Act (“CRA”) requires that the
FDIC evaluate the record of the Bank in meeting the credit needs of its local community, including low- and moderate-income neighborhoods.
These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure
to adequately meet these criteria could impose additional requirements and limitations on our Bank. On January 1, 2019, the date
of the most recent examination report, the Bank received a satisfactory CRA rating.
In December
2019, the FDIC and the Office of the Comptroller of the Currency (the “OCC”) issued a notice of proposed rulemaking
intended to (i) clarify which activities qualify for CRA credit; (ii) update where activities count for CRA credit; (iii) create
a more transparent and objective method for measuring CRA performance; and (iv) provide for more transparent, consistent, and
timely CRA-related data collection, recordkeeping, and reporting. However, the Federal Reserve did not join the proposed rulemaking.
In May 2020, the OCC issued its final CRA rule, which was later rescinded in December 2021, replacing it with a rule based on
the rules adopted jointly by the federal banking agencies in 1995, as amended. On the same day that the OCC announced its plans
to rescind the CRA final rule, the OCC, the FDIC, and the Federal Reserve announced that they are working together to “strengthen
and modernize the rules implementing the CRA.” The effects on the Bank of any potential change to the CRA rules will depend
on the final form of any federal rulemaking and cannot be predicted at this time. Management will continue to evaluate any changes
to the CRA’s regulations and their impact to the Bank.
Fair
Lending Requirements. We are subject to certain fair lending requirements and reporting
obligations involving lending operations. A number of laws and regulations provide these fair lending requirements and reporting
obligations, including, at the federal level, the Equal Credit Opportunity Act (“ECOA”), as amended by the Dodd-Frank
Act, and Regulation B, as well as the Fair Housing Act (“FHA”) and regulations implementing the FHA. ECOA and Regulation
B prohibit discrimination in any aspect of a credit transaction based on a number of prohibited factors, including race or color,
religion, national origin, sex, marital status, age, the applicant’s receipt of income derived from public assistance programs,
and the applicant’s exercise, in good faith, of any right under the Consumer Credit Protection Act. ECOA and Regulation
B include lending acts and practices that are specifically prohibited, permitted, or required, and these laws and regulations
proscribe data collection requirements, legal action statute of limitations, and disclosure of the consumer’s ability to
receive a copy of any appraisal(s) and valuation(s) prepared in connection with certain loans secured by dwellings. FHA prohibits
discrimination in all aspects of residential real-estate related transactions based on prohibited factors, including race or color,
national origin, religion, sex, familial status, and handicap.
In
addition to prohibiting discrimination in credit transactions on the basis of prohibited factors, these laws and regulations can
cause a lender to be liable for policies that result in a disparate treatment of or have a disparate impact on a protected class
of persons. If a pattern or practice of lending discrimination is alleged by a regulator, then the matter may be referred by the
agency to the U.S. Department of Justice (“DOJ”) for investigation. In December 2012, the DOJ and CFPB entered into
a Memorandum of Understanding under which the agencies have agreed to share information, coordinate investigations, and have generally
committed to strengthen their coordination efforts.
In
addition to substantive penalties and corrective measures that may be required for a violation of certain fair lending laws, the
federal banking agencies may take compliance with fair lending requirements into account when regulating and supervising other
activities of the bank, including in acting on expansionary proposals.
Consumer
Protection Regulations. The activities of the Bank are subject to a variety of statutes
and regulations designed to protect consumers. This includes Title X of the Dodd-Frank Act, which prohibits engaging in any unfair,
deceptive, or abusive acts or practices (“UDAAP”). UDAAP claims involve detecting and assessing risks to consumers
and to markets for consumer financial products and services. Interest and other charges collected or contracted for by the Bank
are subject to state usury laws and federal laws concerning interest rates. The loan operations of the Bank are also subject to
federal laws applicable to credit transactions, such as:
| · | the
Truth-In-Lending Act (“TILA”) and Regulation Z, governing disclosures of
credit and servicing terms to consumer borrowers and including substantial requirements
for mortgage lending and servicing, as mandated by the Dodd-Frank Act; |
| · | the
Home Mortgage Disclosure Act and Regulation C, requiring financial institutions to provide
information to enable the public and public officials to determine whether a financial
institution is fulfilling its obligation to help meet the housing needs of the communities
they serve; |
| · | ECOA
and Regulation B, prohibiting discrimination on the basis of race, color, religion, or
other prohibited factors in any aspect of a credit transaction; |
| · | the
Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act
and Regulation V, as well as the rules and regulations of the FDIC governing the use
of consumer reports, provision of information to credit reporting agencies, certain identity
theft protections and certain credit and other disclosures; |
| · | the
Fair Debt Collection Practices Act and Regulation F, governing the manner in which consumer
debts may be collected by collection agencies and intending to eliminate abusive, deceptive,
and unfair debt collection practices; |
| · | the
Real Estate Settlement Procedures Act (“RESPA”) and Regulation X, which governs
various aspects of residential mortgage loans, including the settlement and servicing
process, dictates certain disclosures to be provided to consumers, and imposes other
requirements related to compensation of service providers, insurance escrow accounts,
and loss mitigation procedures; |
| · | The
Secure and Fair Enforcement for Mortgage Licensing Act (“SAFE Act”) which
mandates a nationwide licensing and registration system for residential mortgage loan
originators. The SAFE Act also prohibits individuals from engaging in the business of
a residential mortgage loan originator without first obtaining and maintaining annually
registration as either a federal or state licensed mortgage loan originator; |
| · | The
Homeowners Protection Act, or the PMI Cancellation Act, provides requirements relating
to private mortgage insurance on residential mortgages, including the cancelation and
termination of PMI, disclosure and notification requirements, and the requirement to
return unearned premiums; |
| · | The
Fair Housing Act prohibits discrimination in all aspects of residential real-estate related
transactions based on race or color, national origin, religion, sex, and other prohibited
factors; |
| · | The
Servicemembers Civil Relief Act and Military Lending Act, providing certain protections
for servicemembers, members of the military, and their respective spouses, dependents
and others; and |
| · | Section
106(c)(5) of the Housing and Urban Development Act requires making home ownership available
to eligible homeowners. |
The deposit
operations of the Bank are also subject to federal laws, such as:
| · | the
Federal Deposit Insurance Act (“FDIA”), which, among other things, limits
the amount of deposit insurance available per insured depositor category to $250,000
and imposes other limits on deposit-taking; |
| · | the
Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality
of consumer financial records and prescribes procedures for complying with administrative
subpoenas of financial records; |
| · | the
Electronic Funds Transfer Act and Regulation E, which governs the rights, liabilities,
and responsibilities of consumers and financial institutions using electronic fund transfer
services, and which generally mandates disclosure requirements, establishes limitations
on liability applicable to consumers for unauthorized electronic fund transfers, dictates
certain error resolution processes, and applies other requirements relating to automatic
deposits to and withdrawals from deposit accounts; |
| · | The
Expedited Funds Availability Act and Regulation CC, setting forth requirements to make
funds deposited into transaction accounts available according to specified time schedules,
disclose funds availability policies to customers, and relating to the collection and
return of checks and electronic checks, including the rules regarding the creation or
receipt of substitute checks; and |
| · | the
Truth in Savings Act and Regulation DD, which requires depository institutions to provide
disclosures so that consumers can make meaningful comparisons about depository institutions
and accounts. |
The
Consumer Financial Protection Bureau (the “CFPB”) is an independent regulatory authority housed within the Federal
Reserve. The CFPB has broad authority to regulate the offering and provision of consumer financial products and services. The
CFPB has the authority to supervise and examine depository institutions with more than $10 billion in assets for compliance
with federal consumer laws. The authority to supervise and examine depository institutions with $10 billion or less in assets,
such as us, for compliance with federal consumer laws remains largely with those institutions’ primary regulators. However,
the CFPB may participate in examinations of these smaller institutions on a “sampling basis” and may refer potential
enforcement actions against such institutions to their primary regulators. As such, the CFPB may participate in examinations of
the Bank. In addition, states are permitted to adopt consumer protection laws and regulations that are stricter than the regulations
promulgated by the CFPB, and state attorneys general are permitted to enforce consumer protection rules adopted by the CFPB against
certain institutions.
The CFPB
has issued a number of significant rules that impact nearly every aspect of the lifecycle of consumer financial products and services,
including rules regarding residential mortgage loans. These rules implement Dodd-Frank Act amendments to ECOA, TILA and RESPA.
Among other things, the rules adopted by the CFPB require banks to: (i) develop and implement procedures to ensure compliance
with a “reasonable ability-to-repay” test; (ii) implement new or revised disclosures, policies and procedures
for originating and servicing mortgages, including, but not limited to, pre-loan counseling, early intervention with delinquent
borrowers and specific loss mitigation procedures for loans secured by a borrower’s principal residence, and mortgage origination
disclosures, which integrate existing requirements under TILA and RESPA; (iii) comply with additional restrictions on mortgage
loan originator hiring and compensation; and (iv) comply with new disclosure requirements and standards for appraisals and
certain financial products.
Anti-Money
Laundering and the USA Patriot Act. Financial institutions must maintain anti-money
laundering programs that include established internal policies, procedures, and controls; a designated compliance officer; an
ongoing employee training program; and testing of the program by an independent audit function. The program must comply with the
anti-money laundering provisions of the Bank Secrecy Act (“BSA”). The Company and the Bank are also prohibited from
entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and
“knowing your customer” in their dealings with foreign financial institutions, foreign customers, and other high risk
customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against
money laundering and to report any suspicious transactions, and certain laws provide law enforcement authorities with increased
access to financial information maintained by banks. Financial institutions must comply with requirements regarding risk-based
procedures for conducing ongoing customer due diligence, which requires the institutions to take appropriate steps to understand
the nature and purpose of customer relationships and identify and verify the identity of the beneficial owners of legal entity
customers.
Anti-money
laundering obligations have been substantially strengthened as a result of the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act (which we refer to as the “USA PATRIOT Act”). Bank
regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection
with the regulatory review of applications. The regulatory authorities have been active in imposing cease and desist orders and
money penalty sanctions against institutions that have not complied with these requirements.
The USA PATRIOT
Act amended the Bank Secrecy Act and provides, in part, for the facilitation of information sharing among governmental entities
and financial institutions for the purpose of combating terrorism and money laundering by enhancing anti-money laundering and
financial transparency laws, as well as enhanced information collection tools and enforcement mechanics for the U.S. government,
including: (i) requiring standards for verifying customer identification at account opening; (ii) rules to promote cooperation
among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism
or money laundering; (iii) reports by nonfinancial trades and businesses filed with the U.S. Treasury Department’s Financial
Crimes Enforcement Network for transactions exceeding $10,000; (iv) filing suspicious activities reports if a bank believes a
customer may be violating U.S. laws and regulations; and (v) requires enhanced due diligence requirements for financial institutions
that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons. Bank regulators routinely
examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory
review of applications.
Under the USA
PATRIOT Act, the regulators can provide lists of the names of persons suspected of involvement in terrorist activities. The Bank
can be requested, to search its records for any relationships or transactions with persons on those lists. If the Bank finds any
relationships or transactions, it must file a suspicious activity report and contact the applicable governmental authorities.
On
January 1, 2021, Congress overrode former President Trump’s veto and thereby enacted the National Defense Authorization
Act for Fiscal Year 2021 (“NDAA”). The NDAA provides for one of the most significant overhauls of the BSA and related
anti-money laundering laws since the USA Patriot Act. Notably, changes include:
| · | expansion
of coordination and information sharing efforts among the agencies tasked with administering
anti-money laundering and countering the financing of terrorism requirements, including
the Financial Crimes Enforcement Network (“FinCEN”), the primary federal
banking regulators, federal law enforcement agencies, national security agencies, the
intelligence community, and financial institutions; |
| · | providing
additional penalties with respect to violations of BSA and enhancing the powers of FinCEN;
|
| · | significant
updates to the beneficial ownership collection rules and the creation of a registry of
beneficial ownership which will track the beneficial owners of reporting companies which
may be shared with law enforcement and financial institutions conducting due diligence
under certain circumstances; |
| · | improvements
to existing information sharing provisions that permit financial institutions to share
information relating to SARs with foreign branches, subsidiaries, and affiliates (except
those located in China, Russia, or certain other jurisdictions) for the purpose of combating
illicit finance risks; and |
| · | enhanced
whistleblower protection provisions, allowing whistleblower(s) who provide original information
which leads to successful enforcement of anti-money laundering laws in certain judicial
or administrative actions resulting in certain monetary sanctions to receive up to 30%
of the amount that is collected in monetary sanctions as well as increased protections. |
Under the USA
PATRIOT Act, the Financial Crimes Enforcement Network (“FinCEN”) can send our banking regulatory agencies lists of
the names of persons suspected of involvement in terrorist activities. The Bank can be requested, to search its records for any
relationships or transactions with persons on those lists. If the Bank finds any relationships or transactions, it must file a
suspicious activity report and contact FinCEN.
The
Office of Foreign Assets Control. The Office of Foreign Assets Control (“OFAC”),
which is a division of the U.S. Treasury, is responsible for helping to ensure that U.S. entities do not engage in transactions
with “enemies” of the U.S., as defined by various Executive Orders and Acts of Congress. OFAC has sent, and will send,
our banking regulatory agencies lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist
acts. If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account,
file a suspicious activity report and notify the FBI. The Bank has appointed an OFAC compliance officer to oversee the inspection
of its accounts and the filing of any notifications. The Bank actively checks high-risk OFAC areas such as new accounts, wire
transfers and customer files. The Bank performs these checks utilizing software, which is updated each time a modification is
made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons.
Privacy,
Data Security and Credit Reporting. Financial institutions are required to disclose their
policies for collecting and protecting confidential information. Customers generally may prevent financial institutions from sharing
nonpublic personal financial information with nonaffiliated third parties except under narrow circumstances, such as the processing
of transactions requested by the consumer or if the Bank is jointly sponsoring a product or service with a nonaffiliated third
party. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party
for use in telemarketing, direct mail marketing or other marketing to consumers. It is the Bank’s policy not to disclose
any personal information unless required by law.
Consumers
must be notified in the event of a data breach under applicable state laws. Multiple states and Congress are considering laws
or regulations which could create new individual privacy rights and impose increased obligations on companies handling personal
data. For example, on November 18, 2021, the federal financial regulatory agencies published a final rule that will impose upon
banking organizations and their service providers new notification requirements for significant cybersecurity incidents. Specifically,
the final rule requires banking organizations to notify their primary federal regulator as soon as possible and no later than
36 hours after the discovery of a “computer-security incident” that rises to the level of a “notification incident”
within the meaning attributed to those terms by the final rule. Banks’ service providers are required under the final rule
to notify any affected bank to or on behalf of which the service provider provides services “as soon as possible”
after determining that it has experienced an incident that materially disrupts or degrades, or is reasonably likely to materially
disrupt or degrade, covered services provided to such bank for as much as four hours. The final rule will take effect on April
1, 2022 and banks and their service providers must be in compliance with the requirements of the rule by May 1, 2022.
In addition,
pursuant to the Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”) and the implementing regulations
of the federal banking agencies and Federal Trade Commission, the Bank is required to have in place an “identity theft red
flags” program to detect, prevent and mitigate identity theft. The Bank has implemented an identity theft red flags program
designed to meet the requirements of the FACT Act and the joint final rules. Additionally, the FACT Act amends the Fair Credit
Reporting Act to generally prohibit a person from using information received from an affiliate to make a solicitation for marketing
purposes to a consumer, unless the consumer is given notice and a reasonable opportunity and a reasonable and simple method to
opt out of the making of such solicitations.
Federal
Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank of Atlanta,
which is one of 12 regional FHLBs that administer home financing credit for depository institutions. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes loans or advances to members in accordance with policies and procedures established by
the Board of Directors of the FHLB, which are subject to the oversight of the Federal Housing Financing Board. All advances from
the FHLB, which are subject to the oversight of the Federal Housing Finance Board are required to be fully secured by sufficient
collateral as determined by the FHLB.
Effect
of Governmental Monetary Policies. Our earnings are affected by domestic economic conditions
and the monetary and fiscal policies of the U.S. government and its agencies. The Federal Reserve’s monetary policies have
had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to
implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies
of the Federal Reserve have major effects upon the levels of bank loans, investments and deposits through its open market operations
in U.S. government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements
against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.
On March 15, 2020, the Federal Open Market Committee decreased the federal funds target rate to 0-0.25%. In mid-December the Federal
Reserve indicated that it will conclude its large-scale asset purchase program as soon as March 2022 and that three 25 basis point
rate hikes were expected to follow in 2022.
Incentive
Compensation. The Dodd-Frank Act requires the federal bank regulators and the SEC to
establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities having
at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer, employee, director or
principal stockholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity.
In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based
compensation arrangements. The agencies proposed such regulations in April 2011. However, the 2011 proposal was replaced with
a new proposal in May 2016, which makes explicit that the involvement of risk management and control personnel includes not only
compliance, risk management and internal audit, but also legal, human resources, accounting, financial reporting and finance roles
responsible for identifying, measuring, monitoring or controlling risk-taking. A final rule had not been adopted as of the date
of Annual Report on Form 10-K.
In June 2010,
the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency issued a comprehensive final guidance on incentive
compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the
safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that
have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based
upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives
that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible
with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active
and effective oversight by the organization’s board of directors.
The Federal
Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking
organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored
to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive
compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies
will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make
acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation
arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness
and the organization is not taking prompt and effective measures to correct the deficiencies.
In addition,
the Tax Cuts and Jobs Act (the “Tax Act”), which was signed into law in December 2017, contains certain provisions
affecting performance-based compensation. Specifically, the pre-existing exception to the $1 million deduction limitation applicable
to performance-based compensation was repealed. The deduction limitation is now applied to all compensation exceeding $1.0 million,
for our covered employees, regardless of how it is classified, which could have an adverse effect on our income tax expense and
net income.
Concentrations
in Commercial Real Estate. Concentration risk exists when FDIC-insured institutions deploy
too many assets to any one industry or segment. A concentration in commercial real estate is one example of regulatory concern.
The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance (“CRE Guidance”)
provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with
potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) commercial
real estate loans exceeding 300% of capital and increasing 50% or more in the preceding three years or (ii) construction and land
development loans exceeding 100% of capital. The CRE Guidance does not limit banks’ levels of commercial real estate lending
activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate
with the level and nature of their commercial real estate concentrations. On December 18, 2015, the federal banking agencies issued
a statement to reinforce prudent risk-management practices related to commercial real estate lending, having observed substantial
growth in many commercial real estate asset and lending markets, increased competitive pressures, rising commercial real estate
concentrations in banks, and an easing of commercial real estate underwriting standards. The federal bank agencies reminded FDIC-insured
institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor
and manage the risks arising from commercial real estate lending. In addition, FDIC-insured institutions must maintain capital
commensurate with the level and nature of their commercial real estate concentration risk.
Based on the
Bank’s loan portfolio as of December 31, 2021, it did not exceed the 300% and 100% guidelines for commercial real estate
loans. The Bank will continue to monitor its portfolio to manage this increased risk.
Item 1A. Risk Factors
There are risks,
many beyond our control, which could cause our results to differ significantly from management’s expectations. Some of these
risk factors are described below. Any factor described in Annual Report on Form 10-K could, by itself or together with one or
more other factors, adversely affect our business, results of operations and/or financial condition. Additional risks and uncertainties
not currently known to us or that we currently consider to not be material also may materially and adversely affect us. In assessing
these risks, you should also refer to other information disclosed in our SEC filings, including the financial statements and notes
thereto. The risks discussed below also include forward-looking statements, and actual results may differ substantially from those
discussed or implied in these forward-looking statements.
Risks
Related to Economic Conditions, Including as a Result of the COVID-19 Pandemic
The
ongoing COVID-19 pandemic could have an adverse impact on our financial performance and results of operations.
As the
COVID-19 pandemic has evolved from its emergence in early 2020, so has its impact. Many states have re-instituted, or strongly
encouraged, varying levels of quarantines and restrictions on travel and in some cases have at times limited operations of certain
businesses and taken other restrictive measures designed to help slow the spread of COVID-19 and its variants. Governments and
businesses have also instituted vaccine mandates and testing requirements for employees. While vaccine availability and uptake
has increased, the longer-term macro-economic effects on global supply chains, inflation, labor shortages and wage increases continue
to impact many industries, including the collateral underlying certain of our loans. Moreover, with the potential for new strains
of COVID-19 to emerge, governments and businesses may re-impose aggressive measures to help slow its spread in the future. For
this reason, among others, as the COVID-19 pandemic continues, the potential impacts are uncertain and difficult to assess.
Although
financial markets have largely rebounded from the significant declines that occurred earlier in the pandemic and global economic
conditions showed signs of improvement during the second half of 2020 and throughout 2021, many of the circumstances that arose
or became more pronounced after the onset of the COVID-19 pandemic persist, which may subject us to a number of risks, including,
without limitation, the following:
| · | lower
loan demand or an increased risk of loan delinquencies, defaults, and foreclosures due
to a number of factors, including continuing supply chain issues, decreased consumer
and business confidence and economic activity; |
| · | collateral
for loans, especially real estate, may decline in value, which may reduce our ability
to liquidate such collateral and could cause loan losses to increase and impair our ability
over the long run to maintain our loan origination volume; |
| · | our
allowance loan losses may have to be increased if borrowers experience financial difficulties
beyond forbearance periods, which will adversely affect our net income; |
| · | volatility
in financial and capital markets, interest rates, and exchange rates; |
| · | increased
demands on capital and liquidity; |
| · | heightened
cybersecurity, information security, and operational risks as cybercriminals attempt
to profit from the disruption resulting from the pandemic given increased online and
remote activity, including as a result of work-from-home arrangements; |
| · | disruptions
to business operations experienced by counterparties and service providers; |
| · | increased
risk of business disruption from the loss of employees due to their inability to work
effectively because of illness, quarantines, government actions, failures in systems
or technology that disrupt work-from-home arrangements, or other effects of the COVID-19
pandemic, including the increase in employee resignations currently taking place throughout
the United States in connection with the COVID-19 pandemic, which is commonly referred
to as the “great resignation”; and |
| · | decreased
demands for our products and services. |
We have
also experienced and may experience other negative impacts to our business as a result of the pandemic that could exacerbate other
risks discussed in this “Risk Factors” section. The ongoing fluidity of this situation precludes any prediction as
to the ultimate adverse impact of COVID-19 on economic and market conditions, and, as a result, presents material uncertainty
and risk with respect to us.
Our
business may be adversely affected by conditions in the financial markets and economic conditions generally.
Our financial
performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans
and the value of collateral securing those loans, as well as demand for loans and other products and services we offer and whose
success we rely on to drive our growth, is highly dependent upon the business environment in the primary markets where we operate
and in the U.S. as a whole. Unlike larger banks that are more geographically diversified, we are a regional bank that provides
banking and financial services to customers primarily in South Carolina. The economic conditions in these local markets may be
different from, and in some instances worse than, the economic conditions in the U.S. as a whole. Some elements of the business
environment that affect our financial performance include short-term and long-term interest rates, the prevailing yield curve,
inflation and price levels, monetary and trade policy, unemployment and the strength of the domestic economy and the local economy
in the markets in which we operate. Unfavorable market conditions can result in a deterioration in the credit quality of our borrowers
and the demand for our products and services, an increase in the number of loan delinquencies, defaults and charge-offs, additional
provisions for loan losses, adverse asset values of the collateral securing our loans and an overall material adverse effect on
the quality of our loan portfolio. Unfavorable or uncertain economic and market conditions can be caused by declines in economic
growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of
credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; epidemics
and pandemics (such as COVID-19); or a combination of these or other factors.
The
impact of the COVID-19 pandemic is fluid and continues to evolve and there is pervasive uncertainty surrounding the future economic
conditions that will emerge in the months and years following the onset of the pandemic. Moreover, as economic conditions relating
to the pandemic have improved over time, the Federal Reserve has shifted its focus to limiting inflationary and other potentially
adverse effects of the extensive pandemic-related government stimulus, which signals the potential for a continued period of economic
uncertainty even if the pandemic subsides. In addition, there are continuing concerns related to, among other things, the level
of U.S. government debt and fiscal actions that may be taken to address that debt, a potential resurgence of economic and political
tensions with China or futher impacts of the conflict between Russia and Ukraine, all of which may have a destabilizing effect
on financial markets and economic activity. Economic pressure on consumers and overall economic uncertainty may result in changes
in consumer and business spending, borrowing and saving habits. These economic conditions and/or other negative developments in
the domestic or international credit markets or economies may significantly affect the markets in which we do business, the value
of our loans and investments, and our ongoing operations, costs and profitability. Declines in real estate values and sales volumes
and high unemployment or underemployment may also result in higher than expected loan delinquencies, increases in our levels of
nonperforming and classified assets and a decline in demand for our products and services. These negative events may cause us
to incur losses and may adversely affect our capital, liquidity and financial condition.
Changes
in U.S. trade policies and other factors beyond our control, including the imposition of tariffs and retaliatory tariffs and the
impacts of epidemics or pandemics (particularly COVID-19), may adversely impact our business, financial condition and results
of operations.
There has been
and continues to be substantial debate and controversy concerning changes to U.S. trade policies, legislation, treaties and tariffs,
including trade policies and tariffs affecting other countries, including China, the European Union, Canada and Mexico and retaliatory
tariffs by such countries. Such tariffs, retaliatory tariffs or other trade restrictions on products and materials that our customers
import or export could cause the prices of our customers’ products to increase which could reduce demand for such products,
or reduce our customer margins, and adversely impact their revenues, financial results and ability to service debt; which,
in turn, could adversely affect our financial condition and results of operations. In addition, to the extent changes in the political
environment have a negative impact on us or on the markets in which we operate our business, results of operations and financial
condition could be materially and adversely impacted in the future. It remains unclear what the U.S. Administration or foreign
governments will or will not do with respect to tariffs already imposed, additional tariffs that may be imposed, or international
trade agreements and policies. A trade war or other governmental action related to tariffs or international trade agreements or
policies as well as the COVID-19 pandemic or other potential epidemics or pandemics, have the potential to negatively impact ours
and/or our customers’ costs, demand for our customers’ products, and/or the U.S. economy or certain sectors thereof
and, thus, adversely affect our business, financial condition, and results of operations.
A
significant portion of our loan portfolio is secured by real estate, and events that negatively impact the real estate market
could hurt our business.
A significant
portion of our loan portfolio is secured by real estate. As of December 31, 2021, approximately 74.1% of our loans had real estate
as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment
in the event of default by the borrower and may deteriorate in value during the time the credit is extended. Deterioration in
the real estate market could cause us to adjust our opinion of the level of credit quality in our loan portfolio. Such a determination
may lead to an additional increase in our provisions for loan losses, which could also adversely affect our business, financial
condition, and results of operations. Natural disasters, including hurricanes, tornados, earthquakes, fires and floods, which
could be exacerbated by potential climate change, may cause uninsured damage and other loss of value to real estate that secures
these loans and may also negatively impact our financial condition.
We
have a concentration of credit exposure in floor plan inventory financing to small automobile dealers which could be more significantly
impacted by an economic downturn.
As of December
31, 2021, we had approximately $98.3 million in floor plan inventory loans outstanding to independent automobile dealers located
across more than 20 states through our CarBucks division. These borrowers are typically smaller businesses with less-credit worthy
borrowers themselves, each of which have historically been more negatively impacted by an economic downturn than other segments
of borrowers. In addition, these loans are often secured by used motor vehicles and are subject to adverse conditions in the automobile
market including risks associated with declining values. While we currently limit total exposure to this type of lending to 175%
of subsidiary bank Tier 1 capital, a prolonged economic downturn could result in a loss of earnings from these loans, an increase
in the related provision for loan losses and an increase in charge-offs, all of which could have a material adverse effect on
our financial condition and results of operations.
Changes
in the financial markets could impair the value of our available-for-sale investment portfolio.
Our available-for-sale
(“AFS”) investment securities portfolio is a significant component of our total interest-earning assets. Total AFS
investment securities averaged $127.0 million in the year ended December 31, 2021, as compared to $88.3 million for 2020. This
represents 11.3% and 9.3% of the average interest-earning assets for the years ended December 31, 2021 and 2020, respectively.
At December 31, 2021, the AFS investment portfolio was 9.6% of total interest-earning assets. Turmoil in the financial markets
could impair the market value of our investment portfolio, which could adversely affect our net income and possibly our capital.
As of
December 31, 2021, securities which have unrealized losses were not considered to be “other than temporarily impaired,”
and we believe it is more likely than not we will be able to hold these until they mature or recover our current book value. We
currently maintain substantial liquidity which supports our ability to hold these investments until they mature, or until there
is a market price recovery. However, if we were to cease to have the ability and intent to hold these investments until maturity
or the market prices do not recover, and we were to sell these securities at a loss, it could adversely affect our net income
and possibly our capital.
We
are subject to interest rate risk, which could adversely affect our financial condition and profitability.
A significant
portion of our banking assets are subject to changes in interest rates. For example, as of December 31, 2021, 28.7% of our loan
portfolio consisted of floating or adjustable interest rate loans. Like most financial institutions, our earnings significantly
depend on our net interest income, the principal component of our earnings, which is the difference between interest earned by
us from our interest-earning assets, such as loans and investment securities, and interest paid by us on our interest-bearing
liabilities, such as deposits and borrowings. We expect that we will periodically experience “gaps” in the interest
rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive
to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates
should move contrary to our position, this “gap” will negatively impact our earnings. Many factors beyond our control
impact interest rates, including economic conditions, governmental monetary policies, inflation, recession, changes in unemployment,
the money supply, and disorder and instability in domestic and foreign financial markets. Changes in monetary policies of the
various government agencies could influence not only the interest we receive on loans and securities and the interest we pay on
deposits and borrowings, but such changes could also affect our ability to originate loans and obtain deposits, the fair value
of our financial assets and liabilities, and the average duration of our assets and liabilities.
In a
declining interest rate environment, there may be an increase in prepayments on loans as borrowers refinance their loans at lower
rates. Interest rate increases often result in larger payment requirements for our floating interest rate borrowers, which increases
the potential for default. At the same time, the marketability of the property securing a loan may be adversely affected by any
reduced demand resulting from higher interest rates. An increase (or decrease) in interest rates may also require us to increase
(or decrease) the interest rates that we pay on our deposits.
Changes
in interest rates also can affect the value of loans, securities and other assets. An increase in interest rates that adversely
affects the ability of borrowers to pay the principal or interest on loans may lead to increases in nonperforming assets, charge-offs
and delinquencies, further increases to the allowance for loan losses, and a reduction of income recognized, among others, which
could have a material adverse effect on our results of operations and cash flows. Further, when we place a loan on non-accrual
status, we reverse any accrued but unpaid interest receivable, which decreases interest income. At the same time, we continue
to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated
funding expense. Thus, an increase in the amount of nonperforming assets could have a material adverse impact on our net interest
income.
Additionally,
an increase in interest rates may not increase our net interest income to the same extent we currently anticipate based on our
modeling estimates and the assumptions underlying such modeling. Our failure to benefit from an increased interest rate environment
to the extent we currently estimate, to the same extent as our competitors or at all could have a material adverse effect on our
business, financial condition and results of operations.
In
response to the COVID-19 pandemic, the FOMC cut short-term interest rates to a record low range of 0% to 0.25% in 2020, although,
in mid-December 2021, the Federal Reserve indicated that three 25 basis point rate hikes were expected in 2022. If short-term
interest rates were to continue at their historically low levels for a prolonged period and assuming longer-term interest rates
fall further, we could experience net interest margin compression as our interest-earning assets would continue to reprice downward
while our interest-bearing liability rates could fail to decline in tandem, which would have an adverse effect on our net interest
income. Similarly, if short-term interest rates increase and long-term interest rates do not increase, or increase but at a slower
rate, we could experience net interest margin compression as our rates on interest earning assets decline measured relative to
rates on our interest-bearing liabilities. Any such occurrence could have a material adverse effect on our net interest income
and on our business, financial condition and results of operations.
Continued
uncertainty regarding, and potential deterioration in, the fiscal position of the U.S. federal government and possible downgrades
in U.S. Treasury and federal agency securities could adversely affect us and our banking operations.
The long-term
outlook for the fiscal position of the U.S. federal government is uncertain, as illustrated by the 2011 downgrade by certain rating
agencies of the credit rating of the U.S. government and federal agencies. In addition to causing economic and financial market
disruptions, uncertainty regarding the fiscal position of the U.S. federal government (which could lead to, among other things,
a future credit ratings downgrade of the U.S. government and federal agencies, failure to raise the U.S. statutory debt limit,
or deterioration in the fiscal outlook of the U.S. federal government), could adversely affect the market value of the U.S. and
other government and governmental agency securities that we hold, the availability of those securities as collateral for borrowing
and our ability to access capital markets on favorable terms. In particular, it could increase interest rates and disrupt payment
systems, money markets, and long-term or short-term fixed income markets, adversely affecting the cost and availability of funding,
which could negatively affect our profitability. Also, the adverse consequences of this uncertainty could extend to those to whom
we extend credit and could adversely affect their ability to repay their loans. Any of these developments could have a material
adverse effect on our business, financial condition and results of operations.
Risks
Related to Lending Activities
Our
decisions regarding credit risk and reserves for loan losses may materially and adversely affect our business.
Making loans
and other extensions of credit is an essential element of our business. Although we seek to mitigate risks inherent in lending
by adhering to specific underwriting practices, our loans and other extensions of credit may not be repaid. The risk of nonpayment
is affected by a number of factors, including:
|
· |
the duration
of the credit; |
|
· |
credit risks
of a particular customer; |
|
· |
changes in
economic and industry conditions; and |
|
· |
in
the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral. |
We evaluate
the collectability of our loan portfolio and we maintain an allowance for loan losses that represents management’s judgment
of probable losses and risks inherent in our loan portfolio that we believe to be adequate based on a variety of factors including
but not limited to:
|
· |
an ongoing
review of the quality, mix, and size of our overall loan portfolio; |
|
· |
the risk characteristics
of various classifications of loans; |
|
· |
our historical
loan loss experience; |
|
· |
evaluation
of economic conditions; |
|
· |
regular reviews
of loan delinquencies and loan portfolio quality; |
|
· |
the views of
our regulators; |
|
· |
geographic
and industry loan concentrations; and |
|
· |
the amount
and quality of collateral, including guarantees, securing the loans. |
There is no
precise method of predicting credit losses; therefore, we face the risk that charge-offs in future periods will exceed our allowance
for loan losses and that additional increases in the allowance for loan losses will be required. Additions to the allowance for
loan losses would result in a decrease of our net income, and possibly our capital. We decreased our provision for loan losses
by $1.8 million in 2021 compared to $3.1 million in 2020, mainly due to a decrease in net charge offs and and adjustments to qualitative
factors.
In addition,
our regulators, as an integral part of their periodic examination, review our methodology for calculating, and the adequacy of,
our allowance and provision for loan losses. Although we believe that the methodology used by us to determine the amount of both
the allowance for loan losses and provision is effective, the regulators or our auditor may conclude that changes are necessary
based on information available to them at the time of their review, which could impact our overall credit portfolio. Such changes
could result in, among other things, modifications to our methodology for determining our allowance or provision for loan losses
or models, reclassification or downgrades of our loans, increases in our allowance for loan losses or other credit costs, imposition
of new or more stringent concentration limits, restrictions in our lending activities and/or recognition of further losses. Further,
if actual charge-offs in future periods exceed the amounts allocated to the allowance for loan losses, we may need additional
provisions for loan losses to restore the adequacy of our allowance for loan losses.
We
may have higher loan losses than we have allowed for in our allowance for loan losses.
Our actual
loan losses could exceed our allowance for loan losses. As of December 31, 2021, approximately 12.3% of our loan portfolio is
composed of construction and land loans, 45.4% of commercial real estate loans and 25.1% of commercial loans. Repayment of such
loans is generally considered more subject to market risk than residential mortgage loans. Industry experience shows that a portion
of loans will become delinquent and a portion of loans will require partial or entire charge-off. Regardless of the underwriting
criteria utilized, losses may be experienced as a result of various factors beyond our control, including among other things,
changes in market conditions affecting the value of loan collateral and problems affecting the credit of our borrowers.
While
the COVID-19 fiscal stimulus and relief programs appear to have delayed any materially adverse financial impact to the Bank, once
these stimulus programs have been fully exhausted, we believe our credit metrics could worsen and loan losses could ultimately
materialize. Any potential loan losses will be contingent upon a number of factors beyond our control, such as a slower return
to pre-pandemic routines, which will be influenced by a number of factors including increases in new COVID-19 cases, hospitalizations
and deaths leading to additional government imposed restrictions; refusals to receive the vaccines along with concerns related
to new strains of the virus; supply chain issues remaining unresolved longer than anticipated; unemployment increases while consumer
confidence and spending falls; and rising geopolitical tensions.
We
are exposed to higher credit risk related to our commercial real estate, commercial, financial and agriculture, and real estate
construction and land development lending.
Commercial
real estate, real estate construction and land development, and commercial lending usually involves higher credit risks than that
of single-family residential lending. At December 31, 2021, the following loan types accounted for the stated percentages of our
total loan portfolio: commercial real estate (owner and non-owner occupied)—45.4%, real estate construction and land development—12.3%,
and commercial, financial and agriculture—25.1%.
Commercial real
estate loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy
because commercial real estate borrowers’ ability to repay their loans depends in some cases on successful development of
their properties, as well as the factors affecting residential real estate borrowers. These loans may involve greater risk because
they generally are not fully amortizing over the loan period, but have a balloon payment due at maturity. A borrower’s ability
to make a balloon payment typically will depend on being able to either refinance the loan or sell the underlying property in
a timely manner.
Commercial,
financial and agricultural loans are typically based on the borrowers’ ability to repay the loans from the cash flow of
their businesses, which may be unpredictable, and the collateral securing these loans may fluctuate in value. Our commercial loans
are typically made to small- to medium-sized businesses, which often have shorter operating histories and less sophisticated record
keeping systems than larger entities. As a result, these smaller entities may be less able to withstand adverse competitive, economic
and financial conditions than larger borrowers. Although such loans are often collateralized by equipment, inventory, accounts
receivable, or other business assets, the liquidation of collateral in the event of default is often an insufficient source of
repayment because accounts receivable may be uncollectible, and inventories may be obsolete or of limited use. In addition, business
assets may depreciate over time, may be difficult to appraise, and may fluctuate in value based on the success of the business.
Accordingly, the repayment of commercial business loans depends primarily on the cash flow and credit worthiness of the borrower
and secondarily on the underlying collateral value provided by the borrower and liquidity of the guarantor. Further, the performance
of agricultural loans is highly dependent on favorable weather, reasonable costs for seed and fertilizer, and the ability to successfully
market the product at a profitable margin. The demand for these products is also dependent on macroeconomic conditions that are
beyond the control of the borrower.
Risk
of loss on construction and land development loans depends largely upon whether our initial estimate of the property’s value
at completion of construction exceeds the cost of the property construction (including interest) and the availability of permanent
take-out financing. During the construction phase, a number of factors can result in delays and cost overruns. If estimates of
value are inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient
to ensure full repayment when completed through a permanent loan or by seizure of collateral. Deterioration in demand could result
in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for our
customers.
Commercial
real estate, commercial, financial and agriculture, and real estate construction and land development loans are more susceptible
to a risk of loss during a downturn in the business cycle. Our underwriting, review, and monitoring cannot eliminate all of the
risks related to these loans.
If
we fail to effectively manage credit risk, our business and financial condition will suffer.
We must effectively
manage credit risk. There are risks inherent in making any loan, including risks with respect to the period of time over which
the loan may be repaid, risks relating to proper loan underwriting and guidelines, risks resulting from changes in economic and
industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the future
value of collateral. There is no assurance that our credit risk monitoring and loan approval procedures are or will be adequate
or will reduce the inherent risks associated with lending.
Our risk
management practices, such as monitoring the concentration of our loans within specific industries and our credit approval, review
and administrative practices, may not adequately reduce credit risk, and our credit administration personnel, policies and procedures
may not adequately adapt to changes in economic or any other conditions affecting customers and the quality of our loan portfolio.
Many of our loans are made to small and medium-sized businesses that are less able to withstand competitive, economic and financial
pressures than larger borrowers. Consequently, we may have significant exposure if any of these borrowers becomes unable to pay
their loan obligations as a result of economic or market conditions, or personal circumstances. In addition, we are a middle-market
lender, as such, the relative size of individual credits in our commercial portfolio increases the potential impact from singular
credit events. A failure to effectively measure and limit the credit risk associated with our loan portfolio may result in loan
defaults, foreclosures and additional charge-offs, and may necessitate that we significantly increase our allowance for loan losses,
each of which could adversely affect our net income. As a result, our inability to successfully manage credit risk could have
a material adverse effect on our business, financial condition and results of operations.
Our
underwriting decisions may materially and adversely affect our business.
While we generally
underwrite the loans in our portfolio in accordance with our own internal underwriting guidelines and regulatory supervisory guidelines,
in certain circumstances we have made loans which exceed either our internal underwriting guidelines, supervisory guidelines,
or both. As of December 31, 2021, approximately $33.0 million of our loans, or 24.3% of the Bank’s regulatory capital, had
loan-to-value ratios that exceeded regulatory supervisory guidelines, of which only nine loans totaling approximately $4.3 million
had loan-to-value ratios of 100% or more. In addition, supervisory limits on commercial loan-to-value exceptions are set at 30%
of the Bank’s capital. At December 31, 2021, $24.9 million of our commercial loans, or 18.3% of the Bank’s regulatory
capital, exceeded the supervisory loan-to-value ratio. The number of loans in our portfolio with loan-to-value ratios in excess
of supervisory guidelines, our internal guidelines, or both could increase the risk of delinquencies and defaults in our portfolio.
Risks
Related to Laws and Regulations
The
phase-out of LIBOR could negatively impact our net interest income and require significant operational work.
The United Kingdom’s
Financial Conduct Authority (“FCA”) regulates the London Interbank Offered Rate (“LIBOR”), the reference
rate previously used for many of our transactions, including our lending and borrowing and our purchase and sale of securities,
as well as the derivatives that we use to manage risk related to such transactions. The FCA announced in July 2017 that the sustainability
of LIBOR could not be guaranteed. Accordingly, although the FCA confirmed the extension of overnight and 1-, 3-, 6-, and 12-month
LIBOR through June 30, 2023 in order to accord financial institutions greater time with which to manage the transition from LIBOR,
the FCA is no longer persuading, or compelling, banks to submit to LIBOR. The federal banking agencies previously determined that
banks must cease entering into any new contract that use LIBOR as a reference rate by no later than December 31, 2021.
The discontinuation
of LIBOR, changes in LIBOR, or changes in market perceptions of the acceptability of LIBOR as a benchmark could result in changes
to our risk exposures (for example, if the anticipated discontinuation of LIBOR adversely affects the availability or cost of
floating-rate funding and, therefore, our exposure to fluctuations in interest rates) or otherwise result in losses on a product
or having to pay more or receive less on securities that we own or have issued. In addition, such uncertainty could result in
pricing volatility and increased capital requirements, loss of market share in certain products, adverse tax or accounting impacts,
and compliance, legal and operational costs and risks associated with client disclosures, discretionary actions taken or negotiation
of fallback provisions, systems disruption, business continuity, and model disruption. We have exposure to LIBOR-based products,
including loans, securities, subordinated debt, and we have transitioned away from the use of LIBOR to alternative rates for all
new contracts as of December 31, 2021. We continue to prepare for the transition of our existing LIBOR exposures prior to the
final LIBOR cessation date of June 30, 2023. During the first quarter of 2021, we began the process of indexing renewals to alternative
indexes, including SOFR and the Wall Street Journal Prime Rate. We continue to monitor market developments and regulatory updates,
including recent announcements from the ICE Benchmark Administrator, as well as collaborate with regulators and industry groups
on the transition of existing exposures. In addition, the implementation of LIBOR reform proposals may result in increased compliance
costs and operational costs, including costs related to continued participation in LIBOR and the transition to a replacement reference
rate or rates. We cannot reasonably estimate the expected cost.
Imposition
of limits by the bank regulators on commercial and multi-family real estate lending activities could curtail our growth and adversely
affect our earnings.
In 2006,
the FDIC, the Federal Reserve and the OCC issued joint guidance entitled “Concentrations in Commercial Real Estate Lending,
Sound Risk Management Practices” (the “CRE Guidance”). Although the CRE Guidance did not establish specific
lending limits, it provides that a bank’s commercial real estate lending exposure could receive increased supervisory scrutiny
where (i) total non-owner-occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial
real estate, and construction and land loans, represent 300% or more of an institution’s total risk-based capital, and the
outstanding balance of the commercial real estate loan portfolio has increased by 50% or more during the preceding 36 months,
or (ii) construction and land development loans exceed 100% of the Bank’s total risk-based capital. Our total non-owner-occupied
commercial real estate loans represented 155.3% of the Bank’s total risk-based capital at December 31, 2021, and our construction
and land development loans represented 55.4% of the Bank’s total risk-based capital at December 31, 2021.
In December
2015, the regulatory agencies released a new statement on prudent risk management for commercial real estate lending (the “2015
Statement”). In the 2015 Statement, the regulatory agencies, among other things, indicated their intent to continue “to
pay special attention” to commercial real estate lending activities and concentrations going forward. If the FDIC, our primary
federal regulator, were to impose restrictions on the amount of commercial real estate loans we can hold in our portfolio, for
reasons noted above or otherwise, our earnings would be adversely affected.
Higher
FDIC deposit insurance premiums and assessments could adversely affect our financial condition.
Our deposits
are insured up to applicable limits by the Deposit Insurance Fund of the FDIC and are subject to deposit insurance assessments
to maintain deposit insurance. As an FDIC-insured institution, we are required to pay quarterly deposit insurance premium assessments
to the FDIC. Although we cannot predict what the insurance assessment rates will be in the future, either deterioration in our
risk-based capital ratios or adjustments to the base assessment rates could have a material adverse impact on our business, financial
condition, results of operations, and cash flows.
Our
use of third-party vendors and our other ongoing third-party business relationships are subject to increasing regulatory requirements
and attention.
We regularly
use third party vendors as part of our business. We also have substantial ongoing business relationships with other third parties.
These types of third-party relationships are subject to increasingly demanding regulatory requirements and attention by our federal
bank regulators. Recent regulation requires us to enhance our due diligence, ongoing monitoring and control over our third-party
vendors and other ongoing third-party business relationships. We expect that our regulators will hold us responsible for deficiencies
in our oversight and control of our third-party relationships and in the performance of the parties with which we have these relationships.
As a result, if our regulators conclude that we have not exercised adequate oversight and control over our third party vendors
or other ongoing third party business relationships or that such third parties have not performed appropriately, we could be subject
to enforcement actions, including civil money penalties or other administrative or judicial penalties or fines as well as requirements
for customer remediation, any of which could have a material adverse effect our business, financial condition or results of operations.
We
are subject to extensive regulation that could restrict our activities, have an adverse impact on our operations, and impose financial
requirements or limitations on the conduct of our business.
We operate in
a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various regulatory agencies.
As a bank holding company, the Company is subject to Federal Reserve regulation. In addition, the Bank is subject to extensive
regulation, supervision, and examination by our primary federal regulator, the FDIC, the regulating authority that insures customer
deposits. Also, as a member of the FHLB, our Bank must comply with applicable regulations of the Federal Housing Finance Board
and the FHLB. Regulation by these agencies is intended primarily for the protection of our depositors and the deposit insurance
fund and not for the benefit of our shareholders. Our Bank’s activities are also regulated under consumer protection laws
applicable to our lending, deposit, and other activities. A sufficient claim against us under these laws could have a material
adverse effect on our results of operations.
Further,
changes in laws, regulations and regulatory practices affecting the financial services industry could subject us to increased
capital, liquidity and risk management requirements, create additional costs, limit the types of financial services and products
we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things.
Failure to comply with laws, regulations or policies could also result in heightened regulatory scrutiny and in sanctions by regulatory
agencies (such as a memorandum of understanding, a written supervisory agreement or a cease and desist order), civil money penalties
and/or reputation damage. Any of these consequences could restrict our ability to expand our business or could require us to raise
additional capital or sell assets on terms that are not advantageous to us or our shareholders and could have a material adverse
effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent
any such violations, such violations may occur despite our best efforts.
We
face risks related to the adoption of future legislation and potential changes in federal regulatory agency leadership, policies,
and priorities.
With a new Congress
taking office in 2021, Democrats retained control of the U.S. House of Representatives, and gained control of the U.S. Senate,
albeit with a majority found only in the tie-breaking vote of Vice President Harris. However slim the majorities, though, the
net result was a unified Democratic control of the White House and both chambers of Congress, and consequently Democrats are able
to set the agenda both legislatively, in the Administration, and in the regulatory agencies that have rulemaking and supervisory
authority over the financial services industry generally and the Company and the Bank specifically. Congressional committees with
jurisdiction over the banking sector have pursued oversight and legislative initiatives in a variety of areas, including addressing
climate-related risks, promoting diversity and equality within the banking industry and addressing other Environmental, Social,
and Governance matters, improving competition in the banking sector and enhancing oversight of bank mergers and acquisitions,
establishing a regulatory framework for digital assets and markets, and oversight of the COVID-19 pandemic response and economic
recovery. The prospects for the enactment of major banking reform legislation are unclear at this time.
Moreover, the
turnover of the presidential administration resulted in certain changes in the leadership and senior staffs of the federal banking
agencies, the CFPB, CFTC, SEC, and the Treasury Department, with certain significant leadership positions yet to be filled, including
the Comptroller of the Currency, the Chair of the FDIC and three vacancies among the Governors of the Federal Reserve Board, including
the Vice Chair for Supervision. These changes have impacted the rulemaking, supervision, examination and enforcement priorities
and policies of the agencies and likely will continue to do so over the next several years. The potential impact of any changes
in agency personnel, policies and priorities on the financial services sector, including the Company and the Bank, cannot be predicted
at this time. Regulations and laws may be modified at any time, and new legislation may be enacted that will affect us. Any future
changes in federal and state laws and regulations, as well as the interpretation and implementation of such laws and regulations,
could affect us in substantial and unpredictable ways, including those listed above or other ways that could have a material adverse
effect on our business, financial condition or results of operations.
We
are subject to strict capital requirements, which could be amended to be more stringent, in the future.
We are
subject to regulatory requirements specifying minimum amounts and types of capital that we must maintain and an additional capital
conservation buffer. From time to time, the regulators change these regulatory capital adequacy guidelines. If we fail to meet
these capital guidelines and other regulatory requirements, we or our subsidiaries may be restricted in the types of activities
we may conduct and we may be prohibited from taking certain capital actions, such as paying dividends, repurchasing or redeeming
capital securities, and paying certain bonuses.
In particular,
the capital requirements applicable to the Bank under the Basel III rules became fully phased-in on January 1, 2019. The Bank
is now required to satisfy additional, more stringent, capital adequacy standards than it had in the past. While we expect to
meet the requirements of the Basel III rules, we may fail to do so. Failure to meet minimum capital requirements could result
in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material
effect on our financial condition and results of operations. In addition, these requirements could have a negative impact on our
ability to lend, grow deposit balances, make acquisitions, make capital distributions in the form of dividends or share repurchases,
or pay certain bonuses needed to attract and retain key personnel. Higher capital levels could also lower our return on equity.
Federal,
state and local consumer lending laws restrict our ability to originate certain mortgage loans and increase our risk of liability
with respect to such loans and increase our cost of doing business.
Federal,
state and local laws have been adopted that are intended to eliminate certain lending practices considered “predatory.”
These laws prohibit practices such as steering borrowers away from more affordable products, selling unnecessary insurance to
borrowers, repeatedly refinancing loans and making loans without a reasonable expectation that the borrowers will be able to repay
the loans irrespective of the value of the underlying property. The Consumer Financial Protection Bureau, or CFPB, issued several
rules on mortgage lending, notably a rule requiring all home mortgage lenders to determine a borrower’s ability to repay
the loan. Loans with certain terms and conditions and that otherwise meet the definition of a “qualified mortgage”
under federal regulations may be provided with certain protections from liability to a borrower. Federal regulations define a
“qualified mortgage” to have certain specified characteristics, and generally prohibit loans with negative amortization,
interest-only payments, balloon payments, or terms exceeding 30 years from being “qualified mortgages.” While federal
regulations generally provide “qualified mortgages” with a “safe harbor” status for lenders, a rebuttable
presumption of compliance with the ability-to-repay requirements will attach to “qualified mortgages” that are “higher
priced” per the federal regulations. In response to these laws and related federal rules (including CFPB rules), we have
tightened, and in the future may further tighten, our mortgage loan underwriting standards to determined borrowers’ ability
to repay. Although it is our policy not to make predatory loans and to determine borrowers’ ability to repay, these laws
and related rules create the potential for increased liability with respect to our lending and loan investment activities. They
increase our cost of doing business and, ultimately, may prevent us from making certain loans and cause us to reduce the average
percentage rate or the points and fees on loans that we do make.
We
are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.
Federal
and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory
lending requirements on financial institutions. The U.S. Department of Justice, CFPB and other federal and state agencies are
responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s
performance under fair lending laws in private class action litigation. A successful challenge to our performance under the fair
lending laws and regulations could adversely impact our rating under the Community Reinvestment Act and result in a wide variety
of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions
on merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, business,
financial condition and results of operations.
New
accounting standards may require us to increase our allowance for loan losses and may have a material adverse effect on our financial
condition and results of operations.
The measure
of our allowance for loan losses is dependent on the adoption and interpretation of accounting standards. The Financial Accounting
Standards Board, or FASB, has issued a new credit impairment model, the Current Expected Credit Loss, or CECL model, which will
become applicable to us in 2023. Under the CECL model, we will be required to present certain financial assets carried at amortized
cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The
measurement of expected credit losses is to be based on information about past events, including historical experience, current
conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will
take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly
from the “incurred loss” model currently required under GAAP, which delays recognition until it is probable a loss
has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance
for loan losses and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility
in the level of our allowance for loan losses. If we are required to materially increase our level of allowance for loan losses
for any reason, such increase could adversely affect our business, financial condition and results of operations.
The new CECL
standard will become effective for us on January 1, 2023 and for interim periods within that year. We are currently evaluating
the impact the CECL model will have on our accounting, but we expect to recognize a one-time cumulative-effect adjustment
to our allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, consistent
with regulatory expectations set forth in interagency guidance issued at the end of 2016. We cannot yet determine the magnitude
of any such one-time cumulative adjustment or of the overall impact of the new standard on our business, financial condition
and results of operations; however, we expect that the new CECL standard may result in an increase in our allowance for loan losses
given the change to estimated losses over the contractual life of the loan portfolio and may lead to more volatility in our allowance
for loan losses and our earnings. The amount of any change to our allowance for loan losses will depend, in part, upon the composition
of our loan portfolio at the adoption date as well as economic conditions and loss forecasts at such date.
The
Federal Reserve Board may require us to commit capital resources to support the Bank.
The Federal
Reserve Board requires a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and
to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve
Board may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding
company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. In addition,
the Dodd-Frank Act directs the federal bank regulators to require that all companies that directly or indirectly control an insured
depository institution serve as a source of strength for the institution. Under these requirements, in the future, we could be
required to provide financial assistance to our Bank if the Bank experiences financial distress.
A capital
injection may be required at times when we do not have the resources to provide it, and therefore we may be required to borrow
the funds. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the
holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides
that claims based on any such commitment will be entitled to a priority of payment over the claims of the holding company’s
general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the holding
company in order to make the required capital injection becomes more difficult and expensive and will adversely impact the holding
company’s cash flows, financial condition, results of operations and prospects.
Failure
to comply with government regulation and supervision could result in sanctions by regulatory agencies, civil money penalties,
and damage to our reputation.
Our operations
are subject to extensive regulation by federal, state, and local governmental authorities. With any disruption in the financial
markets, we expect that the government will pass new regulations and laws that will impact us. Compliance with such regulations
may increase our costs and limit our ability to pursue business opportunities. Failure to comply with laws, regulations, and policies
could result in sanctions by regulatory agencies, civil money penalties, and damage to our reputation. While we have policies
and procedures in place that are designed to prevent violations of these laws, regulations, and policies, there can be no assurance
that such violations will not occur.
We
face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The federal
Bank Secrecy Act, the USA Patriot Act and other laws and regulations require financial institutions, among other duties, to institute
and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate.
The federal Financial Crimes Enforcement Network, established by the U.S. Treasury Department to administer the Bank Secrecy Act,
is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated
enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement
Administration and Internal Revenue Service. There is also increased scrutiny of compliance with the rules enforced by the Office
of Foreign Assets Control. Federal and state bank regulators also have begun to focus on compliance with Bank Secrecy Act and
anti-money laundering regulations. If our policies, procedures and systems are deemed deficient or the policies, procedures and
systems of the financial institutions that we have already acquired or may acquire in the future are deficient, we would be subject
to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to
obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans, which would
negatively affect our business, financial condition and results of operations. Failure to maintain and implement adequate programs
to combat money laundering and terrorist financing could also have serious reputational consequences for us.
From
time to time we are, or may become, involved in suits, legal proceedings, information-gatherings, investigations and proceedings
by governmental and self-regulatory agencies that may lead to adverse consequences.
Many aspects
of the banking business involve a substantial risk of legal liability. From time to time, we are, or may become, the subject of
information-gathering requests, reviews, investigations and proceedings, and other forms of regulatory inquiry, including by bank
regulatory agencies, self-regulatory agencies and law enforcement authorities. The results of such proceedings could lead to significant
civil or criminal penalties, including monetary penalties, damages, adverse judgements, settlements, fines, injunctions, restrictions
on the way we conduct our business or reputational harm.
Risks
Related to Operations
Liquidity
needs could adversely affect our financial condition and results of operations.
Dividends
from the Bank provide the primary source of funds for the Company. The primary sources of funds for the Bank are client deposits
and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability
of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including
changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values
or markets, business closings, or lay-offs, inclement weather, natural disasters and international instability.
Additionally,
deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, regulatory
capital requirements, returns available to clients on alternative investments and general economic conditions. We may experience
stress on our liquidity management as a result of the COVID-19 pandemic. As customers manage their own liquidity stress, we could
experience an increase in the utilization of existing lines of credit. We may also see deposit levels decrease as a result of
distressed economic conditions. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to
meet withdrawal demands or otherwise fund operations. Such sources include proceeds from Federal Home Loan Bank, or FHLB, advances,
sales of investment securities and loans, and federal funds lines of credit from correspondent banks, as well as out-of-market
deposits. While we believe that these sources are currently adequate, there can be no assurance they will be sufficient to meet
future liquidity demands, particularly if we continue to grow and experience increasing loan demand. We may be required to slow
or discontinue loan growth, capital expenditures or other investments or liquidate assets should such sources not be adequate.
The Company
is a stand-alone entity with its own liquidity needs to service its debt or other obligations. Other than dividends from the Bank,
the Company does not have additional means of generating liquidity without obtaining additional debt or equity funding. If we
are unable to receive dividends from the Bank or obtain additional funding, we may be unable to pay our debt or other obligations.
New
or acquired banking office facilities and other facilities may not be profitable.
Although
we have been able to expand to several new locations in recent years, we may not be able to identify profitable locations for
new banking offices. The costs to start up new banking offices or to acquire existing branches, and the additional costs to operate
these facilities, may increase our noninterest expense and decrease our earnings in the short term. If branches of other banks
become available for sale, we may acquire those offices. It may be difficult to adequately and profitably manage our growth through
the establishment or purchase of additional banking offices and we can provide no assurance that any such banking offices will
successfully attract enough deposits to offset the expenses of their operation. In addition, any new or acquired banking offices
will be subject to regulatory approval, and there can be no assurance that we will succeed in securing such approval.
We
are dependent on key individuals, and the loss of one or more of these key individuals could curtail our growth and adversely
affect our prospects.
Mason
Y. Garrett, the Company’s chairman and chief executive officer, JB Schwiers, the Company’s president and the Bank’s
chief executive officer, and John B. Garrett, our chief financial officer, have extensive and long-standing ties within our primary
market area and substantial experience with our operations, and they have contributed significantly to our business. If we lose
the services of Mr. M. Garrett, Mr. Schwiers, and/or Mr. J. Garrett, they would be difficult to replace, and our business and
development could be materially and adversely affected.
Our success
also depends, in part, on our continued ability to attract and retain experienced loan originators, as well as other management
personnel, including other executive vice presidents. Competition for personnel is intense, and the process of locating key personnel
with the combination of skills and attributes required to execute our business strategy may be lengthy. In 2021, there has been
a dramatic increase in workers leaving their positions throughout our industry and other industries that is being referred to
as the “great resignation,” and the market to build, retain and replace talent has become even more highly competitive.
We may not be successful in retaining key personnel, and the unexpected loss of services of one or more of our key personnel could
have a material adverse effect on our business because of their skill, knowledge of our primary markets, years of industry experience
and the difficulty of promptly finding qualified replacement personnel. If the services of any of our key personnel should become
unavailable for any reason, we may not be able to identify and hire qualified persons on terms acceptable to the Company, or at
all, which could have a material adverse effect on our business, results of operation, financial condition, and future prospects
Our
historical operating results may not be indicative of our future operating results.
We may
not be able to sustain our historical rate of growth, and, consequently, our historical results of operations will not necessarily
be indicative of our future operations. Various factors, such as economic conditions, regulatory and legislative considerations,
and competition, may also impede our ability to expand our market presence. If we experience a significant decrease in our historical
rate of growth, our results of operations and financial condition may be adversely affected because a high percentage of our operating
costs are fixed expenses.
New
lines of business or new products and services may subject us to additional risk.
From
time to time, we may implement new lines of business or offer new products and services within existing lines of business. There
are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully
developed. In developing and marketing new lines of business and/or new products and services, we may invest significant time
and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services
may not be achieved, and price and profitability targets may not prove feasible. External factors, such as compliance with regulations,
competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business
and/or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant
impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development
and implementation of new lines of business and/or new products or services could have a material adverse effect on our business,
financial condition and results of operations.
We
are subject to losses due to errors, omissions or fraudulent behavior by our employees, clients, counterparties or other third
parties.
We are
exposed to many types of operational risk, including the risk of fraud by employees and third parties, clerical recordkeeping
errors and transactional errors. Our business is dependent on our employees as well as third-party service providers to process
a large number of increasingly complex transactions. We could be materially and adversely affected if employees, clients, counterparties
or other third parties caused an operational breakdown or failure, either as a result of human error, fraudulent manipulation
or purposeful damage to any of our operations or systems.
In deciding
whether to extend credit or enter into other transactions with clients and counterparties, we may rely on information furnished
to us by or on behalf of clients and counterparties, including financial statements and other financial information, which we
do not independently verify. We also may rely on representations of clients and counterparties as to the accuracy and completeness
of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether
to extend credit to clients, we may assume that a customer’s audited financial statements conform with GAAP and present
fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. Our earnings
are significantly affected by our ability to properly originate, underwrite and service loans. Our financial condition and results
of operations could be negatively impacted to the extent we incorrectly assess the creditworthiness of our borrowers, fail to
detect or respond to deterioration in asset quality in a timely manner, or rely on financial statements that do not comply with
GAAP or are materially misleading.
In addition,
criminals committing fraud increasingly are using more sophisticated techniques and in some cases are part of larger criminal
rings, which allow them to be more effective. This type of fraudulent activity has taken many forms, ranging from check fraud,
mechanical devices attached to ATM machines, social engineering and phishing attacks to obtain personal information or impersonation
of our clients through the use of falsified or stolen credentials. Additionally, an individual or business entity may properly
identify themselves, particularly when banking online, yet seek to establish a business relationship for the purpose of perpetrating
fraud. Further, in addition to fraud committed against us, we may suffer losses as a result of fraudulent activity committed against
third parties. Increased deployment of technologies, such as chip card technology, defray and reduce aspects of fraud; however,
criminals are turning to other sources to steal personally identifiable information, such as unaffiliated healthcare providers
and government entities, in order to impersonate the consumer to commit fraud. Many of these data compromises are widely reported
in the media.
As a
result of the increased sophistication of fraud activity, we have increased our spending on systems and controls to detect and
prevent fraud. This will result in continued ongoing investments in the future. Nevertheless, these investments may prove insufficient
and fraudulent activity could result in losses to us or our customers; loss of business and/or customers; damage to our reputation;
the incurrence of additional expenses (including the cost of notification to consumers, credit monitoring and forensics, and fees
and fines imposed by the card networks); disruption to our business; our inability to grow our online services or other businesses;
additional regulatory scrutiny or penalties; or our exposure to civil litigation and possible financial liability any of which
could have a material adverse effect on our business, financial condition and results of operations.
A
failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors and other service
providers or other third parties, including as a result of cyber-attacks, could disrupt our businesses, result in the disclosure
or misuse of confidential or proprietary information, damage our reputation, increase our costs, and cause losses.
We rely heavily
on communications and information systems to conduct our business. Information security risks for financial institutions such
as ours have generally increased in recent years in part because of the proliferation of new technologies, the use of the internet
and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized
crime, hackers, and terrorists, activists, and other external parties. As customer, public, and regulatory expectations regarding
operational and information security have increased, our operating systems and infrastructure must continue to be safeguarded
and monitored for potential failures, disruptions, and breakdowns. Our business, financial, accounting, and data processing systems,
or other operating systems and facilities may stop operating properly or become disabled or damaged as a result of a number of
factors, including events that are wholly or partially beyond our control. For example, there could be electrical or telecommunication
outages; natural disasters such as earthquakes, tornadoes, and hurricanes; disease pandemics (such as COVID-19); events arising
from local or larger scale political or social matters, including terrorist acts; and as described below, cyber-attacks.
As noted
above, our business relies on our digital technologies, computer and email systems, software and networks to conduct its operations.
Although we have information security procedures and controls in place, our technologies, systems, networks, and our customers’
devices may become the target of cyber-attacks or information security breaches that could result in the unauthorized release,
gathering, monitoring, misuse, loss, or destruction of our or our customers’ or other third parties’ confidential
information. Third parties with whom we do business or that facilitate our business activities, including financial intermediaries,
or vendors that provide service or security solutions for our operations, and other unaffiliated third parties, including the
South Carolina Department of Revenue, which had customer records exposed in a 2012 cyber-attack, could also be sources of operational
and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints.
While
we have disaster recovery and other policies and procedures designed to prevent or limit the effect of the failure, interruption
or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches
will not occur or, if they do occur, that they will be adequately addressed. Our risk and exposure to these matters remains heightened
because of the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of
our controls, processes, and practices designed to protect our systems, computers, software, data, and networks from attack, damage
or unauthorized access remain a focus for us. As threats continue to evolve, we may be required to expend additional resources
to continue to modify or enhance our protective measures or to investigate and remediate information security vulnerabilities.
Disruptions or failures in the physical infrastructure or operating systems that support our businesses and clients, or cyber-attacks
or security breaches of the networks, systems or devices that our clients use to access our products and services could result
in client attrition, regulatory fines, penalties or intervention, reputation damage, reimbursement or other compensation costs,
and/or additional compliance costs, any of which could have a material effect on our results of operations or financial condition.
We
are subject to environmental risks that could result in losses.
In the
course of business, the Bank may acquire, through foreclosure, or deed in lieu of foreclosure, properties securing loans it has
originated or purchased which are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances
could be discovered on these properties. In this event, the Bank may be required to remove these substances from the affected
properties at our sole cost and expense. The cost of this removal could substantially exceed the value of affected properties.
We may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible
to sell the affected properties. These events could have a material adverse effect on our business, results of operations and
financial condition.
In addition,
we are subject to the growing risk of climate change. Among the risks associated with climate change are more frequent severe
weather events. Severe weather events such as hurricanes, tropical storms, tornados, winter storms, freezes, flooding and other
large-scale weather catastrophes in our markets subject us to significant risks and more frequent severe weather events magnify
those risks. Large-scale weather catastrophes or other significant climate change effects that either damage or destroy residential
or multifamily real estate underlying mortgage loans or real estate collateral, or negatively affects the value of real estate
collateral or the ability of borrowers to continue to make payments on loans, could decrease the value of our real estate collateral
or increase our delinquency rates in the affected areas and thus diminish the value of our loan portfolio. Such events could also
cause downturns in economic and market conditions generally, which could have an adverse effect on our business and financial
results. The potential losses and costs associated with climate change related risks are difficult to predict and could have a
material adverse effect on our business, financial condition and results of operation.
Risks
Related to Our Industry
We
could experience a loss due to competition with other financial institutions or nonbank companies.
We face
substantial competition in all areas of our operations from a variety of different competitors, both within and beyond our principal
markets, many of which are larger and may have more financial resources. Such competitors primarily include national, regional,
community and internet banks within the various markets in which we operate. We also face competition from many other types of
financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance
companies, and other financial intermediaries. The financial services industry could become even more competitive as a result
of legislative and regulatory changes and continued consolidation. In addition, as customer preferences and expectations continue
to evolve, technology has lowered barriers to entry and made it possible for banks to offer products and services in more areas
in which they do not have a physical location and for nonbanks, such as FinTech companies, to offer products and services traditionally
provided by banks, such as automatic transfer and automatic payment systems. Banks, securities firms, and insurance companies
can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including
banking, securities underwriting, insurance (both agency and underwriting), and merchant banking. Many of our competitors have
fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able
to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for
those products and services than we can.
Our ability
to compete successfully depends on a number of factors, including, among other things:
|
· |
our ability
to develop, maintain, and build upon long-term customer relationships based on top quality service, high ethical standards, and
safe, sound assets; |
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· |
our ability
to expand our market position; |
|
· |
the scope,
relevance, and pricing of the products and services we offer to meet our customers’ needs and demands; |
|
· |
the rate
at which we introduce new products and services relative to our competitors; |
|
· |
customer
satisfaction with our level of service; and |
|
· |
industry
and general economic trends. |
Failure to perform
in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability,
which, in turn, could have a material adverse effect on our business, financial condition and results of operations.
We
may be adversely affected by the soundness of other financial institutions.
Financial
services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure
to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services
industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions
expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated
when the collateral held by the Bank cannot be realized upon or is liquidated at prices not sufficient to recover the full amount
of the credit or derivative exposure due to the Bank. Any such losses could have a material adverse effect on our financial condition
and results of operations.
In addition,
downgrades in the credit or financial strength ratings assigned to the counterparties with whom we transact could create the perception
that our financial condition will be adversely impacted as a result of potential future defaults by such counterparties. Additionally,
we could be adversely affected by a general, negative perception of financial institutions caused by the downgrade of other financial
institutions. Accordingly, ratings downgrades for other financial institutions could affect the market price of our stock and
could limit our access to or increase our cost of capital.
Failure
to keep pace with technological change could adversely affect our business.
The financial
services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products
and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers
and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology
to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations.
Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively
implement new technology-driven products and services or be successful in marketing these products and services to our customers.
In addition, we depend on internal and outsourced technology to support all aspects of our business operations. Failure to successfully
keep pace with technological change affecting the financial services industry could have a material adverse impact on our business,
financial condition and results of operations.
Consumers
may decide not to use banks to complete their financial transactions.
Technology
and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved
banks. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts,
mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills and/or
transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,”
could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits.
The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on
our financial condition and results of operations.
Negative
public opinion surrounding our Bank and the financial institutions industry generally could damage our reputation and adversely
impact our earnings.
Reputation
risk, or the risk to our business, earnings and capital from negative public opinion surrounding our Bank and the financial institutions
industry generally, is inherent in our business. Negative public opinion can result from our actual or alleged conduct in any
number of activities, including lending practices, corporate governance, mergers and acquisitions, cybersecurity incidents, and
from actions taken by government regulators and community organizations in response to those activities. Negative public opinion
can adversely affect our ability to keep and attract clients and employees, could impair the confidence of our investors, counterparties
and business partners and can affect our ability to effect transactions and can expose us to litigation and regulatory action.
Although we take steps to minimize reputation risk in dealing with our clients and communities, this risk will always be present
given the nature of our business.
Risks
Related to an Investment in Our Common Stock
Our
ability to pay cash dividends is limited, and we may be unable to pay future dividends even if we desire to do so.
The Federal
Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s
policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention
by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial
condition. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength
to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods
of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks where necessary. In addition, under the prompt corrective action regulations, the
ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory
policies could affect our ability to pay dividends or otherwise engage in capital distributions.
Our ability
to pay cash dividends may be limited by regulatory restrictions, by our Bank’s ability to pay cash dividends to the Company
and by our need to maintain sufficient capital to support our operations. As a South Carolina-chartered bank, the Bank is subject
to limitations on the number of dividends that it is permitted to pay. Unless otherwise instructed by the S.C. Board, the Bank
is generally permitted under South Carolina state banking regulations to pay cash dividends of up to 100% of net income in any
calendar year without obtaining the prior approval of the S.C. Board. If our Bank is not permitted to pay cash dividends to us,
it is unlikely that we would be able to pay cash dividends on our common stock. Moreover, holders of our common stock are entitled
to receive dividends only when, and if declared by our board of directors. Although we have historically paid cash dividends on
our common stock, we are not required to do so, and our board of directors could reduce or eliminate our common stock dividend
in the future.
Our
stock price may be volatile, which could result in losses to our investors and litigation against us.
Our stock
price has been volatile in the past and several factors could cause the price to fluctuate substantially in the future. These
factors include but are not limited to: actual or anticipated variations in earnings, changes in analysts’ recommendations
or projections, our announcement of developments related to our businesses, operations and stock performance of other companies
deemed to be peers, new technology used or services offered by traditional and non-traditional competitors, news reports of trends,
irrational exuberance on the part of investors, new federal banking regulations, and other issues related to the financial services
industry. Our stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to our performance.
General market declines or market volatility in the future, especially in the financial institutions sector, could adversely affect
the price of our common stock, and the current market price may not be indicative of future market prices. Stock price volatility
may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Moreover, in the
past, securities class action lawsuits have been instituted against some companies following periods of volatility in the market
price of its securities. We could in the future be the target of similar litigation. Securities litigation could result in substantial
costs and divert management’s attention and resources from our normal business.
Our
principal shareholders and management own a significant percentage of our voting shares and are able to exercise significant influence
over our business and have the power to block transactions that could benefit our other shareholders.
As of December
31, 2021, Mason Y. Garrett and his two sons, Harold E. Garrett and John B. Garrett (collectively, the “Garretts”),
own a total of approximately 26.0% of our outstanding shares of voting stock and together constitute our largest shareholder.
As a result, the Garretts have the ability to significantly influence the outcome of matters requiring approval of our shareholders.
Consequently, the Garretts have significant influence over our operations and outcome of shareholder votes on the approval of
mergers and acquisitions or changes in corporate control which, among other things, could discourage potential acquirers from
attempting to acquire the Company, thereby impeding or preventing the consummation of acquisition or change of control transactions
in which our shareholders might otherwise receive a premium for their shares.
Securities
analysts may not initiate coverage or continue to cover our common stock.
The trading
market for our common stock will depend in part on the research and reports that securities analysts publish about us and our
business. We do not have any control over these securities analysts, and they may not cover our common stock. If securities analysts
do not cover our common stock, the lack of research coverage may adversely affect our market price. If we are covered by securities
analysts, and our common stock is the subject of an unfavorable report, the price of our common stock may decline. If one or more
of these analysts cease to cover us or fail to publish regular reports on us, we could lose visibility in the financial markets,
which could cause the price or trading volume of our common stock to decline.
Future
sales of our stock by our shareholders or the perception that those sales could occur may cause our stock price to decline.
Although
our common stock is quoted on the OTC Market, the trading volume in our common stock is lower than that of other larger financial
services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on
the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on
the individual decisions of investors and general economic and market conditions over which we have no control. Given the relatively
low trading volume of our common stock, significant sales of our common stock in the public market, or the perception that those
sales may occur, could cause the trading price of our common stock to decline or to be lower than it otherwise might be in the
absence of those sales or perceptions.
Economic
and other circumstances may require us to raise capital at times or in amounts that are unfavorable to us. If we have to issue
shares of common stock, they will dilute the percentage ownership interest of existing shareholders and may dilute the book value
per share of our common stock and adversely affect the terms on which we may obtain additional capital.
We may
need to incur additional debt or equity financing in the future to make strategic acquisitions or investments or to strengthen
our capital position. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the
capital markets at that time, which are outside of our control and our financial performance. We cannot provide assurance that
such financing will be available to us on acceptable terms or at all, or if we do raise additional capital that it will not be
dilutive to existing shareholders.
If we
determine, for any reason, that we need to raise capital, our board generally has the authority, without action by or vote of
the shareholders, to issue all or part of any authorized but unissued shares of stock for any corporate purpose, including issuance
of equity-based incentives under or outside of our equity compensation plans. Additionally, we are not restricted from issuing
additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent
the right to receive, common stock or preferred stock or any substantially similar securities. The market price of our common
stock could decline as a result of sales by us of a large number of shares of common stock or preferred stock or similar securities
in the market or from the perception that such sales could occur. If we issue preferred stock that has a preference over the common
stock with respect to the payment of dividends or upon liquidation, dissolution or winding-up, or if we issue preferred stock
with voting rights that dilute the voting power of the common stock, the rights of holders of the common stock or the market price
of our common stock could be adversely affected. Any issuance of additional shares of stock will dilute the percentage ownership
interest of our shareholders and may dilute the book value per share of our common stock. Shares we issue in connection with any
such offering will increase the total number of shares and may dilute the economic and voting ownership interest of our existing
shareholders.
Failure
to maintain effective internal controls over financial reporting could have an adverse effect on our business and results of operations.
Effective
internal control is necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide
reliable financial reports or prevent fraud, we could be subject to regulatory action or other litigation, and our operating results
could be adversely affected. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results
would be harmed. As part of our ongoing monitoring of internal controls, we may discover material weaknesses or significant deficiencies
in our internal control that require remediation. A “material weakness” is a deficiency, or a combination of deficiencies,
in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s
annual or interim financial statements will not be prevented or detected on a timely basis. We continually work on improving our
internal controls. However, we cannot be certain that these measures will ensure that we implement and maintains adequate controls
over our financial processes and reporting. Any failure to maintain effective controls or to timely implement any necessary improvement
of our internal and disclosure controls could, among other things, result in losses from fraud or error, harm our reputation,
or cause investors to lose confidence in our reported financial information, all of which could have a material adverse effect
on our results of operation and financial condition.
Any and
all of these factors could have a material adverse effect on us and lead to a decline in the price of our common stock.
Provisions
of our articles of incorporation and bylaws, South Carolina law, and state and federal banking regulations, could delay or prevent
a takeover by a third party.
Our articles
of incorporation and bylaws could delay, defer, or prevent a third-party takeover, despite possible benefit to the shareholders,
or otherwise adversely affect the price of our common stock. Our governing documents:
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authorize 20,000,000
shares of common stock and 20,000,000 shares of preferred stock (the terms, including voting rights, of which may be established
by the board of directors) that may be issued by the board of directors without shareholder approval; |
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require advance
notice of proposed nominations for election to the board of directors and business to be conducted at a shareholder meeting; |
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require the
board of directors, when considering whether a proposed plan of merger, consolidation, exchange, or sale of all, or substantially
all, of the assets of the Company, to consider the interests of the Company’s employees and the communities in which the
Company and its subsidiaries do business in addition to the interests of the Company’s shareholders; |
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provide that
the number of directors shall be fixed from time to time by resolution adopted by a majority of the directors then in office,
but may not consist of fewer than five nor more than 25 members; and |
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provide that
no individual who is or becomes a “business competitor” or who is or becomes affiliated with, employed by, or a representative
of any individual, corporation, or other entity which the board of directors, after having such matter formally brought to its
attention, determines to be in competition with us or any of our subsidiaries (any such individual, corporation, or other entity
being a “business competitor”) shall be eligible to serve as a director if the board of directors determines that
it would not be in our best interests for such individual to serve as a director (any financial institution having branches or
affiliates within the counties in which we operate is presumed to be a business competitor unless the board of directors determines
otherwise). |
In addition,
the South Carolina business combinations statute provides that a 10% or greater shareholder of a resident domestic corporation
cannot engage in a “business combination” (as defined in the statute) with such corporation for a period of two years
following the date on which the 10% shareholder became such, unless the business combination or the acquisition of shares is approved
by a majority of the disinterested members of such corporation’s board of directors before the 10% shareholder’s share
acquisition date. This statute further provides that at no time (even after the two-year period subsequent to such share acquisition
date) may the 10% shareholder engage in a business combination with the relevant corporation unless certain approvals of the board
of directors or disinterested shareholders are obtained or unless the consideration given in the combination meets certain minimum
standards set forth in the statute. The law is very broad in its scope and is designed to inhibit unfriendly acquisitions, but
it does not apply to corporations whose articles of incorporation contain a provision electing not to be covered by the law. Our
articles of incorporation do not contain such a provision. An amendment of our articles of incorporation to that effect would,
however, permit a business combination with an interested shareholder even though such status was obtained prior to the amendment.
Finally, the
Change in Bank Control Act and the Bank Holding Company Act generally require filings and approvals prior to certain transactions
that would result in a party acquiring control of the Company or the Bank.
An
investment in our common stock is not an insured deposit.
Our common
stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any
other public or private entity. An investment in our common stock is inherently risky for the reasons described in this “Risk
Factors” section and elsewhere in Annual Report on Form 10-K and is subject to the same market forces that affect the price
of common stock in any company. As a result, if you acquire our common stock, you may lose some or all of your investment.
General
Risk Factors
We
may be exposed to a need for additional capital resources in the future and these capital resources may not be available when
needed or at all.
We may need
to incur additional debt or equity financing in the future to make strategic acquisitions or investments or to strengthen our
capital position. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital
markets at that time, which are outside of our control and our financial performance. Accordingly, we cannot provide assurance
that such financing will be available to us on acceptable terms or at all. If we cannot raise additional capital when needed,
our ability to further expand our operations through internal growth and acquisitions could be materially impaired. In addition,
if we decide to raise additional equity capital, our current shareholders’ interests could be diluted.
We
are party to various claims and lawsuits incidental to our business. Litigation is subject to many uncertainties such that the
expenses and ultimate exposure with respect to many of these matters cannot be ascertained.
From
time to time, we, our directors and our management are or may be the subject of various claims and legal actions by customers,
employees, shareholders and others. Whether such claims and legal actions are legitimate or unfounded, if such claims and legal
actions are not resolved in our favor, they may result in significant financial liability and/or adversely affect the market perception
of us and our products and services as well as impact customer demand for those products and services. In light of the potential
cost, reputational damage and uncertainty involved in litigation, we have in the past and may in the future settle matters even
when we believe we have a meritorious defense. Certain claims may seek injunctive relief, which could disrupt the ordinary conduct
of our business and operations or increase our cost of doing business. Our insurance or indemnities may not cover all claims that
may be asserted against us. Any judgments or settlements in any pending litigation or future claims, litigation or investigation
could have a material adverse effect on our business, reputation, financial condition and results of operations.