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 this 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.
Economic
and Geographic-Related Risks
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 global impact. Many countries 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 global impacts are uncertain and difficult to assess.
The
COVID-19 pandemic may have a material adverse impact on our financial condition, liquidity and results of operations and the market
price of our common stock, among other things. 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 any of the following risks:
· increased demands on capital and liquidity;
· decreased demands for our products and services.
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In addition, COVID-19 initially
caused us to materially increase our allowance for credit losses. During the year ended December 31, 2020, we recorded a $3.8 million
net increase in our allowance for loan losses, bringing our total allowance to $10.4 million or 1.23% of loans held-for- investment as
of December 31, 2020. During the year ended December 31, 2021, we recorded a $790 thousand net increase in our allowance for loan losses,
bringing our total allowance to $11.2 million or 1.29% of loans held-for-investment. Our allowance as a percentage of loans held-for-investment
excluding PPP loans was 1.30% at both December 31, 2021 and December 31, 2020. The increase in the allowance for loan losses compared
to December 31, 2020 is primarily related to loan growth of $19.5 million ($60.3 million growth in non-PPP loans partially offset by $40.8
million reduction in PPP loans); $455 thousand in net recoveries; an increase in our economic conditions qualitative factor by four basis
points during 2021 due to higher inflation, supply chain bottlenecks, and labor shortages in certain industries; and a one basis point
increase in our change in legal or regulatory requirements qualitative factor. These increases were partially offset by a reduction in
the loss emergence period assumption on our COVID-19 qualitative factor, which was added to our allowance for loan losses methodology
during 2020, to 21 months at December 31, 2021 from 24 months at December 31, 2020. Our COVID-19 qualitative factor represented $1.9 million
of our allowance for loan losses at December 31, 2021. The allowance for loan losses reflects, among other things, the macroeconomic impact
of the COVID-19 pandemic. If the macroeconomic effects of the COVID-19 pandemic improve or worsen, we may materially decrease or increase
our allowance for loan losses, which may have a material effect on our business, financial condition and results of operations.
The
immediately preceding outcomes are those we consider to be most material as a result of the pandemic. 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. The full extent of the impact and effects
of COVID-19 will depend on future developments, including, among other factors, the duration and spread of the virus and its variants,
availability, acceptance and effectiveness of vaccines along with related travel advisories, quarantines and restrictions, the
recovery time of the disrupted supply chains and industries, the impact of labor market interruptions, the impact of government
interventions, and uncertainty with respect to the duration of the global economic slowdown. COVID-19 and the current financial,
economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect
to our performance and results of operations.
Our
business may be adversely affected by 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 and Georgia. 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, foreclosures, 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. The majority of our loan portfolio is secured by
real estate. A decline in real estate values can negatively impact our ability to recover our investment should the borrower become
delinquent. Loans secured by stock or other collateral may be adversely impacted by a downturn in the economy and other factors
that could reduce the recoverability of our investment. Unsecured loans are dependent on the solvency of the borrower, which can
deteriorate, leaving us with a risk of loss. 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, the potential resurgence of economic and political
tensions with China, the Russian invasion of Ukraine and increasing oil prices due to Russian supply disruptions, each 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 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 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.
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Credit and
Interest Rate Risk
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
We
attempt to maintain an appropriate allowance for loan losses to provide for potential losses in our loan portfolio. We periodically
determine the amount of the allowance based on consideration of several factors, including:
· an ongoing review of the quality, mix, and size of our overall loan portfolio;
· our historical loan loss experience;
· evaluation of economic conditions;
· regular reviews of loan delinquencies and loan portfolio quality; and
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.
Federal
and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses
or recognize further loan charge-offs, based on judgments different than those of our management. Any increase in the amount of
our provision or loans charged-off as required by these regulatory agencies could have a negative effect on our operating results.
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. Our average loan size continues to increase and reliance on our
historic allowance for loan losses may not be adequate. As of December 31, 2021, approximately 90.4% of our loan portfolio (excluding
loans held for sale) is composed of construction (11.0%), commercial mortgage (71.5%) and commercial (excluding PPP) (7.9%) 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. If we suffer loan losses that exceed our allowance for loans losses, our financial condition, liquidity or results
of operations could be materially and adversely affected.
Any
potential loan losses will be contingent upon a number of factors beyond our control, such as the resurgence of the virus, including
any new strains, offset by the potency of the vaccine along with its extensive distribution, and the ability for customers and
businesses to return to their pre-pandemic routines.
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We
have a concentration of credit exposure in commercial real estate and challenges faced by the commercial real estate market could
adversely affect our business, financial condition, and results of operations.
As
of December 31, 2021, we had approximately $703.3 million in loans outstanding to borrowers whereby the collateral securing the
loan was commercial real estate, representing approximately 81.4% of our total loans outstanding as of that date. Approximately
$244.0 million or 28.3% of our total loans and 34.7% of our commercial real estate loans are secured by owner-occupied properties.
Commercial real estate loans are generally viewed as having more risk of default than residential real estate loans. They are
also typically larger than residential real estate loans and consumer loans and depend on cash flows from the owner’s business
or the property to service the debt. Cash flows may be affected significantly by general economic conditions, and a downturn in
the local economy or in occupancy rates in the local economy where the property is located could increase the likelihood of default.
Because our loan portfolio contains a number of commercial real estate loans with relatively large balances, the deterioration
of one or a few of these loans could cause a significant increase in our level of non-performing loans. An increase in non-performing
loans 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.
Our
commercial real estate loans have grown 7.3%, or $47.8 million, since December 31, 2020. The banking regulators give commercial
real estate lending greater scrutiny, and may require banks with higher levels of commercial real estate loans to implement more
stringent underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels
of allowances for losses and capital levels as a result of commercial real estate lending growth and exposures.
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 Office of the Comptroller of the Currency 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 total risk-based capital. Our total
non-owner-occupied commercial real estate loans represented 258% of the Bank’s total risk-based capital at December 31,
2021, and our construction and land development loans represented 69% 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.
Repayment
of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral
securing these loans may fluctuate in value.
At
December 31, 2021, commercial business loans excluding PPP loans comprised 7.9% of our total loan portfolio. Our commercial business
loans are originated primarily based on the identified cash flow and general liquidity of the borrower and secondarily on the
underlying collateral provided by the borrower and/or repayment capacity of any guarantor. The borrower’s cash flow may
be unpredictable, and collateral securing these loans may fluctuate in value. Although commercial business 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. If these borrowers do not have sufficient cash flows or resources to pay these loans as they come due or the
value of the underlying collateral is insufficient to fully secure these loans, we may suffer losses on these loans that exceed
our allowance for loan losses.
Our
focus on lending to small to mid-sized community-based businesses may increase our credit risk.
Most
of our commercial business and commercial real estate loans are made to small business or middle market customers. These businesses
generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened
vulnerability to economic conditions. If general economic conditions in the markets in which we operate negatively impact this
important customer sector, our results of operations and financial condition and the value of our common stock may be adversely
affected. Moreover, a portion of these loans have been made by us in recent years and the borrowers may not have experienced a
complete business or economic cycle. Furthermore, the deterioration of our borrowers’ businesses may hinder their ability
to repay their loans with us, which could have a material adverse effect on our financial condition and results of operations.
25
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 $17.6 million of our loans, or 12.2% of the Bank’s
regulatory capital, had loan-to-value ratios that exceeded regulatory supervisory guidelines, of which two loans totaling approximately
$2.0 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, $13.4 million of our commercial loans, or 9.3% 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, which could have a material adverse effect on our financial condition and results of operations.
We
depend on the accuracy and completeness of information about clients and counterparties and our financial condition could be adversely
affected if we rely on misleading information.
In
deciding whether to extend credit or to enter into other transactions with clients and counterparties, we may rely on information
furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information,
which we do not independently verify. We also may rely on representations of clients and counterparties as to the accuracy and
completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in
deciding whether to extend credit to clients, we may assume that a customer’s audited financial statements conform with
GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer.
Our financial condition and results of operations could be negatively impacted to the extent we rely on financial statements that
do not comply with GAAP or are materially misleading.
If
we fail to effectively manage credit risk and interest rate 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. Many of these risks have been and may further be exacerbated by the effects of the COVID-19
pandemic. 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 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. Any failure to manage
such credit risks may materially adversely affect our business and our consolidated results of operations and financial condition.
Changes
in prevailing interest rates may reduce our profitability.
Our
results of operations depend in large part upon the level of our net interest income, which is the difference between interest
income from interest-earning assets, such as loans and investment securities, which include mortgage-backed securities (“MBSs”), and interest expense on
interest-bearing liabilities, such as deposits and other borrowings. Depending on the terms and maturities of our assets and liabilities,
we believe a significant change in interest rates could potentially have a material adverse effect on our profitability. Many
factors cause changes in interest rates, including governmental monetary policies and domestic and international economic and
political conditions. While we intend to manage the effects of changes in interest rates by adjusting the terms, maturities, and
pricing of our assets and liabilities, our efforts may not be effective and our financial condition and results of operations
could suffer.
Capital and
Liquidity Risks
Changes
in the financial markets could impair the value of our investment portfolio.
Our
investment securities portfolio is a significant component of our total earning assets. Total investment securities averaged $456.8
million in 2021, as compared to $300.9 million in 2020. This represents 32.2% and 25.1% of the average earning assets for the
years ended December 31, 2021 and 2020, respectively. At December 31, 2021, the portfolio was 38.2% of earning assets compared
to 27.9% of earning assets at December 31, 2020. 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 and 2020, 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.
26
The
Bank is subject to strict capital requirements, which could be amended to be more stringent, in the future.
The
Bank is 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 under the Basel III require the Bank to satisfy additional, more stringent, capital
adequacy standards than it had in the past. 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.
Risks Related
to Our Industry
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,
including the OCC, previously determined that banks must cease entering into any new contract that uses LIBOR as a reference rate
by no later than December 31, 2021. In addition, banks have been encouraged to identify contracts that extend beyond June 30,
2023 and implement plans to identify and address insufficient contingency provisions in those contracts. The discontinuance of
LIBOR has resulted in significant uncertainty regarding the transition to suitable alternative reference rates and could adversely
impact our business, operations, and financial results.
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. 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.
As
of December 31, 2021, we had $19.4 million in LIBOR-based loans, $64.7 million in securities, and $15.0 million in junior subordinated
debt indexed to LIBOR. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms
to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans, if such loans do not mature or pre-pay before the
transition. For new loan originations and renewals with maturities greater than one year, we have generally ceased relying on
LIBOR and have moved to alternative indices.
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.
27
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 expand our market position;
· 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.
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 changes could have a material adverse impact on our business,
financial condition and results of operations.
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.
28
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.
Risks
Related to Our Strategy
We
may be adversely affected by risks associated with future mergers and acquisitions, including execution risk, which could disrupt
our business and dilute shareholder value.
From
time to time, we may seek to acquire other financial institutions or parts of those institutions. We may also expand into new
markets or lines of business or offer new products or services. These activities would involve a number of risks, including:
If
we do not successfully manage these risks, our merger and acquisition activities could have a material adverse effect on our business,
financial condition, and results of operations, including short-term and long-term liquidity, and our ability to successfully
implement our strategic plan.
We may
be exposed to difficulties in combining the operations of acquired businesses into our own operations, which may prevent us from
achieving the expected benefits from our acquisition activities.
We
may not be able to fully achieve the strategic objectives and operating efficiencies that we anticipate in our acquisition activities.
Inherent uncertainties exist in integrating the operations of an acquired business. In addition, the markets and industries in
which we and our potential acquisition targets operate are highly competitive. We may lose customers or the customers of acquired
entities as a result of an acquisition. We also may lose key personnel from the acquired entity as a result of an acquisition.
We may not discover all known and unknown factors when examining a company for acquisition during the due diligence period. These
factors could produce unintended and unexpected consequences for us. Undiscovered factors as a result of acquisitions, pursued
by non-related third party entities, could bring civil, criminal, and financial liabilities against us, our management, and the
management of those entities acquired. These factors could contribute to us not achieving the expected benefits from acquisitions
within desired time frames.
New or
acquired banking office facilities and other facilities may not be profitable.
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 non-interest 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.
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Risks Related
to Our Human Capital
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.
Michael
C. Crapps, our president and chief executive officer, has extensive and long-standing ties within our primary market area and
substantial experience with our operations, and he has contributed significantly to our business. If we lose the services of Mr.
Crapps, he would be difficult to replace and our business and development could be materially and adversely affected. Our success
also depends, in part, on our continued ability to attract and retain experienced loan originators, as well as other management
personnel. Competition for personnel is intense, and we may not be successful in attracting or retaining qualified personnel.
Our failure to compete for these personnel, or the loss of the services of several of such key personnel, could adversely affect
our business strategy and materially and adversely affect our business, results of operations, and financial condition.
Operational
Risks
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; 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, plans 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.
30
We
are at risk of increased losses from fraud.
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. The 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.
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 on our
business, financial condition or results of operations.
Negative
public opinion surrounding the 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 the 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, 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.
Legal,
Accounting, Regulatory and Compliance Risks
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. We are subject to Federal Reserve regulation. The Bank is subject to extensive regulation, supervision, and examination
by our primary federal regulator, the FDIC, the regulating authority that insures customer deposits; and by our state regulator,
the S.C. Board. Also, as a member of the Federal Home Loan Bank (the “FHLB”), the 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. The 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.
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.
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Federal,
state and local consumer lending laws may restrict our ability to originate certain mortgage loans or increase our risk of liability
with respect to such loans and could 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. Loans with certain terms and conditions and that otherwise meet
the definition of a “qualified mortgage” may be protected from liability to a borrower for failing to make the necessary
determinations. In either case, we may find it necessary to tighten our mortgage loan underwriting standards in response to the
CFPB rules, which may constrain our ability to make loans consistent with our business strategies. It is our policy not to make
predatory loans and to determine borrowers’ ability to repay, but the law 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 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 CRA 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.
Changes
in accounting standards could materially affect our financial statements.
Our
accounting policies and methods are fundamental to how we record and report our financial condition and results of operations.
From time to time, FASB, the SEC and our bank regulators change the financial accounting and reporting standards, or the interpretation
thereof, and guidance that govern the preparation and disclosure of external financial statements. Such changes are beyond our
control, can be hard to predict and could materially impact how we report and disclose our financial condition and results of
operations. In some cases, we could be required to apply a new or revised standard retrospectively, or apply an existing standard
differently, also retrospectively, which under some circumstances could potentially result in a need to revise or restate prior
period financial statements.
New
accounting standards will likely 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 (the “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