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
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 credit 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.
As economic
conditions relating to the COVID-19 pandemic have improved, 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 though the pandemic has subsided. 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, the war in Ukraine, and the Middle East conflict, 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.
In addition,
during 2023, concerns have arisen with respect to the financial condition of a number of banking organizations in the United States,
in particular those with exposure to certain types of depositors and large portfolios of investment securities. On March 10, 2023,
Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation and the FDIC was appointed
receiver of Silicon Valley Bank. On March 11, 2023, Signature Bank was similarly closed and placed into receivership and concurrently
the Federal Reserve Board announced it will make available additional funding to eligible depository institutions to assist eligible
banking organizations with potential liquidity needs. On May 1, 2023, First Republic Bank was closed and its assets were seized.
Regulatory agencies have closed no further banks with assets greater than $150 million since the closure of First Republic Bank.
While the Company’s business, balance sheet and depositor profile differs substantially from banking institutions that are
the focus of the greatest scrutiny, the operating environment and public trading prices of financial services sector securities
can be highly correlated, in particular in times of stress, which may adversely affect the trading price of the Company’s
common stock and potentially its results of operations.
Credit and Interest Rate
Risk
Our decisions regarding credit
risk and allowance for credit 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:
· credit risks of a particular customer;
· changes in economic and industry conditions; and
We attempt to
maintain an appropriate allowance for credit 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:
· evaluation of economic conditions;
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 credit losses and that additional increases in the allowance for credit losses will be required. Additions to the
allowance for credit losses would result in a decrease of our net income, and possibly our capital.
Federal
and state regulators periodically review our allowance for credit losses and may require us to increase our provision for credit
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 could have a negative effect on our operating results.
We may have higher credit
losses than we have allowed for in our allowance for credit losses.
Our actual credit
losses could exceed our allowance for credit losses. Our average loan size continues to increase and reliance on our historic
allowance for credit losses may not be adequate. As of December 31, 2023, approximately 87.2% of our loan portfolio (excluding
loans held for sale) is composed of construction (10.4%), commercial mortgage (69.9%) and commercial (6.9%) 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, changes
in market conditions affecting the value of loan collateral and problems affecting the credit of our borrowers. If we suffer credit
losses that exceed our allowance for credit losses, our financial condition, liquidity, or results of operations could be materially
and adversely affected.
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, 2023, we had approximately $889.8 million in loans outstanding to borrowers whereby the collateral securing the loan
was commercial real estate, representing approximately 78.5% of our total loans outstanding as of that date. Approximately $273.7
million, or 24.1% of our total loans, and 30.8% 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 credit 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 12.8%, or $100.9 million, since December 31, 2022. The banking regulators give commercial real estate
lending greater scrutiny, and they 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 credit losses and capital levels as a result of commercial real estate lending growth and exposures. We have expertise and
a long history in originating and managing commercial real estate loans. We have a strong credit underwriting process, which includes
management and board oversight. We perform rigorous monitoring, stress testing, and reporting of these portfolios at the management
and board levels, and we continue to monitor the level of the concentration in commercial real estate loans within the Bank’s
loan portfolio monthly.
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 313% of the Bank’s total risk-based capital at December 31,
2023, and our construction and land development loans represented 74% of the Bank’s total risk-based capital at December
31, 2023. Furthermore, our three-year growth in non-owner occupied commercial real estate loans was 47% from December 31, 2020
to December 31, 2023.
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, 2023, commercial business loans comprised 6.9% 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, be difficult to appraise, and 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 credit 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.
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, 2023, approximately $27.5 million of our loans, or 16.6% of the Bank’s
regulatory capital (Tier 1 Capital plus allowance for credit losses), had loan-to-value ratios that exceeded regulatory supervisory
guidelines, of which two loans totaling approximately $559 thousand 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 tier 1 capital plus allowance for credit losses.
At December 31, 2023, $18.7 million of our commercial loans, or 11.3% 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 (i) the period of time over which
the loan may be repaid, (ii) proper loan underwriting and guidelines, (iii) changes in economic and industry conditions, (iv)
the credit risks of individual borrowers, and (v) 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 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, and interest expense
on interest-bearing liabilities, such as deposits and 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 $541.1 million
in 2023, as compared to $570.6 million in 2022. This represents 33.2% and 37.0% of the average earning assets for the years ended
December 31, 2023 and 2022, respectively. At December 31, 2023, the portfolio was 29.6% of earning assets compared to 36.2% of
earning assets at December 31, 2022. 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.
On June 1, 2022,
we reclassified $224.5 million in investments to held-to-maturity (HTM) from available-for-sale (AFS). These securities were transferred
at fair value at the time of the transfer, which became the new cost basis for the securities held to maturity. The pretax unrealized
net holding loss on the available for sale securities on the date of transfer totaled approximately $16.7 million and continued
to be reported as a component of accumulated other comprehensive loss. This net unrealized loss is being amortized to interest
income over the remaining life of the securities as a yield adjustment. There were no gains or losses recognized as a result of
this transfer. The remaining pretax unrealized net holding loss on these investments was $14.0 million ($11.1 million net of tax)
and $15.7 million ($12.4 million net of tax) at December 31, 2023 and 2022, respectively.
During the three
months ended September 2023, we sold $39.9 million of book value U.S. Treasuries in our available-for-sale investment securities
portfolio. While this sale created a one-time pre-tax loss of $1.2 million, it provided additional liquidity which is being used
to pay down borrowings and fund loan growth. The weighted average book yield of the securities sold was 1.75% and the projected
earn back period is 1.6 years. Such measures transition the balance sheet to be more efficient, improves net interest margin,
and positions us for higher earnings in the future.
Our HTM investments
totaled $217.2 million and represented approximately 42.9% of our total investments at December 31, 2023. Our AFS investments
totaled $282.2 million, or approximately 55.8% of our total investments at December 31, 2023. Investments at cost totaled $6.8
million, or approximately 1.3% of our total investments at December 31, 2023. The effective duration on our total investment securities
portfolio was 3.8 at December 31, 2023.
Securities which
have unrealized losses were not considered to be credit loss impaired at December 31, 2023 or “other than temporarily
impaired,” at December 31, 2022 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 adequate 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 our capital.
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 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
Inflationary
pressures and rising prices may affect our results of operations and financial condition.
In
2021 through 2022, inflation rose to levels not seen for over 40 years, reaching 7.0% and 6.5%, respectively. In 2023, the annual
inflation rate decreased to 3.4% but inflationary pressures are currently expected to remain elevated throughout 2024. Inflation
could lead to increased costs to our customers, making it more difficult for them to repay their loans or other obligations increasing
our credit risk. Sustained higher interest rates by the Federal Reserve may be needed to tame persistent inflationary price pressures,
which could push down asset prices and weaken economic activity. A deterioration in economic conditions in the United States and
our markets could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and
a decrease in demand for our products and services, all of which, in turn, would adversely affect our business, financial condition
and results of operations.
The Federal
Reserve has implemented significant economic strategies that have affected interest rates, inflation, asset values, and the shape
of the yield curve.
In
2020, in response to economic disruption associated with the COVID-19 pandemic, the Federal Reserve quickly reduced short-term
rates to extremely low levels and acted to influence the markets to reduce long-term rates as well. During 2021, the Federal Reserve
significantly reduced such “easing” actions that held down long-term rates. During 2022, the Federal Reserve switched
to a tightening policy and raised short term rates significantly and rapidly throughout the year. Those actions triggered a significant
decline in the values of most categories of U.S. stocks and bonds; significantly raised recessionary expectations for the U.S.;
and inverted the yield curve in the U.S. for much of the last two quarters of 2022. Effects on the yield curve often are most
pronounced at the short end of the curve, which is of particular importance to us and other banks. Among other things, easing
strategies are intended to lower interest rates, expand the money supply, and stimulate economic activity, while tightening strategies
are intended to increase interest rates, discourage borrowing, tighten the money supply, and restrain economic activity. However,
in 2022, short term rates rose faster than long term rates to the point that the yield curve inverted for much of the final two
quarters of 2022. This sort of phenomenon-where short term rates rise more strongly and rapidly than long-term rates can follow-is
relatively common.
It
is unclear when long term rates are likely to catch up. Many external factors may interfere with the effects of these plans or
cause them to be changed, sometimes quickly. Such factors include significant economic trends or events as well as significant
international monetary policies and events. These economic strategies have had, and will continue to have, a significant impact
on our business and on many of our customers. As exemplified by the 2023 bank failures in the U.S., such strategies also can affect
the U.S. and world-wide financial systems in ways that may be difficult to predict.
Adverse
developments affecting the financial services industry, such as the 2023 bank failures or concerns involving liquidity, may have
a material adverse effect on our operations.
The high-profile
bank failures in 2023 involving Silicon Valley Bank, Signature Bank, and First Republic Bank caused general uncertainty and concern
regarding the liquidity adequacy of the banking sector. Although we were not directly affected by these bank failures, the resulting
speed and ease in which news, including social media commentary, led depositors to withdraw or attempt to withdraw their funds
from these and other financial institutions, which then caused the stock prices of many financial institutions to become volatile.
Additional bank failures could have an adverse effect on our financial condition and results of operations, either directly or
through an adverse impact on certain of our customers. In response to these bank failures and the resulting market reaction, the
Secretary of the Treasury approved actions enabling the FDIC to complete its resolutions of the failed banks in a manner that
fully protects depositors by utilizing the Deposit Insurance Fund, including the use of Bridge Banks to assume all of the deposit
obligations of the failed banks, while leaving unsecured lenders and equity holders of such institutions exposed to losses. With
the risk of any additional bank failures, we may face the potential for reputational risk, deposit outflows, increased costs and
competition for liquidity, and increased credit risk which, individually or in the aggregate, could have a material adverse effect
on our business, financial condition and results of operations.
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.
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.
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.
We
use brokered deposits which may be an unstable and/or expensive deposit source to fund earning asset growth.
We
use brokered deposits as a source of funding to support our asset growth, to augment deposits generated from our branch network
and to assist in the management of our interest rate risk. We have established policies and procedures with respect to the use
of brokered deposits, which require, among other things, that (i) we limit the amount of brokered deposits as a percentage of
total deposits, and (ii) our Asset/Liability Committee of the board of directors and our board of directors monitor our use of
brokered deposits on a regular basis, including interest rates and the total volume of such deposits in relation to our total
deposits. In the event that our funding strategies call for the use of additional brokered deposits, there can be no assurance
that such sources will be available, or will remain available, or that the cost of such funding sources will be reasonable. Additionally,
if the Bank is no longer considered well capitalized, our ability to access new brokered deposits or retain existing brokered
deposits could be affected by market conditions, regulatory requirements or a combination thereof, which could result in most,
if not all, brokered deposit sources being unavailable. The inability to utilize brokered deposits as a source of funding could
have an adverse effect on our financial position, results of operations and liquidity.
Further,
if, as a result of competitive pressures, market interest rates, alternative investment opportunities that present more attractive
returns to customers, general economic conditions or other events, the balance of our deposits decreases relative to our overall
banking operations, we may need to rely more heavily on wholesale or other sources of external funding, or may have to increase
deposit rates to maintain deposit levels in the future. Any such increased reliance on wholesale funding, or increases in funding
rates in general, could have a negative impact on our net interest income and, consequently, on our results of operations and
financial condition.
Our
ability to obtain brokered deposits as an additional funding source could be limited.
We
had $48.1 million, or 3.2% of total deposits in brokered deposit accounts, at December 31, 2023 and no brokered deposit accounts
at December 31, 2022. We have obtained brokered certificates of deposit when obtaining them allowed us to extend the maturities
of our deposits at favorable rates compared to borrowing funds with similar maturities or when we are seeking to extend the maturities
of our funding to assist in the management of our interest rate risk. Unlike non-brokered certificates of deposit where the deposit
amount can be withdrawn with a penalty for any reason, including increasing interest rates, a brokered certificate of deposit
can only be withdrawn in the event of the death or court declared mental incompetence of the depositor. This allows us to better
manage the maturity of our deposits and our interest rate risk.
The
FDIC has promulgated regulations implementing limitations on brokered deposits. Under the regulations, well capitalized institutions,
such as the Bank, are not subject to brokered deposit limitations, while adequately capitalized institutions are able to accept,
renew or roll over brokered deposits only with a waiver from the FDIC and subject to restrictions on the interest rate that can
be paid on such deposits. Undercapitalized institutions are not permitted to accept brokered deposits. Should our capital ratios
decline, this could limit our ability to replace brokered deposits when they mature. At December 31, 2023, the Bank met or exceeded
all applicable requirements to be deemed “well capitalized” for purposes of these regulations. However, there can
be no assurance that the Bank will continue to meet those requirements. Limitations on the Bank’s ability to accept brokered
deposits for any reason (including regulatory limitations on the amount of brokered deposits in total or as a percentage of total
deposits) in the future could materially adversely impact our funding costs and liquidity.
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,
like we did in York County, South Carolina in 2022, 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. 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.. 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.
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, and Mr. Nissen, the Bank’s president and, effective July 1, 2024,
also the Bank’s chief executive officer, each have extensive and long-standing ties within our primary market area and substantial
experience with our operations, and each has contributed significantly to our business. If we lose the services of Mr. Crapps
or Mr. Nissen, each 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 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, 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, cybersecurity 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.
Our Information Systems May
Experience Failure, Interruption or Breach in Security.
In the ordinary
course of business, we rely on electronic communications and information systems to conduct our operations and to store sensitive
data. Any failure, interruption or breach in security of these systems could result in significant disruption to our operations.
Information security breaches and cybersecurity-related incidents include, but are not limited to, attempts to access information,
including customer and company information, malicious code, computer viruses and denial of service attacks that could result in
unauthorized access, theft, misuse, loss, release or destruction of data (including confidential customer information), account
takeovers, unavailability of service or other events. These types of threats may derive from human error, fraud or malice on the
part of external or internal parties or may result from accidental technological failure. Our technologies, systems, networks
and software have been and continue to be subject to cybersecurity threats and attacks, which range from uncoordinated individual
attempts to sophisticated and targeted measures directed at us. Any failures related to upgrades and maintenance of our technology
and information systems could further increase our information and system security risk. Our increased use of cloud and other
technologies also increases our risk of being subject to a cyber-attack. The risk of a security breach or disruption, particularly
through cyber-attack or cyber-intrusion, has increased as the number, intensity and sophistication of attempted attacks and intrusions
from around the world have increased. Our customers, employees and third parties that we do business with have been, and will
continue to be, targeted by parties using fraudulent emails and other communications in attempts to misappropriate passwords,
bank account information or other personal information or to introduce viruses or other malware programs to our information systems,
the information systems of our merchants or third-party service providers and/or our customers’ personal devices, which
are beyond our security control systems. Though we endeavor to mitigate these threats through product improvements, use of encryption
and authentication technology and customer and employee education, such cyber-attacks against us, our merchants, our third-party
service providers and our customers remain a serious issue.
Although
we make significant efforts to maintain the security and integrity of our information systems and have implemented various measures
to manage the risks of a security breach or disruption, there can be no assurance that our security efforts and measures will
be effective or that attempted security breaches or disruptions would not be successful or damaging. Even well protected information,
networks, systems and facilities remain potentially vulnerable to attempted security breaches or disruptions because the techniques
used in such attempts are constantly evolving and generally are not recognized until launched against a target, and in some cases
are designed not to be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques
or to implement zero risk security barriers or other preventative measures, and thus it is virtually impossible for us to entirely
mitigate this risk. Furthermore, in the event of a cyber-attack, we may be delayed in identifying or responding to the attack,
which could increase the negative impact of the cyber-attack on our business, financial condition and results of operations. While
we maintain specific “cyber” insurance coverage, which would apply in the event of various breach scenarios, the amount
of coverage may not be adequate in any particular case. Furthermore, because cyber threat scenarios are inherently difficult to
predict and can take many forms, some breaches may not be covered under our cyber insurance coverage. A security breach or other
significant disruption of our information systems or those related to our customers, merchants or our third-party vendors, including
as a result of cyber-attacks, could (i) disrupt the proper functioning of our networks and systems and therefore our operations
and/or those of our customers; (ii) result in the unauthorized access to, and destruction, loss, theft, misappropriation
or release of confidential, sensitive or otherwise valuable information of ours or our customers; (iii) result in a violation
of applicable privacy, data breach and other laws, subjecting us to additional regulatory scrutiny and exposing us to civil litigation,
enforcement actions, governmental fines and possible financial liability; (iv) require significant management attention and
resources to remedy the damages that result; or (v) harm our reputation or cause a decrease in the number of customers that
choose to do business with us. The occurrence of any of the foregoing could have a material adverse effect on our business, financial
condition and results of operations.
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 and 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 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, this risk will always be present given the nature of our business.
Legal, Accounting, Regulatory