What changed in this filing

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Item 1. Business

2021-03-02 compared with 2020-03-02 · 335 added, 212 removed, 470 unchanged (54% of the section changed)

Southern First Bancshares, Inc.

(the “Company”) was incorporated in March 1999 under the laws of South Carolina and is a bank holding company registered under the Bank Holding Company Act of 1956.

Our primary business is to serve as the holding company for Southern First Bank (the “Bank”), a South Carolina state bank.

The Bank is a commercial bank with ten retail offices located in the Greenville, Columbia, and Charleston markets of South Carolina, two retail offices in the Raleigh and Greensboro markets of North Carolina and one retail office in Atlanta, Georgia.

The Bank is primarily engaged in the business of accepting demand deposits and savings deposits insured by the Federal Deposit Insurance Corporation (the “FDIC”), and providing commercial, consumer and mortgage loans to the general public.

The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning purposes by management.

(the “Company”) was incorporated in March 1999 under the laws of South Carolina and is a bank holding company registered under the Bank Holding Company Act of 1956.

Our primary business is to serve as the holding company for Southern First Bank (the “Bank”), a South Carolina state bank.

The Bank is a commercial bank with eight retail offices located in the Greenville, Columbia, and Charleston markets of South Carolina, two retail offices in the Raleigh and Greensboro markets of North Carolina and one retail office in Atlanta, Georgia.

As of February 3, 2021, we have obtained approval to open a retail office in the Charlotte, North Carolina market.

The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning purposes by management.

The three segments include Commercial and Retail Banking, Mortgage Banking, and Corporate Operations as described below.

Commercial and Retail Banking.

The Company’s primary business is to provide traditional deposit and lending products and services to its commercial and retail banking clients.

The commercial and retail banking segment is responsible for 219 of the Companys full-time equivalent employees (“FTEs”).

The Company’s primary business is to provide traditional deposit and lending products and services to its commercial and retail banking clients.

The commercial and retail banking segment employs 220 of the Company’s full-time equivalent (“FTE”) employees.

Mortgage Banking.

The mortgage banking segment provides mortgage loan origination services for loans that will be sold in the secondary market to investors and is responsible for 28 FTEs.

The mortgage banking segment provides mortgage loan origination services for loans that will be sold in the secondary market to investors and employs 34 FTE employees.

Corporate Operations.

Corporate operations is comprised primarily of compensation and benefits for certain members of management and interest on parent company debt.

There are no direct employees of corporate operations, however a

portion of the salaries related to executive management and finance are allocated to this segment.

Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” or similar references mean Southern First Bancshares, Inc.

Corporate operations is comprised primarily of compensation and benefits for certain members of management and interest on company debt.

There are no direct employees of corporate operations, however a portion of the salaries related to executive management and finance are allocated to this segment.

Unless the context requires otherwise, references to the “Company,”

“we,”

“us,”

“our,”

or similar references mean Southern First Bancshares, Inc.

and its subsidiaries.

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We operate our Bank using a simple and efficient style of banking that is focused on providing core banking products and services to our clients through a team of talented and experienced bankers.

We refer to this model as “ClientFIRST” and it is structured to deliver superior client service via “relationship teams,” which provide each client with a specific banker contact and a consistent support team responsible for all of the client’s banking needs.

We refer to this model as “ClientFIRST”

and it is structured to deliver superior client service via “relationship teams,”

which provide each client with a specific banker contact and a consistent support team responsible for all of the client’s banking needs.

We believe this model results in a consistent and superior level of professional service that provides us with a distinct competitive advantage by enabling us to build and maintain long-term relationships with desirable clients, enhancing the quality and stability of our funding and lending operations and positioning us to take advantage of future growth opportunities in our existing markets.

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Our ClientFIRST model focuses on achieving cost efficiencies by diligently managing the growth of our number of employees and banking offices.

We have historically insisted that the identification of talented bankers drives our growth strategy, as opposed to a more general desire to enter a specific geography or market.

We believe that the identification of talented bankers will drive our growth strategy, as opposed to a more general desire to enter a specific geography or market.

This strategy translates into a smaller number of brick and mortar offices relative to our size and compared to peer banks, but larger overall deposit balances in our offices as compared to peers.

As a result, our offices average approximately $192.8 million in total deposits.

We believe this style of banking allows us to deliver exceptional client service, while achieving lower efficiency ratios relative to our local competitors, as evidenced by our 54.1% efficiency ratio for the year ended December 31, 2019.

We believe this style of banking allows us to deliver exceptional client service, while achieving lower efficiency ratios relative to certain of our local competitors, as evidenced by our 50.2% efficiency ratio for the year ended December 31, 2020.

We continue to make significant investments in our IT systems and technology offerings to our clients that we believe will continue to drive low-cost deposit growth.

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Attractive South Carolina, North Carolina and Georgia Markets.

We have ten banking offices located in Greenville, Columbia and Charleston, South Carolina, which are the three largest markets in South Carolina, two banking offices located in Raleigh and Greensboro, North Carolina, which are the second and third largest markets in North Carolina, respectively, and one banking office located in Atlanta, Georgia, which is the largest market in Georgia.

The following table illustrates our market share, by insured deposits as of the dates indicated, in these five markets:

Our Market Deposits at

We have eight banking offices located in Greenville, Columbia and Charleston, South Carolina, which are the three largest markets in South Carolina, two banking offices located in Raleigh and Greensboro, North Carolina, which are the second and third largest markets in North Carolina, respectively, and one banking office located in Atlanta, Georgia, which is the largest market in Georgia.

The following table illustrates our market share, by insured deposits as of the dates indicated, in these six markets:

Total Offices

Our Market Deposits at

June 30, 2020

(Dollars in thousands)

Represents the metropolitan statistical area (“MSA”) for each market.

 20,841,299

Represents the metropolitan statistical area (“MSA”) for each market.

The total market deposits data displayed are as of June 30, 2020 as reported by the FDIC.

The city of Greenville is located in Greenville County, South Carolina approximately midway between Atlanta and Charlotte on the heavily traveled I-85 business corridor.

The Greenville-Anderson-Mauldin MSA is the most populous market in South Carolina with an estimated 906,626 residents as reported in 2019.

The median household income for the Greenville-Anderson-Mauldin MSA was $55,790 for 2019.

A large and diverse metropolitan area, the Greenville-Anderson-Mauldin MSA is one of the southeast region’s premier areas for business, serving as headquarters for Michelin and Hubbell Lighting as well as hosting significant operations for BMW and Lockheed Martin.

The Greenville-Anderson MSA is the most populous market in South Carolina with an estimated 920,477 residents as of 2019.

The median household income for the Greenville-Anderson MSA was $55,790 for 2019.

The city of Columbia is located in Richland County, South Carolina and its surrounding suburban areas expand into adjoining Lexington County.

Columbia is the state capital, the largest city in the state and the home of the University of South Carolina and Fort Jackson, the Army’s largest Initial Entry Training Center.

The Columbia MSA is the second most populous market in the state with an estimated population of 833,165 residents as reported in 2019.

Columbia is the state capital, the largest city in the state and the home of the University of South Carolina and Fort Jackson, the Army’s largest Initial Entry Training Center.

The Columbia MSA is the second

most populous market in the state with an estimated population of 838,433 residents as of 2019.

The median household income for the Columbia MSA was $53,765 for 2019.

The city of Charleston is located in Charleston County, South Carolina.

The Charleston-North Charleston MSA is the third most populous market in the state with an estimated population of 787,643 residents as reported in 2019.

The Charleston-North Charleston MSA is the third most populous market in the state with an estimated population of 802,122 residents as of 2019.

Charleston is home to the deepest port in the Southeast and boasts top companies in the aerospace, biomedical and technology fields such as Boeing, the Medical University of South Carolina (MUSC) and Blackbaud.

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The city of Raleigh is the second largest city in the state and is located in Wake County, North Carolina.

The Raleigh MSA is one of the most populous markets in the state of North Carolina with an estimated population of 1.36 million residents as reported in 2019.

The Raleigh-Cary MSA is one of the most populous markets in the state of North Carolina with an estimated population of 1.39 million residents as of 2019.

Raleigh is the state capital and is home to North Carolina State University and is part of the Research Triangle area, together with Durham, North Carolina (home of Duke University) and Chapel Hill, North Carolina (home of the University of North Carolina at Chapel Hill).

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The city of Greensboro is the third largest city in North Carolina and is located in Guilford County.

The Greensboro-High Point MSA has an estimated population of 767,711 residents as reported in 2019.

The Greensboro-High Point MSA has an estimated population of 771,851 residents as of 2019.

Greensboro has traditionally been a fixture in the textiles, tobacco and furniture industries while also moving towards an increased presence of high-tech, aviation and transportation/logistics sectors.

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The median household income for the Greensboro MSA was approximately $50,026 for 2019.

The Atlanta-Sandy Springs-Roswell MSA has the ninth largest population in the U.S.

with 5.95 million residents as reported in 2019.

The Atlanta-Sandy Springs-Alpharetta MSA has the ninth largest population in the U.S.

with 6.02 million residents as of 2019.

Atlanta is the state capital of, and largest city in, Georgia and is the world headquarters of corporations such as Coca-Cola, Home Depot, UPS, Delta Airlines and Turner Broadcasting.

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We believe that the demographics and growth characteristics of these six markets will provide us with significant opportunities to further develop existing client relationships and expand our client base.

In addition, on February 3, 2021, we obtained regulatory approval to open a retail office in the Charlotte, North Carolina market.

The Charlotte-Concord-Gastonia MSA is among the top 25 largest populations in the U.S.

with 2.64 million residents as of 2019.

Charlotte is the largest manufacturing region in the Carolinas and is the second largest financial hub in the country.

Charlotte is also home to many Fortune 500 companies including Duke Energy, Honeywell and Lowe’s.

The median household income for the Charlotte MSA was $69,464 in 2019.

We believe that our entrance into the Charlotte market will provide us with further opportunity to expand our client base.

Experienced Management Team, Dedicated Board of Directors and Talented Employees.

Our senior management team is led by R.

Arthur Seaver, Jr.

and Michael D.

Dowling, whose biographies are included below.

Justin Strickland served as President from 2006 through January 21, 2020, at which time he resigned from his position with the Bank.

Arthur Seaver, Jr., Michael D.

Dowling, Calvin C.

Hurst and Silvia T.

King whose biographies are included below.

These executives lead a team of 23 additional senior team members which we believe compares favorably to any community bank management team assembled in South Carolina.

Arthur “Art” Seaver, Jr .

Arthur “Art”

has served as the Chief Executive Officer of our Company and our Bank since 1999.

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From 1992 until February 1999, he was with Greenville National Bank, which was acquired by Regions Bank in 1998.

He was the Senior Vice President in lending and was also responsible for managing Greenville National Bank’s deposit strategies prior to leaving to form the Bank.

Seaver is a 1986 graduate of Clemson University with a bachelor’s degree in Financial Management and a 1999 graduate of the BAI Graduate School of Community Bank Management.

He was the Senior Vice President in lending and was also responsible for managing Greenville National Bank’s deposit strategies prior to leaving to form the Bank.

Seaver is a 1986 graduate of Clemson University with a bachelor’s degree in Financial Management and a 1999 graduate of the BAI Graduate School of Community Bank Management.

Dowling has served as an Executive Vice President and the Chief Financial Officer of our Company and our Bank since 2011 and as Chief Operating Officer since July 2019.

He has over 25 years of experience in the banking industry.

Dowling was previously employed with KPMG LLP from 1994 until 2011, including most recently as an Audit Partner (2005-2011) and a member of KPMG’s Financial Services practice.

Dowling has extensive experience working with public companies and financial institutions.

He is a 1993 graduate of Clemson University, with a degree in Accounting and is a CPA in South Carolina and North Carolina.

Hurst has served as Chief Banking Officer of our Company and our Bank since March 2019.

Hurst has over 14 years of banking experience.

From 2006 to 2008, Mr.

Hurst served as a commercial underwriter for RBC Bank, and from 2008 to 2015 he served as commercial relationship manager for PNC Bank.

Before joining Southern First, Mr.

Hurst served as regional vice president for TD Bank.

Hurst is a 2005 graduate of Furman University, with a Bachelor’s degree in Business Administration and Economics.

King has served as Chief Human Resources Officer of our Company and our Bank since March 2018.

King has over 17 years of Human Resources leadership experience.

From 2003 to 2006, Ms.

King served in various human resource roles with Monsanto Company and from 2007 to 2009, she served in senior management roles with Select Comfort Corporation.

From 2009 to 2016, Ms.

King served as senior human resources consultant for FGP International, a professional staffing firm in Greenville, South Carolina, and most recently as a human resources instructor with e-Cornell University.

King holds degrees in Psychology and International Marketing from Clemson University and a Master of Human Resources degree from the University of South Carolina.

She has also earned both her Senior Professional in Human Resources through the HR Certification Institute as well as her Senior Certified Professional designations through the Society of Human Resource Management.

In addition to Messrs.

Seaver and Dowling, our executive management team consists of 11 individuals who bring an average of 25 years of experience in the banking industry.

The management team is complemented by a dedicated board of directors with extensive local market knowledge and a wide range of experience including accounting, business, banking, manufacturing, insurance, management and finance.

We believe that our management’s and board’s incentives are closely aligned with our shareholders through the ownership of a substantial amount of our stock.

Seaver, Dowling, and Hurst and Ms.

King, our executive management team consists of nine individuals who bring an average of 29 years of experience in the banking industry.

The management team is complemented by our dedicated board of directors with extensive local market knowledge and a wide range of experience including accounting, business, banking, manufacturing, insurance, management and finance.

We believe that our management’s and board’s incentives are closely aligned with our shareholders through the ownership of a substantial amount of our stock.

As of December 31, 2020, our executive officers and board of directors owned an aggregate of 580,606 shares of our common stock, including options to purchase shares of our common stock, which represented approximately 7.41% of the fully-diluted amount of our common stock outstanding.

We believe that our officers’ and directors’ experience and local market knowledge are valuable assets and will enable them to guide us successfully in the future.

We believe that our officers’

and directors’

experience and local market knowledge are valuable assets and will enable them to guide us successfully in the future.

In addition, we believe that we have assembled a group of highly talented employees by being an employer of choice in the markets we serve.

We employed a total of 242 full-time equivalent employees as of December 31, 2019.

We employed a total of 254 FTE employees as of December 31, 2020.

Our employees are skilled in the areas of banking, information technology, management, sales, advertising and marketing, among others.

We strive to provide an “umbrella for great talent,” characterized by a culture of transparency and collaboration which permeates all levels of the organization.

We strive to provide an “umbrella for great talent,”

characterized by a culture of transparency and collaboration which permeates all levels of the organization.

To drive our culture of transparency and collaboration, our employees engage in a series of weekly meetings to understand the goals and plan for each week.

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We believe that the volume in remote deposit capture and mobile deposit channels will continue to increase over time as more clients become acquainted with the convenience these services provide.

By delivering superior professional service through our ClientFIRST model, coupled with our deep understanding of our markets and our commitment to providing the latest technology solutions to meet our clients’ banking needs, we believe that we can attract new clients and expand our total loans and deposits.

banking needs, we believe that we can attract new clients and expand our total loans and deposits.

Maintain a Rigorous Risk Management Infrastructure.

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We believe our risk management structure allows our board and senior management to maintain effective oversight of our risks to ensure that our personnel are following prudent and appropriate risk management practices resulting in strong loan quality and minimal loan losses.

Attract Talented Banking Professionals With A “ClientFIRST” Focus.

Attract Talented Banking Professionals With A “ClientFIRST”

We believe that our ability to attract and retain banking professionals with strong community relationships and significant knowledge of our markets will continue to drive our success and grow our business in an efficient manner.

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We may choose to open new locations, but only after rigorous due diligence and substantial quantitative analysis regarding the financial and capital impacts of such investments.

We may also choose to enter new metropolitan markets contiguous to, or nearby, our current South Carolina footprint, such as our recently opened expansions in Raleigh and Greensboro, North Carolina and Atlanta, Georgia, but only after careful study and the identification and vetting of a local, senior level banking team with significant experience and reputational strength in that market.

We may also choose to enter new metropolitan markets contiguous to, or nearby, our current South Carolina footprint, such as our recently opened expansions in Greensboro and Charlotte, North Carolina, but only after careful study and the identification and vetting of a local, senior level banking team with significant experience and reputational strength in that market.

We have not yet supplemented our historic strategy of organic deposit and loan growth with traditional mergers or acquisitions.

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Our loan approval policies provide for various levels of officer lending authority.

When the amount of aggregate loans to a single borrower exceeds an individual officer’s lending authority, the loan request will be considered for approval by a team of officers led by a senior lender, or by the voting members of the Credit Approval Support Team (“CAST”) committee, based on the loan amount.

The CAST committee, which is comprised of a group of our senior commercial lenders, chief banking officer, and chief executive officer, has pre-determined lending limits, and any loans in excess of this lending limit will be submitted for approval by the finance committee of our board or by the full board.

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These types of loans are subject to strict underwriting standards and are more closely monitored than a loan with a low loan-to-value ratio.

Furthermore, there are industry practices that could subject us to increased credit risk should economic conditions change over the course of a loan’s life.

For example, we make variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e.

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Our lending activities are subject to a variety of lending limits imposed by federal and state laws and regulations.

In general, the Bank is subject to a legal limit on loans to a single borrower equal to 15% of the Bank’s capital and unimpaired surplus.

Based upon the capitalization of the Bank at December 31, 2020, the maximum amount we could lend to one borrower was $44.7 million.

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The board of directors will adjust the internal lending limit as deemed necessary to continue to mitigate risk and serve our clients.

The Bank’s legal lending limit will increase or decrease in response to increases or decreases in the Bank’s level of capital.

We are able to sell participations in our larger loans to other financial institutions, which allow us to manage the risk involved in these loans and to meet the lending needs of our clients requiring extensions of credit in excess of these limits.

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Real estate loans are subject to the same general risks as other loans and are particularly sensitive to fluctuations in the value of real estate.

Fluctuations in the value of real estate, as well as other factors arising after a loan has been made, could negatively affect a borrower’s cash flow, creditworthiness, and ability to repay the loan.

Although, the loans are collateralized by real estate, the primary source of repayment may not be the sale of real estate.

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Commercial Real Estate Loans (Commercial Owner Occupied and Commercial Non-owner Occupied Real Estate Loans).

At December 31, 2019, commercial owner occupied and non-owner occupied real estate loans (other than construction loans) amounted to $909.7 million, or 46.8% of our loan portfolio.

Of our commercial real estate loan portfolio, $501.9 million in loans were non-owner occupied properties, representing 38.7% of our commercial real estate portfolio and 25.8% of our total loan portfolio.

At December 31, 2020, commercial owner occupied and non-owner occupied real estate loans (other than construction loans) amounted to $1.02 billion, or 47.5% of our loan portfolio.

Of our commercial real estate loan portfolio, $585.3 million in loans were non-owner occupied properties, representing 42.2% of our commercial loan portfolio and 27.3% of our total loan portfolio.

The remainder of our commercial real estate loan portfolio, $433.3 million in loans or 31.2% of the commercial loan portfolio, were owner occupied.

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We attempt to reduce credit risk in the commercial real estate portfolio by emphasizing loans on owner-occupied office and retail buildings where the loan-to-value ratio, established by independent appraisals, does not exceed 85%.

We also generally require that a borrower’s cash flow exceeds 115% of monthly debt service obligations.

In order to ensure secondary sources of payment and liquidity to support a loan request, we typically review all of the personal financial statements of the principal owners and require their personal guarantees.

Construction Real Estate Loans.

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Commercial construction loans generally carry a higher degree of risk than long-term financing of existing properties because repayment depends on the ultimate completion of the project and sometimes on the sale of the property.

Specific risks include:

cost overruns;

mismanaged construction;

inferior or improper construction techniques;

economic changes or downturns during construction;

a downturn in the real estate market;

Specific risks include:  

cost overruns;  

mismanaged construction;  

inferior or improper construction techniques;  

economic changes or downturns during construction;  

a downturn in the real estate market;  

rising interest rates which may prevent sale of the property;

failure to sell completed projects in a timely manner.

and  

failure to sell completed projects in a timely manner.  

We attempt to reduce the risk associated with construction loans by obtaining personal guarantees where possible and by keeping the loan-to-value ratio of the completed project at or below 80%.

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At December 31, 2020, commercial business loans amounted to $307.6 million, or 14.4% of our loan portfolio, and ranged in size from approximately $5,000 to $13.4 million, with an average loan size of approximately $197,000.

Commercial loans are generally considered to have greater risk than first or second mortgages on real estate because commercial loans may be unsecured, or if they are secured, the value of the collateral may be difficult to assess and more likely to decrease than real estate.

We are eligible to offer small business loans utilizing government enhancements such as the Small Business Administration’s (“SBA”) 7(a) program and SBA’s 504 programs.

These loans typically are partially guaranteed by the government, which helps to reduce their risk.

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At December 31, 2020 consumer real estate loans (other than construction loans) amounted to $693.3 million, or 32.4% of our loan portfolio.

Included in the consumer real estate loans was $398.2 million, or 20.5% of our loan portfolio, in first and second mortgages on individuals’ homes, while home equity loans represented $179.7 million, or 9.3% of our total loan portfolio.

Included in the consumer real estate loans was $536.3 million, or 25.0% of our loan portfolio, in first and second mortgages on individuals’

homes, while home equity loans represented $157.0 million, or 7.3% of our total loan portfolio.

At December 31, 2020, our individual residential real estate loans ranged in size from $10,000 to $5.9 million, with an average loan size of approximately $434,000.

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Home equity lines of credit typically have terms of ten years or less.

We generally limit the extension of credit to 90% of the market value of each property, although we may extend up to 100% of the market value.

Other Consumer Loans.

We make a variety of loans to individuals for personal and household purposes, including secured and unsecured installment loans and revolving lines of credit.

These consumer loans are underwritten based on the borrower’s income, current debt level, past credit history, and the availability and value of collateral.

Consumer rates are both fixed and variable, with negotiable terms.

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We typically require monthly payments of interest and a portion of the principal on our revolving loan products.

Consumer loans are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess and more likely to decrease in value than real estate.

Deposit Services

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We believe our commitment to quality and personalized banking services through our ClientFIRST culture is a factor that contributes to our competitiveness and success.

At December 31, 2019, we employed a total of 242 full-time equivalent employees.

We provide our full-term employees and certain part-time employees with a comprehensive program of benefits, including medical benefits, life insurance, long-term disability coverage and a 401(k) plan.

At December 31, 2020, we employed a total of 254 FTE employees.

We provide our full-time employees and certain part-time employees with a comprehensive program of benefits, including medical benefits, life insurance, long-term disability coverage and a 401(k) plan.

Our employees are not represented by a collective bargaining agreement.

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Available Information

We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K with the SEC which are accessible electronically at the SEC’s website at www.sec.gov .

We maintain an Internet website at www.southernfirst.com where these reports can also be accessed free of charge.

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Legislative and Regulatory Developments

Although the financial crisis has now passed, two legislative and regulatory responses – the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the Basel III-based capital rules – will continue to have an impact on our operations.

Although the 2008 financial crisis has now passed, two legislative and regulatory responses –

the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the Basel III-based capital rules –

will continue to have an impact on our operations.

In addition, newer regulatory developments implemented in response to the COVID-19 pandemic, including the CARES Act and the Consolidated Appropriations Act, 2021, which enhanced and expanded certain provisions of the CARES Act, have had and will continue to have an impact on our operations.

The Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Act was signed into law in July 2010 and impacts financial institutions in numerous ways, including:

● The creation of a Financial Stability Oversight Council responsible for monitoring and managing systemic risk,

● Granting additional authority to the Board of Governors of the Federal Reserve (the “Federal Reserve”) to regulate certain types of nonbank financial companies,

● Granting new authority to the FDIC as liquidator and receiver,

● Changing the manner in which deposit insurance assessments are made,

● Requiring regulators to modify capital standards,

● Establishing the Consumer Financial Protection Bureau (the “CFPB”),

● Capping interchange fees that banks charge merchants for debit card transactions,

● Imposing more stringent requirements on mortgage lenders, and

● Limiting banks’ proprietary trading activities.

The creation of a Financial Stability Oversight Council responsible for monitoring and managing systemic risk,  

Granting additional authority to the Board of Governors of the Federal Reserve (the “Federal Reserve”) to regulate certain types of nonbank financial companies,  

Granting new authority to the FDIC as liquidator and receiver,  

Changing the manner in which deposit insurance assessments are made,  

Requiring regulators to modify capital standards,  

Establishing the Consumer Financial Protection Bureau (the “CFPB”),  

Capping interchange fees that banks charge merchants for debit card transactions,  

Imposing more stringent requirements on mortgage lenders, and  

Limiting banks’

proprietary trading activities.  

There are many provisions in the Dodd-Frank Act mandating regulators to adopt new regulations and conduct studies upon which future regulation may be based.

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On May 24, 2018, President Trump signed into law the first major financial services reform bill since the enactment of the Dodd-Frank Act.

The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Reform Law”) modifies or eliminates certain requirements on community and regional banks and nonbank financial institutions.

For instance, under the Reform Act and related rule making:

banks that have less than $10 billion in total consolidated assets and total trading assets and trading liabilities of less than five percent of total consolidated assets from Section 619 of the Dodd-Frank Act, known as the “Volcker Rule”, which prohibits “proprietary trading” and the ownership or sponsorship of private equity or hedge funds that are referred to as “covered funds”;

the asset threshold for bank holding companies to qualify for treatment under the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” was raised from $1 billion to $3 billion, which exempts these institutions (including the Company) from certain regulatory requirements including the Basel III capital rules;

a new “community bank leverage ratio” was adopted, which is applicable to certain banks and bank holding companies with total assets of less than $10 billion (as described below under “Basel Capital Standards”);

banks with up to $3 billion in total consolidated assets may be examined by their federal banking regulator every 18 months (as opposed to every 12 months).

and the ownership or sponsorship of private equity or hedge funds that are referred to as “covered funds”;  

the asset threshold for bank holding companies to qualify for treatment under the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement”

was raised from $1 billion to $3 billion, which exempts these institutions (including the Company) from certain regulatory requirements including the Basel III capital rules;  

a new “community bank leverage ratio”

was adopted, which is applicable to certain banks and bank holding companies with total assets of less than $10 billion (as described below under “Basel Capital Standards”);

and  

banks with up to $3 billion in total consolidated assets may be examined by their federal banking regulator every 18 months (as opposed to every 12 months).  

Basel Capital Standards

Regulatory capital rules adopted in July 2013 and fully phased in as of January 1, 2019, which we refer to as Basel III, impose minimum capital requirements for bank holding companies and banks.

The Basel III rules apply to all national and state banks and savings and loan associations regardless of size and bank holding companies and savings and loan holding companies other than “small bank holding companies,” generally holding companies with consolidated assets of less than $3 billion.

The Company is currently considered a “small bank holding company.” More stringent requirements are imposed on “advanced approaches” banking organizations-those organizations with $250 billion or more in total consolidated assets, $10 billion or more in total foreign exposures, or that have opted in to the Basel II capital regime.

generally holding companies with consolidated assets of less than $3 billion.

The Company is currently considered a “small bank holding company.”

More stringent requirements are imposed on “advanced approaches”

banking organizations-those organizations with $250 billion or more in total consolidated assets, $10 billion or more in total foreign exposures, or that have opted in to the Basel II capital regime.

The rules include certain higher risk-based capital and leverage requirements than those previously in place.

Specifically, the following minimum capital requirements apply to the Bank:

a new common equity Tier 1 (“CET1”) risk-based capital ratio of 4.5%;

a Tier 1 risk-based capital ratio of 6%;

a new common equity Tier 1 (“CET1”) risk-based capital ratio of 4.5%;  

a Tier 1 risk-based capital ratio of 6%;  

a total risk-based capital ratio of 8%;

a leverage ratio of 4%.

and  

a leverage ratio of 4%.  

Under Basel III, Tier 1 capital includes two components:

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We made this opt-out election and, as a result, retained our pre-existing treatment for AOCI.

In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, under Basel III, a banking organization must maintain a “capital conservation buffer” on top of its minimum risk-based capital requirements.

on top of its minimum risk-based capital requirements.

This buffer must consist solely of CET1 capital, but the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital).

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In November 2019, the federal banking regulators published final rules under the Reform Law (discussed above) implementing a simplified measure of capital adequacy for certain banking organizations that have less than $10 billion in total consolidated assets.

Under the final rules, which went into effect on January 1, 2020, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%, off-balance-sheet exposures of 25% or less of total consolidated assets and trading assets plus trading liabilities of 5% or less of total consolidated assets, are deemed “qualifying community banking organizations” and are eligible to opt into the “community bank leverage ratio framework.” A qualifying community banking organization that elects to use the community bank leverage ratio framework and that maintains a leverage ratio of greater than 9% is considered to have satisfied the generally applicable risk-based and leverage capital requirements under the Basel III rules and, if applicable, is considered to have met the “well capitalized” ratio requirements for purposes of its primary federal regulator’s prompt corrective action rules, discussed below.

The final rules include a two-quarter grace period during which a qualifying community banking organization that temporarily fails to meet any of the qualifying criteria, including the greater-than-9% leverage capital ratio requirement, is generally still deemed “well capitalized” so long as the banking organization maintains a leverage capital ratio greater than 8%.

and are eligible to opt into the “community bank leverage ratio framework.”

A qualifying community banking organization that elects to use the community bank leverage ratio framework and that maintains a leverage ratio of greater than 9% is considered to have satisfied the generally applicable risk-based and leverage capital requirements under the Basel III rules and, if applicable, is considered to have met the “well capitalized”

ratio requirements for purposes of its primary federal regulator’s prompt corrective action rules, discussed below.

so long as the banking organization maintains a leverage capital ratio greater than 8%.

A banking organization that fails to maintain a leverage capital ratio greater than 8% is not permitted to use the grace period and must comply with the generally applicable requirements under the Basel III rules and file the appropriate regulatory reports.

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As of December 31, 2020, the Bank was well-capitalized, as defined by FDIC regulations.

As of December 31, 2019, the Company had regulatory capital in excess of the Federal Reserve’s requirements and met the Basel III rule requirements to be well-capitalized.

As of December 31, 2020, the Company had regulatory capital in excess of the Federal Reserve’s requirements and met the Basel III rule requirements to be well-capitalized.

The CARES Act and Initiatives Related to COVID-19

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was signed into law.

The CARES Act provided for approximately $2.2 trillion in direct economic relief in response to the public health and economic impacts of COVID-19.

Many of the CARES Act’s programs are, and remain, dependent upon the direct involvement of financial institutions like the Bank.

These programs have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S.

Department of Treasury, the Federal Reserve and other federal bank regulatory authorities, including those with direct supervisory jurisdiction over the Company and the Bank.

Furthermore, as the COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, life cycle, and eligibility requirements for the various CARES Act programs, as well as industry-specific recovery procedures for COVID-19.

In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including amendments to the CARES Act or new bills comparable in scope to the CARES Act.

The Company continues to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic.

Paycheck Protection Program

A principal provision of the CARES Act amended the SBA’s loan program to create a guaranteed, unsecured loan program, the Paycheck Protection Program, or PPP, to fund operational costs of eligible businesses, organizations and self-employed persons impacted by COVID-19.

These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA.

Additionally, loan payments will also be deferred for the first six months of the loan term.

The PPP commenced on April 3, 2020 and was available to qualified borrowers through August 8, 2020.

No collateral or personal guarantees were required.

On December 27, 2020, the President signed into law omnibus federal spending and economic stimulus legislation titled the “Consolidated Appropriations Act, 2021”

that included the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “HHSB Act”).

Among other things, the HHSB Act renewed the PPP, allocating $284.45 billion for both new first time PPP loans under the existing PPP and the expansion of existing PPP loans for certain qualified, existing PPP borrowers.

In addition to extending and amending the PPP, the HHSB Act also creates a new grant program for “shuttered venue operators.”

While we were a participating lender in the PPP in 2020, we sold our PPP loan portfolio in the second quarter of 2020.

Troubled Debt Restructurings and Loan Modifications for Affected Borrowers

The CARES Act, as extended by certain provisions of the Consolidated Appropriations Act, 2021, permits banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that may otherwise be characterized as troubled debt restructurings and suspend any determination related thereto if (i) the borrower was not more than 30 days past due as of December 31, 2019, (ii) the modifications are related to COVID-19, and (iii) the modification occurs between March 1, 2020 and the earlier of 60 days after the date of termination of the national emergency or January 1, 2022.

Federal bank regulatory authorities also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19.

Main Street Lending Program

The CARES Act encouraged the Federal Reserve, in coordination with the Secretary of the Treasury, to establish or implement various programs to help mid-size businesses, nonprofit organizations, and municipalities.

On April 9, 2020, the Federal Reserve proposed the creation of the Main Street Lending Program (the “MSLP”) to implement certain of these recommendations.

The MSLP supported lending to small- and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic.

The MSLP, which expired on January 8, 2021, operated through three facilities:

the Main Street New Loan Facility, the Main Street Priority Loan Facility, and the Main Street Expanded Loan Facility.

We did not participate as a lender under the MSLP.

Proposed Legislation and Regulatory Action

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Southern First Bancshares, Inc.

We own 100% of the outstanding capital stock of the Bank, and therefore we are considered to be a bank holding company under the federal Bank Holding Company Act of 1956 (the “Bank Holding Company Act”).

As a result, we are primarily subject to the supervision, examination and reporting requirements of the Federal Reserve under the Bank Holding Company Act and its regulations promulgated thereunder.

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Under the Bank Holding Company Act, a bank holding company is generally permitted to engage in, or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in, the following activities:

banking or managing or controlling banks;

furnishing services to or performing services for our subsidiaries;

any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking.

and  

any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking.  

Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of banking include:

factoring accounts receivable;

making, acquiring, brokering or servicing loans and usual related activities;

leasing personal or real property;

operating a non-bank depository institution, such as a savings association;

trust company functions;

financial and investment advisory activities;

factoring accounts receivable;  

making, acquiring, brokering or servicing loans and usual related activities;  

leasing personal or real property;  

operating a non-bank depository institution, such as a savings association;  

trust company functions;  

financial and investment advisory activities;  

conducting discount securities brokerage activities;

underwriting and dealing in government obligations and money market instruments;

providing specified management consulting and counseling activities;

performing selected data processing services and support services;

underwriting and dealing in government obligations and money market instruments;  

providing specified management consulting and counseling activities;  

performing selected data processing services and support services;  

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

performing selected insurance underwriting activities.

As a bank holding company we also can elect to be treated as a “financial holding company,” which would allow us to engage in a broader array of activities.

and  

performing selected insurance underwriting activities.  

As a bank holding company we also can elect to be treated as a “financial holding company,”

which would allow us to engage in a broader array of activities.

In summary, a financial holding company can engage in activities that are financial in nature or incidental or complimentary to financial activities, including insurance underwriting, sales and brokerage activities, providing financial and investment advisory services, underwriting services and limited merchant banking activities.

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If we were to elect financial holding company status, each insured depository institution we control would have to be well capitalized, well managed and have at least a satisfactory rating under the Community Reinvestment Act as discussed below.

The Federal Reserve has the authority to order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the Bank holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness or stability of it or any of its bank subsidiaries.

Change in Control .

Two statutes, the Bank Holding Company Act and the Change in Bank Control Act, together with regulations promulgated under them, require some form of regulatory review before any company may acquire “control” of a bank or a bank holding company.

of a bank or a bank holding company.

Under the Bank Holding Company Act, control is deemed to exist if a company acquires 25% or more of any class of voting securities of a bank holding company;

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or exercises a controlling influence over the management or policies of a bank or bank holding company.

In guidance issued in 2008, the Federal Reserve has stated that it would not expect control to exist if a person acquires, in aggregate, less than 33% of the total equity of a bank or bank holding company (voting and nonvoting equity), provided such person’s ownership does not include 15% or more of any class of voting securities.

Prior Federal Reserve approval is necessary before an entity acquires sufficient control to become a bank holding company.

Natural persons, certain non-business trusts, and other entities are not treated as companies (or bank holding companies), and their acquisitions are not subject to review under the Bank Holding Company Act.

On January 30, 2020, the Federal Reserve issued a final rule (which became effective September 30, 2020) that clarified and codified the Federal Reserve’s standards for determining whether one company has control over another.

The final rule established four categories of tiered presumptions of noncontrol that are based on the percentage of voting shares held by the investor (less than 5%, 5-9.9%, 10-14.9% and 15-24.9%) and the presence of other indicia of control.

As the percentage of ownership increases, fewer indicia of control are permitted without falling outside of the presumption of noncontrol.

These indicia of control include nonvoting equity ownership, director representation, management interlocks, business relationship and restrictive contractual covenants.

Under the final rule, investors can hold up to 24.9% of the voting securities and up to 33% of the total equity of a company without necessarily having a controlling influence.

State laws generally, including South Carolina law, require state approval before an acquirer may become the holding company of a state bank.

Under the Change in Bank Control Act, a person or company is required to file a notice with the Federal Reserve if it will, as a result of the transaction, own or control 10% or more of any class of voting securities or direct the management or policies of a bank or bank holding company and either if the bank or bank holding company has registered securities or if the acquirer would be the largest holder of that class of voting securities after the acquisition.

For a change in control at the holding company level, both the Federal Reserve and the subsidiary bank's primary federal regulator must approve the change in control;

at the bank level, only the bank's primary federal regulator is involved.

For a change in control at the holding company level, both the Federal Reserve and the subsidiary bank's primary federal regulator must approve the change in control;

at the bank level, only the bank's primary federal regulator is involved.

Transactions subject to the Bank Holding Company Act are exempt from Change in Control Act requirements.

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Under a policy of the Federal Reserve, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy.

Under the Federal Deposit Insurance Corporation Improvement Act of 1991, to avoid receivership of its insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become “undercapitalized” within the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the institution’s total assets at the time the institution became undercapitalized, or (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan.

The Federal Reserve also has the authority under the Bank Holding Company Act to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company.

Further, federal law grants federal bank regulatory authorities’ additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution's financial condition.

In addition, the “cross guarantee” provisions of the Federal Deposit Insurance Act (the “FDIA”) require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the FDIC as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default.

The FDIC’s claim for damages is superior to claims of shareholders of the insured depository institution or its holding company, but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions.

within the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the institution’s total assets at the time the institution became undercapitalized, or (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan.

Further, federal law grants federal bank regulatory authorities’

additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution's financial condition.

In addition, the “cross guarantee”

provisions of the Federal Deposit Insurance Act (the “FDIA”) require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the FDIC as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default.

The FDIA also provides that amounts received from the liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit liabilities of the institution prior to payment of any other general or unsecured senior liability, subordinated liability, general creditor or shareholder.

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Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank.

In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Capital Requirements.

The Federal Reserve imposes certain capital requirements on the bank holding company under the Bank Holding Company Act, including a minimum leverage ratio and a minimum ratio of “qualifying” capital to risk-weighted assets.

These requirements are essentially the same as those that apply to the Bank and are described above under “Basel III Capital Standards.” However, because the Company currently qualifies as a small bank holding company, these capital requirements do not currently apply to the Company.

The Federal Reserve imposes certain capital requirements on the bank holding company under the Bank Holding Company Act, including a minimum leverage ratio and a minimum ratio of “qualifying”

capital to risk-weighted assets.

These requirements are essentially the same as those that apply to the Bank and are described above under “Basel III Capital Standards.”

However, because the Company currently qualifies as a small bank holding company, these capital requirements do not currently apply to the Company.

Subject to certain restrictions, we are able to borrow money to make a capital contribution to the Bank, and these loans may be repaid from dividends paid from the Bank to the Company.

Our ability to pay dividends depends on, among other things, the Bank’s ability to pay dividends to us, which is subject to regulatory restrictions as described below in “Southern First Bank—Dividends.”

We are also able to raise capital for contribution to the Bank by issuing securities without having to receive regulatory approval, subject to compliance with federal and state securities laws.

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The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies.

In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition.

The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary.

Further, under the prompt corrective action regulations, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized.

These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions.

In addition, since the Company is a legal entity separate and distinct from the Bank and does not conduct stand-alone operations, its ability to pay dividends depends on the ability of the Bank to pay dividends to it, which is also subject to regulatory restrictions as described below in “Southern First Bank – Dividends.”

Dividends.”

South Carolina State Regulation.

As a South Carolina bank holding company under the South Carolina Banking and Branching Efficiency Act, we are subject to limitations on sale or merger and to regulation by the South Carolina Board of Financial Institutions (the “S.C.

Board”).

We are not required to obtain the approval of the S.C.

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We must receive the S.C.

Board’s approval prior to engaging in the acquisition of a South Carolina state chartered bank or another South Carolina bank holding company.

Southern First Bank

As a South Carolina bank, deposits in the Bank are insured by the FDIC up to a maximum amount, which is currently $250,000 per depositor.

Board and the FDIC regulate or monitor virtually all areas of the Bank’s operations, including;

security devices and procedures;

adequacy of capitalization and loss reserves;

issuances of securities;

payment of dividends;

interest rates payable on deposits;

interest rates or fees chargeable on loans;

establishment of branches;

corporate reorganizations;

Board and the FDIC regulate or monitor virtually all areas of the Bank’s operations, including;

security devices and procedures;  

adequacy of capitalization and loss reserves;  

loans;  

investments;  

borrowings;  

deposits;  

mergers;  

issuances of securities;  

payment of dividends;  

interest rates payable on deposits;  

interest rates or fees chargeable on loans;  

establishment of branches;  

corporate reorganizations;  

maintenance of books and records;

adequacy of staff training to carry on safe lending and deposit gathering practices.

These agencies, and the federal and state laws applicable to the Bank’s operations, extensively regulate various aspects of our banking business, including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits, the maintenance of reserves on demand deposit liabilities, and the safety and soundness of our banking practices.

and  

adequacy of staff training to carry on safe lending and deposit gathering practices.  

All insured institutions must undergo regular on-site examinations by their appropriate banking agency.

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The FDIC and the other federal banking regulatory agencies also have issued standards for all insured depository institutions relating, among other things, to the following:

internal controls;

information systems and audit systems;

loan documentation;

credit underwriting;

internal controls;  

information systems and audit systems;  

loan documentation;  

credit underwriting;  

interest rate risk exposure;

asset quality.

and  

asset quality.  

Prompt Corrective Action.

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Under these regulations, the categories are:

Well Capitalized — The institution exceeds the required minimum level for each relevant capital measure.

Well Capitalized —

The institution exceeds the required minimum level for each relevant capital measure.

A well-capitalized institution (i) has a total risk-based capital ratio of 10% or greater, (ii) has a Tier 1 risk-based capital ratio of 8% or greater, (iii) has a common equity Tier 1 risk-based capital ratio of 6.5% or greater, (iv) has a leverage capital ratio of 5% or greater, and (v) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure.

Adequately Capitalized — The institution meets the required minimum level for each relevant capital measure.

Adequately Capitalized —

The institution meets the required minimum level for each relevant capital measure.

No capital distribution may be made that would result in the institution becoming undercapitalized.

An adequately capitalized institution (i) has a total risk-based capital ratio of 8% or greater, (ii) has a Tier 1 risk-based capital ratio of 6% or greater, (iii) has a common equity Tier 1 risk-based capital ratio of 4.5% or greater, and (iv) has a leverage capital ratio of 4% or greater.

Undercapitalized — The institution fails to meet the required minimum level for any relevant capital measure.

An undercapitalized institution (i) has a total risk-based capital ratio of less than 8%, (ii) has a Tier 1 risk-based capital ratio of less than 6%, (iii) has a common equity Tier 1 risk-based capital ratio of less than 4.5% or greater, or (iv) has a leverage capital ratio of less than 4%.

Significantly Undercapitalized — The institution is significantly below the required minimum level for any relevant capital measure.

A significantly undercapitalized institution (i) has a total risk-based capital ratio of less than 6%, (ii) has a Tier 1 risk-based capital ratio of less than 4%, (iii) has a common equity Tier 1 risk-based capital ratio of less than 3% or greater, or (iv) has a leverage capital ratio of less than 3%.

Critically Undercapitalized — The institution fails to meet a critical capital level set by the appropriate federal banking agency.

A critically undercapitalized institution has a ratio of tangible equity to total assets that is equal to or less than 2%.

Undercapitalized —

The institution fails to meet the required minimum level for any relevant capital measure.

Significantly Undercapitalized —

The institution is significantly below the required minimum level for any relevant capital measure.

Critically Undercapitalized —

The institution fails to meet a critical capital level set by the appropriate federal banking agency.

A critically undercapitalized institution has a ratio of tangible equity to total assets that is equal to or less than 2%.  

Effective with the March 31, 2020 Call Report, qualifying community banking organizations that elect to use the new community bank leverage ratio framework and that maintain a leverage ratio of greater than 9.0% will be considered to have satisfied the risk-based and leverage capital requirements to be deemed well-capitalized.

We do not have any immediate plans to elect to use the community bank leverage ratio framework but may make such an election in the future.

If the FDIC determines, after notice and an opportunity for hearing, that the Bank is in an unsafe or unsound condition, the regulator is authorized to reclassify the Bank to the next lower capital category (other than critically undercapitalized) and require the submission of a plan to correct the unsafe or unsound condition.

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Even if approved, rate restrictions will govern the rate a bank may pay on brokered deposits.

In addition, a bank that is not well capitalized cannot offer an effective yield in excess of 75 basis points over interest paid on deposits of comparable size and maturity in such institution’s normal market area for deposits accepted from within its normal market area, or national rate paid on deposits of comparable size and maturity for deposits accepted outside the bank’s normal market area.

Moreover, the FDIC generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be categorized as undercapitalized.

Undercapitalized institutions are subject to growth limitations (an undercapitalized institution may not acquire another institution, establish additional branch offices or engage in any new line of business unless determined by the appropriate federal banking agency to be consistent with an accepted capital restoration plan, or unless the FDIC determines that the proposed action will further the purpose of prompt corrective action) and are required to submit a capital restoration plan.

The agencies may not accept a capital restoration plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital.

In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with the capital restoration plan.

The aggregate liability of the parent holding company is limited to the lesser of an amount equal to 5.0% of the depository institution’s total assets at the time it became categorized as undercapitalized or the amount that is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan.

In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with the capital restoration plan.

If a depository institution fails to submit an acceptable plan, it is categorized as significantly undercapitalized.

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Thus, if payment of such a management fee or the making of such would cause a bank to become undercapitalized, it could not pay a management fee or dividend to the bank holding company.

As of December 31, 2019, the Bank was deemed to be “well capitalized.”

As of December 31, 2020, the Bank was deemed to be “well capitalized.”

Standards for Safety and Soundness.

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Insurance of Accounts and Regulation by the FDIC.

The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC.

The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks to $250,000 per account.

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As an FDIC-insured bank, the Bank must pay deposit insurance assessments to the FDIC based on its average total assets minus its average tangible equity.

The Bank’s assessment rates are currently based on its risk classification (i.e., the level of risk it poses to the FDIC’s deposit insurance fund).

Institutions classified as higher risk pay assessments at higher rates than institutions that pose a lower risk.

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Assessment rates are expected to decrease if the reserve ratio increases such that it exceeds 2%.

In addition, FDIC insured institutions were required to pay a Financing Corporation (“FICO”) assessment to fund the interest on bonds issued to resolve thrift failures in the 1980s, which expired between 2017 and 2019.

The final FICO assessment was collected in March 2019.

The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

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If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC.

Management is not aware of any practice, condition or violation that might lead to termination of the Bank’s deposit insurance.

Transactions with Affiliates and Insiders.

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The Company and the Bank are subject to Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W.

Section 23A of the Federal Reserve Act places limits on the amount of loans or extensions of credit by a bank to any affiliate, including its holding company, and on a bank’s investments in, or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or obligations of any affiliates of the bank.

Section 23A also applies to derivative transactions, repurchase agreements and securities lending and borrowing transactions that cause a bank to have credit exposure to an affiliate.

The aggregate of all covered transactions is limited in amount, as to any one affiliate, to 10% of the Bank’s capital and surplus and, as to all affiliates combined, to 20% of the Bank’s capital and surplus.

Furthermore, within the foregoing limitations as to amount, each covered transaction must meet specified collateral requirements.

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Section 23B of the Federal Reserve Act, among other things, prohibits an institution from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

If there are no comparable transactions, a bank’s (or one of its subsidiaries’) affiliate transaction must be on terms and under circumstances, including credit standards, that in good faith would be offered to, or would apply to, nonaffiliated companies.

These requirements apply to all transactions subject to Section 23A as well as to certain other transactions.

The affiliates of a bank include any holding company of the bank, any other company under common control with the bank (including any company controlled by the same shareholders who control the bank), any subsidiary of the bank that is itself a bank, any company in which the majority of the directors or trustees also constitute a majority of the directors or trustees of the bank or holding company of the bank, any company sponsored and advised on a contractual basis by the bank or an affiliate, and any mutual fund advised by a bank or any of the bank’s affiliates.

Regulation W generally excludes all non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the Federal Reserve decides to treat these subsidiaries as affiliates.

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Any extension of credit to an insider (i) must be made on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with unrelated third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable features.

On December 27, 2019, the federal banking agencies issued an interagency statement explaining that such agencies will provide temporary relief from enforcement action against banks or asset managers, which become principal shareholders of banks, with respect to certain extensions of credit by banks that otherwise would violate Regulation O, provided the asset managers and banks satisfy certain conditions designed to ensure that there is a lack of control by the asset manager over the bank.

This temporary relief will apply while the Federal Reserve, in consultation with the other federal banking agencies, considers whether to amend Regulation O.

The Company’s principal source of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from the Bank.

Statutory and regulatory limitations apply to the Bank’s payment of dividends to the Company.

On December 22, 2020, the federal banking agencies issued an interagency statement extending the temporary relief from enforcement action against banks or asset managers, which become principal shareholders of banks, with respect to certain extensions of credit by banks that otherwise would violate Regulation O, provided the asset managers and banks satisfy certain conditions designed to ensure that there is a lack of control by the asset manager over the bank.

This temporary relief will apply until January 1, 2022, unless amended or extended, while the Federal Reserve, in consultation with the other federal banking agencies, considers whether to amend Regulation O.

The Company’s principal source of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from the Bank.

Statutory and regulatory limitations apply to the Bank’s payment of dividends to the Company.

As a South Carolina chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay.

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Community Reinvestment Act.

The Community Reinvestment Act (“CRA”) requires that the FDIC evaluate the record of the Bank in meeting the credit needs of its local community, including low and moderate income neighborhoods.

These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility.

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On February 12, 2018, the date of the most recent examination report, the Bank received a satisfactory CRA rating.

The Gramm Leach Bliley Act (the “GLBA”) made various changes to the CRA.

Among other changes, CRA agreements with private parties must be disclosed and annual CRA reports must be made available to a bank’s primary federal regulator.

The Gramm Leach Bliley Act (the “GLBA”) made various changes to the CRA.

Among other changes, CRA agreements with private parties must be disclosed and annual CRA reports must be made available to a bank’s primary federal regulator.

A bank holding company will not be permitted to become a financial holding company and no new activities authorized under the GLBA may be commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a satisfactory CRA rating in its latest CRA examination.

In December 2019, the FDIC and the Office of the Comptroller of the Currency proposed changes to the regulations implementing the CRA, which, if adopted will result in changes to the current CRA framework.

The Federal Reserve did not join the proposal.

In December 2019, the FDIC and the Office of the Comptroller of the Currency (“OCC”) proposed changes to the regulations implementing the CRA, which, if adopted will result in changes to the current CRA framework.

On May 20, 2020 the OCC issued a final rule to strengthen and modernize its existing CRA framework.

The Federal Reserve did not join the proposal, but instead issued its own proposed rules in September 2020.

Neither the FDIC nor the Federal Reserve have finalized their CRA proposals at this time.

Consumer Protection Regulations.

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Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates.

The Bank’s loan operations are also subject to federal laws applicable to credit transactions, such as:

The Dodd-Frank Act that created the CFPB within the Federal Reserve Board, which has broad rulemaking authority over a wide range of consumer laws that apply to all insured depository institutions;

the Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

the Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

the Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit Transactions Act, governing the use and provision of information to credit reporting agencies, certain identity theft protections, and certain credit and other disclosures;

The Bank’s loan operations are also subject to federal laws applicable to credit transactions, such as:

The Dodd-Frank Act that created the CFPB within the Federal Reserve Board, which has broad rulemaking authority over a wide range of consumer laws that apply to all insured depository institutions;  

the Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;  

the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;  

the Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

and  

the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.  

The deposit operations of the Bank also are subject to:

the Federal Deposit Insurance Act, which, among other things, limits the amount of deposit insurance available per account to $250,000 and imposes other limits on deposit-taking;

the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

the Electronic Funds Transfer Act and Regulation E, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

The Check Clearing for the 21 st Century Act (also known as “Check 21”), which gives “substitute check,” such as digital images and copies made from that image, the same legal standing as the original paper check;

the Truth in Savings Act and Regulation DD, which requires depository institutions to provide disclosures so that consumers can make meaningful comparisons about depository institutions and accounts.

the Federal Deposit Insurance Act, which, among other things, limits the amount of deposit insurance available per account to $250,000 and imposes other limits on deposit-taking;  

the Electronic Funds Transfer Act and Regulation E, which governs automatic deposits to and withdrawals from deposit accounts and customers’

rights and liabilities arising from the use of automated teller machines and other electronic banking services;  

The Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute check,”

such as digital images and copies made from that image, the same legal standing as the original paper check;

and  

the Truth in Savings Act and Regulation DD, which requires depository institutions to provide disclosures so that consumers can make meaningful comparisons about depository institutions and accounts.  

Anti-Money Laundering.

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and testing of the program by an independent audit function.

The Company and the Bank are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and “knowing your customer” in their dealings with foreign financial institutions and foreign customers.

in their dealings with foreign financial institutions and foreign customers.

Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and recent laws provide law enforcement authorities with increased access to financial information maintained by banks.

Anti-money laundering obligations have been substantially strengthened as a result of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (which we refer to as the “USA PATRIOT Act”).

Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications.

The regulatory authorities have been active in imposing “cease and desist” orders and money penalty sanctions against institutions that have not complied with these requirements.

The regulatory authorities have been active in imposing “cease and desist”

orders and money penalty sanctions against institutions that have not complied with these requirements.

USA PATRIOT Act.

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(ii) rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering;

(iii) reports by nonfinancial trades and businesses filed with the Treasury Department’s Financial Crimes Enforcement Network for transactions exceeding $10,000;

and (iv) filing suspicious activities reports by brokers and dealers if they believe a customer may be violating U.S.

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Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications.

Under the USA PATRIOT Act, the Financial Crimes Enforcement Network (“FinCEN”) can send our banking regulatory agencies lists of the names of persons suspected of involvement in terrorist activities.

The Bank can be requested, to search its records for any relationships or transactions with persons on those lists.

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The Office of Foreign Assets Control.

The Office of Foreign Assets Control (“OFAC”), which is a division of the U.S.

Treasury, is responsible for helping to insure that U.S.

entities do not engage in transactions with “enemies” of the U.S., as defined by various Executive Orders and Acts of Congress.

entities do not engage in transactions with “enemies”

of the U.S., as defined by various Executive Orders and Acts of Congress.

OFAC has sent, and will send, our banking regulatory agencies lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts.

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Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers.

It is the Bank’s policy not to disclose any personal information unless required by law.

Recent cyberattacks against banks and other institutions that resulted in unauthorized access to confidential customer information have prompted the Federal banking agencies to issue several warnings and extensive guidance on cyber security.

The agencies are likely to devote more resources to this part of their safety and soundness examination than they have in the past.

In addition, pursuant to the Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”) and the implementing regulations of the federal banking agencies and Federal Trade Commission, the Bank is required to have in place an “identity theft red flags” program to detect, prevent and mitigate identity theft.

program to detect, prevent and mitigate identity theft.

The Bank has implemented an identity theft red flags program designed to meet the requirements of the FACT Act and the joint final rules.

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Federal Home Loan Bank System.

The Bank is a member of the Federal Home Loan Bank ("FHLB") of Atlanta, which is one of 12 regional FHLBs that administer home financing credit for depository institutions.

Each FHLB serves as a reserve or central bank for its members within its assigned region.

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government and its agencies.

The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession.

The monetary policies of the Federal Reserve have major effects upon the levels of bank loans, investments and deposits through its open market operations in U.S.

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It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.

On August 1, 2019, September 19, 2019 and October 31, 2019, the Federal Open Market Committee decreased the federal funds target rate by 25 basis points, as expected from the previous year.

Further changes may occur in 2020, but, if so, there is no announced timetable.

In response to the COVID-19 pandemic, on March 3, 2020, the Federal Open Market Committee (“FOMC”) reduced the targeted federal funds interest rate range by 50 basis points to 1.00% to 1.25%.

On March 15, 2020, the FOMC again lowered the federal funds rate to a target range of 0.0% to 0.25%.

Incentive Compensation.

The Dodd-Frank Act requires the federal bank regulators and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities having at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer, employee, director or principal stockholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity.

The Dodd-Frank Act requires the federal bank regulators and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities having at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity.

In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements.

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A final rule had not been adopted as of December 31, 2020.

In June 2010, the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency issued a comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking.

The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements.

In June 2010, the Federal Reserve, the FDIC and the OCC issued a comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking.

These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements.

The findings of the supervisory initiatives will be included in reports of examination.

Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions.

Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

In addition, the Tax Cuts and Jobs Act (the “Tax Act”), which was signed into law in December 2017, contains certain provisions affecting performance-based compensation.

Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions.

In addition, the Tax Cuts and Jobs Act (the “Tax Act”), which was signed into law in December 2017, contains certain provisions affecting performance-based compensation.

Specifically, the pre-existing exception to the $1 million deduction limitation applicable to performance-based compensation was repealed.

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A concentration in commercial real estate is one example of regulatory concern.

The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance (“CRE Guidance”) provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny:

(i) commercial real estate loans exceeding 300% of capital and increasing 50% or more in the preceding three years or (ii) construction and land development loans exceeding 100% of capital.

The CRE Guidance does not limit banks’ levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations.

The CRE Guidance does not limit banks’

levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations.

On December 18, 2015, the federal banking agencies issued a statement to reinforce prudent risk-management practices related to commercial real estate lending, having observed substantial growth in many commercial real estate asset and lending markets, increased competitive pressures, rising commercial real estate concentrations in banks, and an easing of commercial real estate underwriting standards.

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In addition, FDIC-insured institutions must maintain capital commensurate with the level and nature of their commercial real estate concentration risk.

Based on the Bank’s loan portfolio as of December 31, 2018, it did not exceed the 300% and 100% guidelines for commercial real estate loans.

Based on the Bank’s loan portfolio as of December 31, 2020, it did not exceed the 300% and 100% guidelines for commercial real estate loans.

The Bank will continue to monitor its portfolio to manage this increased risk.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business