Item 1. Business
Item 1. Business
General
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 (the “BHCA”). 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, three retail offices in the Raleigh, Greensboro, and Charlotte markets of North Carolina
and one retail office in Atlanta, Georgia. In addition, we opened our Dream Mortgage Center, a loan production office, located in Columbia,
South Carolina during 2023.
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.
Unless the context requires otherwise, references to
the “Company,” “we,” “us,” “our,” or similar references mean Southern First Bancshares,
Inc. and its subsidiaries.
Our Competitive Strengths
We believe that the following business strengths have
been instrumental to the success of our core operations. We believe these attributes will enable us to continue profitable growth, while
remaining fundamentally sound and driving value to our shareholders.
Simple and Efficient ClientFIRST Model.
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 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. We also believe that this client focused culture has led to our successful expansion
into new markets in the past, and will enable us to be successful if we seek to expand into new markets in the future.
Our ClientFIRST model focuses on achieving cost efficiencies
by diligently managing the growth of our number of employees and banking offices. 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 $240.5 million in total deposits. 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 73.5% efficiency ratio for the year ended December 31, 2024.
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. We believe that our
current mobile banking, on-line banking and cash management offerings are industry-leading solutions amongst community banks, and we plan
to continue to invest in the latest technology solutions to enable us to meet the evolving needs of our clients and maintain this competitive
advantage over other community banks.
Attractive South Carolina, North Carolina, and
Georgia Markets. We have eight banking offices located in Greenville, Columbia and Charleston, South Carolina, which are the three
largest markets in South Carolina; three banking offices located in Charlotte, Raleigh and Greensboro, North Carolina, which are the three
largest markets in North Carolina; 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 seven markets:
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Market (1)
Total Offices
Our Market Deposits at
June 30, 2024
Total Market
Deposits (2)
(Dollars in thousands)
Greenville
4
$ 1,793,261
$ 25,853,933
Charleston
3
595,162
21,601,456
Columbia
1
318,530
27,815,655
Atlanta
1
423,760
236,728,095
Raleigh
1
186,582
93,740,594
Greensboro
1
105,580
16,839,786
Charlotte
1
54,815
457,313,881
(1) Represents the metropolitan statistical area (“MSA”) for each market.
(2) The total market deposits data displayed are as of June 30, 2024 as reported by the FDIC.
Greenville. 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 MSA is the most populous market in South Carolina with an estimated population of 975,480 as reported for 2023.
The median household income for the Greenville-Anderson-Mauldin MSA was $69,413 for 2023. A large and diverse metropolitan area, the Greenville-Anderson
MSA is one of the southeast region’s premier areas for business, serving as headquarters for Michelin and Current Lighting (formerly
Hubbell Lighting) as well as hosting significant operations for BMW and Lockheed Martin.
Charleston . 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 849,417 for 2023. 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. The median household income for the
Charleston-North Charleston MSA was approximately $85,165 for 2023. One of our retail offices in the Charleston market is located in the
city of Mount Pleasant, which is located just north of Charleston in Charleston County and ranks as the fourth largest city in South Carolina.
Columbia . 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 856,889 for 2023. The
median household income for the Columbia MSA was $67,189 for 2023.
Raleigh . The city of Raleigh is the second largest
city in the state of North Carolina and is located in Wake County, North Carolina. The Raleigh-Cary MSA is one of the most populous markets
in the state with an estimated population of 1.51 million for 2023. 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). The median household income for the Raleigh-Cary MSA was approximately $96,096
for 2023.
Greensboro . The city of Greensboro is the third
largest city in North Carolina and is located in Guilford County, North Carolina. The Greensboro-High Point MSA is one of the most populous
markets in the state of North Carolina with an estimated population of 789,842 for 2023. 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. Greensboro, along with Winston-Salem and High Point, is commonly referred to as the Triad region of North Carolina and is home
to companies such as Honda Aircraft, Lincoln Financial Group and Volvo Trucks of North America. The median household income for the Greensboro-High
Point MSA was approximately $63,280 for 2023.
Charlotte . The city of Charlotte is the largest
city in the state and is located in Mecklenburg County, North Carolina. The Charlotte-Concord-Gastonia MSA is the most populous market
in the state of North Carolina with an estimated population of 2.81 million for 2023. Charlotte is the second largest banking city in
the United States after New York and is home to the corporate headquarters of Bank of America, Truist Financial, and the east coast headquarters
of Wells Fargo. Charlotte is also home to many Fortune 500 companies including Duke Energy, Honeywell and Lowe’s. The median household
income for the Charlotte-Concord-Gastonia MSA was approximately $81,262 for 2023.
Atlanta . The Atlanta-Sandy Springs-Alpharetta
MSA has the eighth largest population in the U.S. estimated at 6.31 million for 2023. Atlanta is the state capital of, and largest city
in, Georgia and is the world headquarters of corporations such as
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Coca-Cola, Home Depot, UPS, Delta Airlines and Turner
Broadcasting. The median household income for the Atlanta-Sandy Springs-Alpharetta MSA is $86,505 for 2023.
We believe that the demographics and growth characteristics
of these seven markets will provide us with significant opportunities to further develop existing client relationships and expand our
client base.
Data related to the estimated population and median
household income for each of the markets presented above is from the Federal Reserve Economic Data (“FRED”) online database.
Experienced Management Team, Dedicated Board
of Directors and Talented Employees. Our senior management team is led by R. Arthur Seaver, Jr., Calvin C. Hurst, Christian J.
Zych, William M. Aiken, Silvia T. King, and Julie A. Fairchild, and whose biographies are included below. These executives lead a team
of 28 additional senior team members which we believe compares favorably to any community bank management team assembled in South Carolina.
R. Arthur “Art” Seaver, Jr . has
served as the Chief Executive Officer of our Company and our Bank since 1999. He has over 35 years of banking experience. From 1986 until
1992, Mr. Seaver held various positions with The Citizens & Southern National Bank of South Carolina. 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. Mr. 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.
Calvin C. Hurst has served as Chief Banking
Officer of our Company and our Bank since March 2019 and as President since August 2022. Mr. Hurst has over 15 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. Mr. Hurst is a 2005 graduate
of Furman University, with a Bachelor’s degree in Business Administration and Economics.
Christian J. Zych has served as Chief Financial
Officer of our Company and our Bank since May 2024. He has 30 years of experience in the banking industry. Mr. Zych is a highly accomplished
leader with a proven track record of financial management and analysis, formulation and execution of corporate and financial strategy,
and investor relations management. Mr. Zych holds a Master of Business Administration from Wake Forest University School of Business and
a bachelor’s degree in finance from Bentley University.
William M. Aiken, III has served as a Senior
Executive Vice President and Chief Risk officer of our Company and our Bank since 2021 and previously served as an executive credit risk
officer since 2020. He has over 25 years in the banking industry. Mr. Aiken has served in various roles at several banks during
his career including most recently as a Chief Commercial Credit officer at a regional bank. He is a 1996 graduate of Clemson University,
with a degree in Financial Management.
Silvia T. King has served as Chief Human Resources
Officer of our Company and our Bank since March 2018. Ms. King has over 20 years of Human Resources leadership experience. From 2003 to
2009, Ms. King served in various human resource and senior management roles with Monsanto Company and 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. Ms. King holds degrees in Psychology and
International Marketing from Clemson University and a Master of Human Resources degree from the University of South Carolina.
Julie A. Fairchild has served as Chief Accounting
Officer and principal accounting officer of our Company and our Bank since October 2024. Ms. Fairchild joined the bank in 2005, serving
in various roles, most recently as Executive Vice President of Accounting and Finance. Prior to joining the Bank, Ms. Fairchild served
as audit manager for Elliott Davis LLC, a regional public accounting and consulting firm. Ms. Fairchild holds a Bachelor of Science degree
in accounting from Bob Jones University and is a certified public accountant in the State of South Carolina.
In addition to Messrs. Seaver, Hurst, Zych, Aiken,
Mses. King and Fairchild, our executive management team consists of 14 individuals who bring an average of 30 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
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ownership of a substantial amount of our stock. As
of December 31, 2024, our executive officers and board of directors owned an aggregate of 643,642 shares of our common stock, including
options to purchase shares of our common stock, which represented approximately 7.93% 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.
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 297 FTE employees as of December
31, 2024. 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. 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. These meetings are intended to remind our employees of our vision,
strategy and ClientFIRST service, and provide our employees with information regarding monthly and quarterly goals and client or prospect
needs. In addition, each week is started with a meeting of all Executive Vice Presidents so that all team members are informed on the
latest developments of our Company. Our employees and their ClientFIRST approach to service have been instrumental to our success.
Our Business Strategy
We are focused on growing business relationships and
building core deposits, profitable loans and noninterest income. We believe that we have built a dynamic franchise that meets the financial
needs of our clients by providing an array of personalized products and services delivered by seasoned banking professionals with knowledge
of our local markets. Our overall strategic goal is to provide the highest level of service to our clients while achieving high-performance
metrics within the community banking market that drive franchise and shareholder value. Our specific business strategies include:
Focus on Profitable and Efficient Growth.
Our executive management team and board of directors are dedicated to producing profits and returns for our shareholders. We actively
manage the mix of assets and liabilities on our balance sheet to optimize our net interest margin while also maintaining expense controls
and developing noninterest income streams. By continually striving to build a well-structured balance sheet, we seek to increase profitability
and improve our return on average assets, return on average equity and efficiency ratio. We believe that, as the economy continues to
improve, our focus on maximizing our net interest margin and minimizing our efficiency ratio while maintaining credit quality controls
will translate into continued and improved profitability and shareholder returns. We are committed to enhancing these levels of profitability
by focusing on our core competencies of commercial lending and core deposit gathering. We believe that we have the infrastructure currently
in place, such as technology, support staff and administration, to support expansion with limited associated noninterest expense increases.
Provide a Distinctive Client Experience.
Our markets have been subject to consolidation of local community banks primarily by larger, out-of-state financial institutions. We believe
there is a large client base in our markets that prefers doing business with a local institution and may be dissatisfied with the service
offered by national and larger regional banks. We believe that the exceptional level of professional service provided to our clients as
a result of our ClientFIRST model provides us with a distinct competitive advantage over our local competitors. We also believe that technology
innovation will continue to play a critical role in retaining clients and winning new business. We believe that our current mobile banking,
on-line banking and cash management offerings are industry-leading solutions amongst community banks. During 2024, 38% of deposits were
acquired through our office network, 44% came through the commercial remote deposit capture channel and the remaining 17% came through
consumer mobile deposits. 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.
Maintain a Rigorous Risk Management Infrastructure.
As we grow, one of our top priorities is to continue to build a robust enterprise risk management infrastructure. We believe effective
risk management requires a culture of risk management and governance throughout the Company. The legislative and regulatory landscape
continues to quickly evolve, so we are continually performing risk assessments throughout the organization and re-allocating resources
where appropriate. We will continue to add new resources and technology investments to help enhance all of our risk management processes
throughout the Bank. Our risk management success is exemplified by our historic credit risk management and disciplined underwriting practices,
which have enabled us to successfully grow our balance sheet while maintaining strong credit quality metrics. We do not reduce our credit
standards or pricing discipline to generate new loans. In addition, we are heavily focused on compliance risk and cybersecurity risk,
as both of these risks have increased since our inception. Our management team continually analyzes emerging fraud and security risks
and utilizes tools,
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strategies and policies to manage risk while delivering
an optimal and appropriate client experience. 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 credit losses.
Attract Talented Banking Professionals With A
“ClientFIRST” Focus. 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.
By focusing on experienced, established bankers who deliver exceptional client service through our ClientFIRST model, we believe we can
enhance our market position and add profitable growth opportunities. We believe that the strength of our exceptional client service and
relationship banking approach will continue to help us attract these established bankers. We have carefully invested in our internal infrastructure,
including support and back office personnel, and we believe that we can continue to add experienced frontline bankers to our existing
markets, which will drive our efficient growth.
We will continue to expand our franchise, but only
in a controlled manner and as permitted by our regulators. 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 seek 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 and receipt of any applicable regulatory approvals. We have not yet supplemented our
historic strategy of organic deposit and loan growth with traditional mergers or acquisitions. We evaluate potential acquisition opportunities
that we believe would be complementary to our business as part of our growth strategy. However, we have not yet identified any specific
acquisition opportunity that meets our strict requirements and do not have any immediate plans, arrangements or understandings relating
to any acquisition. Furthermore, we do not believe an acquisition is necessary to successfully drive our growth and execute our ClientFIRST
model.
Lending Activities
General. We offer a full complement of loan
services to businesses and individuals. This includes commercial, real estate, and consumer loans. Our underwriting standards vary for
each type of loan, as described below. Because loans typically provide higher interest yields than other types of interest-earning assets,
we invest a substantial percentage of our earning assets in our loan portfolio. At December 31, 2024, we had net loans of $3.59 billion,
representing 87.9% of our total assets.
We focus our lending to businesses and individuals
that reside in the markets that we serve. By focusing on this client base and by serving each client with a consistent relationship team
of bankers, we have generated a loan portfolio with larger average loan amounts than we believe is typical for a community bank. As of
December 31, 2024, our average loan size was approximately $375,000. At the same time, we have strived to maintain a diversified loan
portfolio and limit the amount of our loans to any single client. As of December 31, 2024, our ten largest client loan relationships represented
approximately $289.0 million, or 7.95%, of our loan portfolio.
In October 2023, we announced the opening of the Dream
Mortgage Center in Columbia, South Carolina. The Dream Mortgage Center is a loan production center designed to create space for opportunities
for homebuyer education, community events, and mortgage lending experts equipped with a variety of loan products.
Loan Approval . Certain credit risks are inherent
in making loans. These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting
from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers. We attempt to mitigate repayment
risks by adhering to internal credit policies and procedures. These policies and procedures include officer and client lending limits,
a multi-layered approval process for larger loans, documentation examination, and follow-up procedures for any exceptions to credit policies.
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, senior credit administrators, chief risk officer,
president, and chief executive officer, has pre-determined lending limits, and any loans in excess of this lending limit will be submitted
for approval by our full board. We do not make any loans to any director or executive officer of the Bank unless the loan is approved
by the board of directors of the Bank and all loans to directors, officers and employees are on terms not more favorable to such person
than would be available to a person not affiliated with the Bank, consistent with federal banking regulations.
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Management monitors exposure to credit risk from potential
concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, as well as concentrations of
lending products and practices such as loans that subject borrowers to substantial payment increases (e.g., principal deferral periods,
loans with initial interest-only periods, etc.), and loans with high loan-to-value ratios. 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. balloon
payment loans). The various types of loans are individually underwritten and monitored to manage the associated risks.
Credit Administration and Loan Review . We maintain
a continuous loan review system. We also apply a credit grading system to each loan, and we use an independent process to review the loan
files on a test basis to assess the grading of each loan. We periodically review performance benchmarks established by management in the
areas of nonperforming assets, charge-offs, past dues, and loan documentation. Each loan officer is responsible for each loan he or she
makes, regardless of whether other individuals or committees joined in the approval. This responsibility continues until the loan is repaid
or until the loan is officially assigned to another officer.
Lending Limits. 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, 2024, the maximum amount we could lend to one borrower was $60.4 million. However, to mitigate concentration risk, our
internal lending limit at December 31, 2024 was $42.3 million and may vary based on our assessment of the lending relationship. 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.
Loan Portfolio Segments. Our loan portfolio
is comprised of commercial and consumer loans made to small businesses and individuals for various business and personal purposes. While
our loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers, the principal component
of our loan portfolio is loans secured by real estate mortgages on either commercial or residential property. These loans will generally
fall into one of the following six categories: commercial owner occupied real estate, commercial non-owner occupied real estate, commercial
construction, consumer real estate, consumer construction, and home equity loans. We obtain a security interest in real estate whenever
possible, in addition to any other available collateral, in order to increase the likelihood of the ultimate repayment of the loan. At
December 31, 2024, loans secured by first or second mortgages on commercial and consumer real estate made up approximately 83.5% of our
loan portfolio. In addition to loans secured by real estate, our loan portfolio includes commercial business loans and other consumer
loans which comprised 15.3% and 1.2%, respectively, of our total loan portfolio at December 31, 2024.
Interest rates for all real estate loan categories
may be fixed or adjustable, and will more likely be fixed for shorter-term loans. We generally charge an origination fee for each loan
which is taken into income over the life of the loan as an adjustment to the loan yield. Other loan fees consist primarily of late charge
fees. 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.
The following describes the types of loans in our loan
portfolio.
· Commercial Real Estate Loans (Commercial Owner
Occupied and Commercial Non-owner Occupied Real Estate Loans). At December 31, 2024, commercial owner occupied and non-owner occupied
real estate loans (other than construction loans) amounted to $1.58 billion, or 43.4% of our loan portfolio. Of our commercial real estate
loan portfolio, $924.4 million in loans were non-owner occupied properties, representing 41.4% of our commercial loan portfolio and 25.5%
of our total loan portfolio. The remainder of our commercial real estate loan portfolio, $651.6 million in loans or 29.2% of the commercial
loan portfolio, were owner occupied. Owner occupied loans represented 17.9% of our total loan portfolio. At December 31, 2024, our individual
commercial real estate loans ranged in size from approximately $15,000 to $21.0 million, with an average loan size of approximately $871,000.
These loans generally have terms of five years or less, although payments may be structured on a longer amortization basis. We evaluate
each borrower on an individual basis and attempt to determine the business risks and credit profile of each borrower. We attempt to reduce
credit risk in the
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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. As of December 31,
2024, $214.0 million, or 5.9% of our total loan portfolio, was collateralized by office properties, $170.6 million, or 4.7%, was collateralized
by retail properties, $125.6 million, or 3.5%, was collateralized by hotels, and $96.7 million, or 2.7% was collateralized by multifamily
properties. In order to seek 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. We offer adjustable
and fixed rate construction real estate loans for commercial and consumer projects, typically to builders and developers and to consumers
who wish to build their own homes. At December 31, 2024, total commercial and consumer construction loans amounted to $124.1 million,
or 3.4% of our loan portfolio. Commercial construction loans represented $103.2 million, or 2.8%, of our total loan portfolio, while consumer
construction loans represented $20.9 million, or 0.6% of our total loan portfolio. At December 31, 2024, our commercial construction real
estate loans ranged in size from approximately $3,000 to $13.9 million, with an average loan balance of approximately $2.2 million. At
December 31, 2024, our consumer or residential construction loans ranged in size from approximately $8,000 to $3.1 million, with an average
loan size of approximately $580,000. The duration of our construction loans generally is limited to 18 months, although payments may be
structured on a longer amortization basis. 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;
· rising interest rates which may prevent sale of
the property; 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%.
· Commercial Business Loans.
We make loans for commercial purposes in various lines of businesses, including the manufacturing, service industry, and professional
service areas. At December 31, 2024, commercial business loans amounted to $556.1 million, or 15.3% of our loan portfolio, and ranged
in size from approximately $1,000 to $21.0 million, with an average loan size of approximately $287,000. 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. Government guarantees of
SBA loans do not exceed, and are generally less than, 80% of the loan. As of December 31, 2024, we had originated ten loans utilizing
government enhancements and over 35 loans engaged in state-based small business partnerships.
· Consumer Real Estate Loans
and Home Equity Loans. At December 31, 2024 consumer real estate loans (other than construction loans) amounted to $1.33 billion,
or 36.7% of our loan portfolio. Included in the consumer real estate loans was $1.13 billion, or 31.1% of our loan portfolio, in first
and second mortgages on individuals’ homes, while home equity loans represented $204.9 million, or 5.6% of our total loan portfolio.
At December 31, 2024, our individual residential real estate loans ranged in size from $5,000 to $5.3 million, with an average loan size
of approximately $469,000. Generally, we limit the loan-to-value ratio on our consumer real estate loans to 85%. We offer fixed and adjustable
rate consumer real estate loans with terms of up to 30 years. We also offer home equity lines of credit. At December 31, 2024, our individual
home equity lines of credit ranged in size from $1,000 to $1.8 million, with an average of approximately $93,000. Our underwriting criteria
and the risks associated with home equity loans and lines of credit are generally the same as those for first mortgage loans. 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.
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· 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. At December 31, 2024,
consumer loans other than real estate amounted to $42.1 million, or 1.2% of our loan portfolio, and ranged in size from $1,000 to $17.1
million, with an average loan size of approximately $33,000. Our installment loans typically amortize over periods up to 60 months. We
will offer consumer loans with a single maturity date when a specific source of repayment is available. 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
Our principal source of funds is core deposits. We
offer a full range of deposit services, including checking accounts, commercial checking accounts, savings accounts, and other time deposits
of various types, ranging from daily money market accounts to long-term certificates of deposit. At December 31, 2024, we had $550.3 million
in out-of-market, or wholesale, certificates of deposits. In an effort to obtain lower cost deposits, we have focused on expanding our
retail deposit program. We currently have 12 retail offices which assist us in obtaining low cost transaction accounts that are less affected
by rising rates. Deposit rates are reviewed regularly by our senior management. We believe that the rates we offer are competitive with
those offered by other financial institutions in our area. We focus on client service and our ClientFIRST culture to attract and retain
deposits.
Other Banking Services
In addition to deposit and loan services, we offer
other bank services such as internet banking, cash management, safe deposit boxes, direct deposit, automatic drafts, bill payment and
mobile banking services. We earn fees for most of these services, including debit and credit card transactions, sales of checks, and wire
transfers. We also receive ATM transaction fees from transactions performed by our non-clients. We are associated with the NYCE, Pulse,
STAR, and Cirrus networks, which are available to our clients throughout the country. Since we outsource our ATM services, we are charged
related transaction fees from our ATM service provider. We have contracted with Fidelity National Information Systems, an outside computer
service company, to provide our core data processing services and our ATM processing. By outsourcing these services, we believe we are
able to reduce our overhead by matching the expense in each period to the transaction volume that occurs during the period, as a significant
portion of the fee charged is directly related to the number of loan and deposit accounts and the related number of transactions we have
during the period. We believe that by being associated with a shared network of ATMs, we are better able to serve our clients and are
able to attract clients who are accustomed to the convenience of using ATMs, although we do not believe that maintaining this association
is critical to our success. We also offer purchasing cards to our business clients which are designed for business expenses and procurement
purposes.
Competition
The banking business is highly competitive, and we
experience competition in our market from many other financial institutions. Competition among financial institutions is based upon interest
rates offered on deposit accounts, interest rates charged on loans, other credit and service charges relating to loans, the quality and
scope of the services rendered, the convenience of banking facilities, and, in the case of loans to commercial borrowers, relative lending
limits. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies,
securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, national,
and international financial institutions that operate offices in Greenville, Columbia and Charleston, South Carolina; Charlotte, Raleigh
and Greensboro, North Carolina; Atlanta, Georgia and elsewhere.
As of June 30, 2024, the most recent date for which
market data is available, there were 40 financial institutions in our primary market of Greenville County, 27 financial institutions in
the Columbia market, 36 financial institutions in the Charleston and Raleigh markets, 25 financial institutions in the Greensboro market,
50 financial institutions in the Charlotte market, and 81 financial institutions in the Atlanta market. We compete with other financial
institutions in our market areas both in attracting deposits and in making loans. In addition, we have to attract our client base from
other existing financial institutions and from new residents. Many of our competitors are well-established, larger financial institutions
with substantially greater resources and lending limits, such as, Bank of America, Wells Fargo, and Truist. These institutions offer some
services, such as extensive and established branch networks and trust services that we do not provide. In addition, many of our non-bank
competitors are not subject to the same extensive federal regulations that
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govern bank holding companies and federally insured
banks. We believe the financial services industry will likely continue to become more competitive as further technological advances enable
more financial institutions to provide expanded financial services without having a physical presence in our markets. Because larger competitors
have advantages in attracting business from larger corporations, we do not generally compete for that business. Instead, we concentrate
our efforts on attracting the business of individuals and small and medium-size businesses. With regard to such accounts, we generally
compete on the basis of client service and responsiveness to client needs, the convenience of our offices and hours, and the availability
and pricing of our products and services.
We believe our commitment to quality and personalized
banking services through our ClientFIRST culture is a factor that contributes to our competitiveness and success.
Employees
At December 31, 2024, we employed a total of 297 full-time
equivalent 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. Management considers its employee relations to be excellent.
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. No information contained on our website is intended to be included as part of, or incorporated by
reference into, this Annual Report on Form 10-K.
SUPERVISION AND REGULATION
Both the Company and the Bank are subject to extensive
state and federal banking laws and regulations that impose specific requirements or restrictions on and provide for general regulatory
oversight of virtually all aspects of our operations. These laws and regulations are generally intended to protect depositors, not shareholders.
Changes in applicable laws or regulations may have a material effect on our business and prospects.
The following discussion is not intended to be a complete
list of all the activities regulated by the banking laws or of the impact of such laws and regulations on our operations. It is intended
only to briefly summarize some material provisions. The following summary is qualified by reference to the statutory and regulatory provisions
discussed.
Legislative and Regulatory Developments
Two legislative and regulatory responses to the 2008
financial crisis – the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the Basel
III-based capital rules –continue to have an impact on our operations.
In addition, newer regulatory developments implemented
in response to the COVID-19 pandemic and the bank failures in 2023 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.
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There are many provisions in the Dodd-Frank Act mandating
regulators to adopt new regulations and conduct studies upon which future regulation may be based. While some have been issued, many remain
to be issued. Governmental intervention and new regulations could materially and adversely affect our business, financial condition and
results of operations.
The Economic Growth, Regulatory Relief, and Consumer
Protection Act
On May 24, 2018, 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”) modified or eliminated 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 is excluded 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 from certain regulatory requirements including the Basel III
capital rules;
· a “community bank leverage
ratio” was adopted, which is applicable to certain banks and bank holding companies with total assets of less than $10 billion (as
described below under “Basel Capital Standards”); and
· banks with up to $3 billion in
total consolidated assets may be examined by their federal banking regulator every 18 months (as opposed to every 12 months).
Basel Capital Standards
Regulatory capital rules known as Basel III impose
minimum capital requirements for bank holding companies and banks. The Basel III rules apply to all national and state banks and savings
and loan associations regardless of size and bank holding companies and savings and loan holding companies other than “small bank
holding companies,” generally holding companies with consolidated assets of less than $3 billion. More stringent requirements are
imposed on “advanced approaches” banking organizations-those organizations with $250 billion or more in total consolidated
assets, $10 billion or more in total foreign exposures, or that have opted into the Basel II capital regime.
The Basel III rules require the Company and the Bank
to maintain the following minimum capital requirements:
· a common equity Tier 1 (“CET1”)
risk-based capital ratio of 4.5%;
· a Tier 1 risk-based capital ratio
of 6%;
· a total risk-based capital ratio
of 8%; and
· a leverage ratio of 4%.
Under Basel III, Tier 1 capital includes two
components: CET1 capital and additional Tier 1 capital. The highest form of capital, CET1 capital, consists solely of common stock (plus
related surplus), retained earnings, accumulated other comprehensive income, otherwise referred to as AOCI, and limited amounts of minority
interests that are in the form of common stock. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred
stock, Tier 1 minority interests and grandfathered trust preferred securities (as discussed below). Tier 2 capital generally includes
the allowance for credit losses up to 1.25% of risk-weighted assets, qualifying preferred stock, subordinated debt and qualifying tier
2 minority interests, less any deductions in Tier 2 instruments of an unconsolidated financial institution. Cumulative perpetual preferred
stock is included only in Tier 2 capital, except that the Basel III rules permit bank holding companies with less than $15 billion in
total consolidated assets to continue to include trust preferred securities and cumulative perpetual preferred stock issued before May
19, 2010 in Tier 1 Capital (but not in CET1 capital), subject to certain restrictions. AOCI is presumptively included in CET1 capital
and often would operate to reduce this category of capital. When implemented, Basel III provided a one-time opportunity at the end of
the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI. We made this opt-out election
and, as a result, retained our pre-existing treatment for AOCI.
In addition, in order to avoid restrictions
on capital distributions or discretionary bonus payments to executives, under Basel III, a banking organization must maintain a 2.5% “capital
conservation buffer” on top of its minimum risk-based capital requirements. This buffer must consist solely of CET1 capital, but
the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital). The 2.5% capital conservation buffer
effectively results in the following minimum capital ratios (taking into account the capital conservation buffer): (i) a CET1 capital
ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%.
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Proposed new rules for U.S. implementation of capital
requirements under Basel IV rules, more recently referred to as the “Basel III Endgame”, were issued by the U.S. federal banking
agencies on July 27, 2023. These proposed rules include broad-based changes to the risk-weighting framework for various credit exposures
and operational risk capital requirements. However, the proposed rules generally apply only to large banking organizations with total
assets of $100 billion or more, and are expected to not be applicable to us. Recent regulatory developments have introduced uncertainty
regarding the implementation of the Basel III Endgame rules. Changes in leadership and evolving policy priorities within regulatory agencies
have led to speculation about potential delays or modifications to the final rulemaking process.
As part of its response to the impact of the COVID-19
pandemic, in the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provided banking organizations
that adopted the credit impairment model, the Current Expected Credit Loss, or CECL, during the 2020 calendar year with the option to
delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred
loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during
the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2022, we did
not elect to utilize the five-year CECL transition.
In November 2019, the federal banking regulators published
final rules under the Reform Law (discussed above) implementing a simplified measure of capital adequacy for certain banking organizations
that have less than $10 billion in total consolidated assets. Under the final rules, which went into effect on January 1, 2020, depository
institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other
qualifying criteria, including a leverage ratio of greater than 9%, off-balance-sheet exposures of 25% or less of total consolidated assets
and trading assets plus trading liabilities of 5% or less of total consolidated assets, are deemed “qualifying community banking
organizations” and are eligible to opt into the “community bank leverage ratio framework.” A qualifying community banking
organization that elects to use the community bank leverage ratio framework and that maintains a leverage ratio of greater than 9% is
considered to have satisfied the generally applicable risk-based and leverage capital requirements under the Basel III rules and, if applicable,
is considered to have met the “well capitalized” ratio requirements for purposes of its primary federal regulator’s
prompt corrective action rules, discussed below. We do not have any immediate plans to elect to use the community bank leverage ratio
framework but may make such an election in the future.
As of December 31, 2024, the Bank was well-capitalized,
as defined by FDIC regulations. As of December 31, 2024, the Company had regulatory capital in excess of the Federal Reserve’s requirements
and met the Basel III rule requirements to be well-capitalized.
Acquisition Activity
The primary purpose of a bank holding company is to
control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding
company or any acquisition by a bank holding company of another bank or bank holding company. In addition, the prior approval of the FDIC
is required for a bank to merge with another bank or purchase the assets or assume the deposits of another bank. In determining whether
to approve a proposed bank acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on competition,
the public benefits expected to be received from the acquisition, the projected capital ratios and levels on a post-acquisition basis,
and the acquiring institution’s record of addressing the credit needs of the communities it serves, including the needs of low and
moderate income neighborhoods, consistent with the safe and sound operation of the bank, under the Community Reinvestment Act (“CRA”).
On July 9, 2021, President Biden issued an Executive
Order on Promoting Competition in the American Economy. Among other initiatives, the Executive Order encouraged the federal banking agencies
to review their current merger oversight practices under the BHCA and the Bank Merger Act and adopt a plan for revitalization of such
practices. In December 2021, the U.S. Department of Justice (“DOJ”) (in consultation with the Federal Reserve, the Office
of the Comptroller of the Currency (the “OCC”), and FDIC announced that it was seeking additional public comments on whether
and how the DOJ should revise the 1995 Bank Merger Competitive Review Guidelines. The comment period closed on February 15, 2022. In March
2022, the FDIC published a Request for Information seeking information and comments regarding the laws, practices, rules, regulations,
guidance, and statements of policy that apply to merger transactions involving one or more insured depository institutions, including
the merger between an insured depository institution and a noninsured institution. In a May 2022 speech, the acting head of the OCC announced
that he had asked his staff to work with DOJ and other federal banking agencies to review the agency’s frameworks to analyze bank
mergers. In May 2022, the CFPB announced the establishment of an Office of Competition and Innovation.
On September 17, 2024, the FDIC approved a final Statement
of Policy on Bank Merger Transactions, updating its approach to evaluating bank mergers under the Bank Merger Act. The new policy emphasizes
a principles-based
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evaluation, focusing on factors such as the effect
of the transaction on competition, financial stability, and the convenience and needs of the community to be served. The OCC concurrently
approved a final rule updating its regulations for business combinations involving national banks and federal savings associations, including
a policy statement summarizing the principles used during its review of Bank Merger Act applications. Importantly, the Federal Reserve
did not join with the FDIC and the OCC in this updated guidance. Additionally, the DOJ announced its withdrawal from the 1995 Bank Merger
Competitive Review Guidelines, indicating that it would apply its 2023 Merger Guidelines to the banking industry.
These developments
reflect a heightened regulatory focus on bank mergers, with an emphasis on maintaining competition, ensuring financial stability, and
addressing community needs. However, given the shift in administration under President Trump, regulatory priorities may change. Financial
institutions considering mergers or acquisitions should monitor potential regulatory shifts under the new administration, as changes in
policy priorities may impact the level of scrutiny and the application of existing regulatory frameworks.
Proposed Legislation and Regulatory Action
From time to time, various legislative and regulatory
initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals
to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial
institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial
and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible
activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot
predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have
on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable
to the Company or the Bank could have a material effect on the business of the Company.
On October 2, 2024, the FDIC released a notice of proposed
rulemaking to strengthen recordkeeping requirements for certain types of custodial accounts. Under the proposed rule, FDIC-insured banks
holding certain custodial accounts, as defined in the proposal, would be required to take certain steps to ensure accurate account records
are maintained in order to determine the individual owner of the funds, including a requirement to reconcile the account for each individual
owner on a daily basis. These requirements, as well as others, apply if the bank uses a third party to maintain records. The FDIC extended
the comment period to January 16, 2025. It is unclear how President Trump’s administration will approach proposals under the previous
administration.
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. As a result, we
are primarily subject to the supervision, examination and reporting requirements of the Federal Reserve under the BHCA and its regulations
promulgated thereunder. Moreover, as a bank holding company of a bank located in South Carolina, we also are subject to the South Carolina
Banking and Branching Efficiency Act.
Permitted Activities. Under the BHCA,
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; 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;
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· 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;
· acting as agent or broker in
selling credit life insurance and other types of insurance in connection with credit transactions; 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. We have not sought financial holding company status, but may elect such status in the future as our
business matures. If we were to elect financial holding company status, each insured depository institution we control would have to be
well capitalized, well managed and have at least a satisfactory rating under the CRA 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
BHCA and the Change in Bank Control Act, together with regulations promulgated under them, require some form of regulatory review before
any company may acquire “control” of a bank or a bank holding company. Under the BHCA, control is deemed to exist if a company
acquires 25% or more of any class of voting securities of a bank holding company; controls the election of a majority of the members of
the board of directors; or exercises a controlling influence over the management or policies of a bank or bank holding company. The Federal
Reserve’s standards for determining whether one company has control over another establish 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 standards, 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. Transactions subject to the BHCA are
exempt from Change in Control Act requirements. For state banks, state laws, including that of South Carolina, typically require approval
by the state bank regulator as well.
In August 2024, the FDIC proposed amendments to its
regulations implementing the Change in Bank Control Act. The proposed rule aims to remove certain existing exemptions and seeks public
comment on the FDIC’s overall approach to changes in control affecting FDIC-supervised institutions. If adopted, these amendments
could result in more transactions being subject to the Change in Bank Control Act notice requirements and FDIC review.
Source of Strength . There are a number
of obligations and restrictions imposed by law and regulatory policy on bank holding companies with regard to their depository institution
subsidiaries that are designed to minimize potential loss to depositors and to the FDIC insurance funds in the event that the depository
institution becomes in danger of defaulting under its obligations to repay deposits. Under a policy of the Federal Reserve, a bank holding
company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support
such institutions in circumstances where it might not do so absent such policy. Under the Federal Deposit Insurance Corporation Improvement
Act of 1991, to avoid receivership of its insured depository institution subsidiary, a bank holding company is required to guarantee the
compliance of any insured depository institution subsidiary that may become “undercapitalized” within the terms of any capital
restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of
the institution’s total assets at the time the institution became undercapitalized, or (ii) the amount which is necessary (or would
have been necessary) to bring the institution
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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
BHCA to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary
of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness
or stability of any subsidiary depository institution of the bank holding company. Further, federal law grants federal bank regulatory
authorities’ additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency
determines that divestiture may aid the depository institution's financial condition.
In addition, the “cross guarantee” provisions
of the Federal Deposit Insurance Act (the “FDIA”) require insured depository institutions under common control to reimburse
the FDIC for any loss suffered or reasonably anticipated by the FDIC as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The
FDIC’s claim for damages is superior to claims of shareholders of the insured depository institution or its holding company, but
is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled
insured depository institutions.
The FDIA also provides that amounts received from the
liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims)
to pay the deposit liabilities of the institution prior to payment of any other general or unsecured senior liability, subordinated liability,
general creditor or shareholder. This provision would give depositors a preference over general and subordinated creditors and shareholders
in the event a receiver is appointed to distribute the assets of our Bank.
Any capital loans by a bank holding company to any
of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In
the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency
to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Capital Requirements . The Federal Reserve
imposes certain capital requirements on the bank holding company under the BHCA, 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.” 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.
Dividends. Since the Company
is a bank holding company, its ability to declare and pay dividends is dependent on certain federal and state regulatory considerations,
including the guidelines of the Federal Reserve. The Federal Reserve has issued a policy statement regarding the payment of dividends
by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current
earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s
capital needs, asset quality and overall financial condition. The Federal Reserve’s policies also require that a bank holding company
serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital
funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising
capacity to obtain additional resources for assisting its subsidiary banks where necessary. Further, under the prompt corrective action
regulations, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These
regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions.
In addition, since the Company is a legal entity separate
and distinct from the Bank and does not conduct stand-alone operations, its ability to pay dividends depends on the ability of the Bank
to pay dividends to it, which is also subject to regulatory restrictions as described below in “Southern First Bank – Dividends.”
South Carolina State Regulation. As a
South Carolina bank holding company under the South Carolina Banking and Branching Efficiency Act, we are subject to limitations on sale
or merger and to regulation by the South Carolina Board of Financial Institutions (the “S.C. Board”). We are not required
to obtain the approval of the S.C. Board prior to acquiring
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the capital stock of a national bank, but we must notify
them at least 15 days prior to doing so. We must receive the S.C. Board’s approval prior to engaging in the acquisition of a South
Carolina state chartered bank or another South Carolina bank holding company.
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. The S.C. 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;
and
· adequacy of staff training to
carry on safe lending and deposit gathering practices.
These agencies, and the federal and state laws applicable
to the Bank’s operations, extensively regulate various aspects of our banking business, including, among other things, permissible
types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits, the
maintenance of reserves on demand deposit liabilities, and the safety and soundness of our banking practices.
All insured institutions must undergo regular on-site
examinations by their appropriate banking agency. The cost of examinations of insured depository institutions and any affiliates may be
assessed by the appropriate federal banking agency against each institution or affiliate as it deems necessary or appropriate. Insured
institutions are required to submit annual reports to the FDIC, their federal regulatory agency, and state supervisor when applicable.
The FDIC has developed a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value
of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition or any
other report of any insured depository institution. The FDIC and the other federal banking regulatory agencies also have issued standards
for all insured depository institutions relating, among other things, to the following:
· internal controls;
· information systems and audit
systems;
· loan documentation;
· credit underwriting;
· interest rate risk exposure;
and
· asset quality.
Prompt Corrective Action. As an insured
depository institution, the Bank is required to comply with the capital requirements promulgated under the FDIA and the prompt corrective
action regulations thereunder, which set forth five capital categories, each with specific regulatory consequences. Under these regulations,
the categories are:
· 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. 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
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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%.
If the FDIC determines, after notice and an opportunity
for hearing, that the Bank is in an unsafe or unsound condition, the regulator is authorized to reclassify the Bank to the next lower
capital category (other than critically undercapitalized) and require the submission of a plan to correct the unsafe or unsound condition.
If a bank is not well
capitalized, it cannot accept brokered deposits without prior regulatory approval. Even if approved, rate restrictions will govern
the rate a bank may pay on brokered deposits. In addition, a bank that is not well capitalized cannot offer an effective yield in
excess of 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. If a depository institution fails to submit an acceptable plan, it is categorized as significantly
undercapitalized.
Significantly undercapitalized categorized depository
institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become categorized
as adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. The appropriate
federal banking agency may take any action authorized for a significantly undercapitalized institution if an undercapitalized institution
fails to submit an acceptable capital restoration plan or fails in any material respect to implement a plan accepted by the agency. A
critically undercapitalized institution is subject to having a receiver or conservator appointed to manage its affairs and for loss of
its charter to conduct banking activities.
An insured depository institution may not pay a management
fee to a bank holding company controlling that institution or any other person having control of the institution if, after making the
payment, the institution would be undercapitalized. In addition, an institution cannot make a capital distribution, such as a dividend
or other distribution, that is in substance a distribution of capital to the owners of the institution if following such a distribution
the institution would be undercapitalized. Thus, if payment of such a management fee or the making of such would cause a bank to become
undercapitalized, it could not pay a management fee or dividend to the bank holding company.
As of December 31, 2024, the Bank was deemed to be
“well capitalized.”
Standards for Safety and Soundness. The
FDIA also requires the federal banking regulatory agencies to prescribe, by regulation or guideline, operational and managerial standards
for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset growth. The agencies also must prescribe standards
for asset quality, earnings,
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and stock valuation, as well as standards for compensation,
fees and benefits. The federal banking agencies have adopted regulations and Interagency Guidelines Prescribing Standards for Safety and
Soundness to implement these required standards. These guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions before capital becomes impaired. Under the regulations,
if the FDIC determines that the Bank fails to meet any standards prescribed by the guidelines, the agency may require the Bank to submit
to the agency an acceptable plan to achieve compliance with the standard, as required by the FDIC. The final regulations establish deadlines
for the submission and review of such safety and soundness compliance plans. The FDIC requested comments on a proposal that would amend
the regulations implementing section 29 of the Federal Deposit Insurance Act. Section 29 contains brokered deposits restrictions that
apply to less than well capitalized depository institutions. The proposed changes include: (i) modifying the definition of “deposit
broker”; (ii) eliminating the exclusive deposit placement arrangement exception; and (ii) revising the interpretation of the primary
purpose exception to consider a third party’s intent in placing customer funds at a particular insured depository institution. The
FDIC extended the comment-period, which concluded on November 21, 2024.
Insurance of Accounts and Regulation by the FDIC.
The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. The Dodd-Frank Act permanently
increased the maximum amount of deposit insurance for banks to $250,000 per account. As insurer, the FDIC imposes deposit insurance premiums
and is authorized to conduct examinations of and to require reporting by FDIC insured institutions. It also may prohibit any FDIC insured
institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the insurance fund.
As an FDIC-insured bank, the Bank must pay deposit
insurance assessments to the FDIC based on its average total assets minus its average tangible equity. The Bank’s assessment rates
are currently based on its risk classification (i.e., the level of risk it poses to the FDIC’s deposit insurance fund). Institutions
classified as higher risk pay assessments at higher rates than institutions that pose a lower risk. In addition to ordinary assessments
described above, the FDIC has the ability to impose special assessments in certain instances.
In addition to the ordinary assessments described
above, the FDIC has the ability to impose special assessments in certain instances. For example, in November 2023, the FDIC implemented
a special assessment to recover the approximately $16.3 billion loss to the Deposit Insurance Fund associated with protecting uninsured
depositors following the closures of Silicon Valley Bank and Signature Bank earlier in the year. However, the assessment was limited to
banks with more than $5 billion uninsured deposits as of December 31, 2022, so we did not receive any assessment. As of March 2025, no
further special assessments have been imposed.
The FDIC may terminate the deposit insurance of any
insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination
of insurance if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the
time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is not aware of any practice, condition or violation that might lead to termination of the Bank’s deposit
insurance.
Transactions with Affiliates and Insiders.
The Company is a legal entity separate and distinct from the Bank and its other subsidiaries. Various legal limitations restrict the Bank
from lending or otherwise supplying funds to the Company or its non-bank subsidiaries. The Company and the Bank are subject to Sections
23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W.
Section 23A of the Federal Reserve Act places limits
on the amount of loans or extensions of credit by a bank to any affiliate, including its holding company, and on a bank’s investments
in, or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or
obligations of any affiliates of the bank. Section 23A also applies to derivative transactions, repurchase agreements and securities lending
and borrowing transactions that cause a bank to have credit exposure to an affiliate. The aggregate of all covered transactions is limited
in amount, as to any one affiliate, to 10% of the Bank’s capital and surplus and, as to all affiliates combined, to 20% of the Bank’s
capital and surplus. Furthermore, within the foregoing limitations as to amount, each covered transaction must meet specified collateral
requirements. The Bank is forbidden to purchase low quality assets from an affiliate.
Section 23B of the Federal Reserve Act, among other
things, prohibits an institution from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially
the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions
with nonaffiliated companies. If there are
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no comparable transactions, a bank’s (or one
of its subsidiaries’) affiliate transaction must be on terms and under circumstances, including credit standards, that in good faith
would be offered to, or would apply to, nonaffiliated companies. These requirements apply to all transactions subject to Section 23A as
well as to certain other transactions.
The affiliates of a bank include any holding company
of the bank, any other company under common control with the bank (including any company controlled by the same shareholders who control
the bank), any subsidiary of the bank that is itself a bank, any company in which the majority of the directors or trustees also constitute
a majority of the directors or trustees of the bank or holding company of the bank, any company sponsored and advised on a contractual
basis by the bank or an affiliate, and any mutual fund advised by a bank or any of the bank’s affiliates. Regulation W generally
excludes all non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the Federal
Reserve decides to treat these subsidiaries as affiliates.
The Bank is also subject to certain restrictions on
extensions of credit to executive officers, directors, certain principal shareholders, and their related interests. Extensions of credit
include derivative transactions, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions to the
extent that such transactions cause a bank to have credit exposure to an insider. Any extension of credit to an insider (i) must be made
on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable
transactions with unrelated third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable
features.
On December 22, 2020, the federal banking agencies
issued an interagency statement extending the temporary relief from enforcement action against banks or asset managers, which become principal
shareholders of banks, with respect to certain extensions of credit by banks that otherwise would violate Regulation O, provided the asset
managers and banks satisfy certain conditions designed to ensure that there is a lack of control by the asset manager over the bank.
The federal banking agencies have extended the temporary
relief from enforcement actions related to Regulation O multiple times, most recently on December 27, 2024. The relief, which applies
to banks and asset managers that become principal stockholders of banks, will now expire on the earlier of January 1, 2026, or the effective
date of a final Federal Reserve rule revising Regulation O. This extension allows additional time for regulators to address the treatment
of bank credit extensions to complex-controlled portfolio companies that qualify as insiders. Financial institutions and asset managers
should continue monitoring updates, as a final rule could impact the relief before its expiration.
Dividends. 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. Unless otherwise instructed by the S.C. Board, the Bank is generally
permitted under South Carolina state banking regulations to pay cash dividends of up to 100% of net income in any calendar year without
obtaining the prior approval of the S.C. Board. The FDIC also has the authority under federal law to enjoin a bank from engaging in what
in its opinion constitutes an unsafe or unsound practice in conducting its business, including the payment of a dividend under certain
circumstances. The Bank must also maintain the CET1 capital conservation buffer of 2.5% to avoid becoming subject to restrictions on capital
distributions, including dividends, as described above.
Branching. Under current South Carolina
law, the Bank may open branch offices throughout South Carolina with the prior approval of the S.C. Board. In addition, with prior
regulatory approval, the Bank is able to acquire existing banking operations in South Carolina. Furthermore, federal legislation
permits interstate branching, including out-of-state acquisitions by bank holding companies, interstate branching by banks, and interstate
merging by banks. The Dodd-Frank Act removes previous state law restrictions on de novo interstate branching in states such as South
Carolina. This change permits out-of-state banks to open de novo branches in states where the laws of the state where the de novo branch
to be opened would permit a bank chartered by that state to open a de novo branch.
Community
Reinvestment Act. The CRA requires that the FDIC evaluate the record of the Bank in meeting the credit needs of its local
community, including low and moderate income neighborhoods. These factors are also considered in evaluating mergers, acquisitions,
and applications to open a branch or facility. Failure to adequately meet these criteria imposes additional requirements and
limitations on our Bank. On February 27, 2025, the date of the most recent examination report, the Bank received a Satisfactory
CRA rating.
In December 2019, the FDIC and the Office of the Comptroller
of the Currency (the “OCC”) issued a notice of proposed rulemaking intended to (i) clarify which activities qualify for CRA
credit; (ii) update where activities count for CRA credit; (iii) create a more transparent and objective method for measuring CRA performance;
and (iv) provide for more transparent, consistent, and timely CRA-related data collection, recordkeeping, and reporting. However, the
Federal Reserve did not join the proposed rulemaking. In January 2025, the OCC, FDIC, and Federal Reserve issued additional
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guidance clarifying that digital and fintech-driven
activities may be eligible for CRA credit provided they meet established criteria. This guidance reflects efforts to modernize CRA evaluations
in light of evolving banking practices.
In May 2020, the OCC issued its final CRA rule, which
was later rescinded in December 2021, replacing it with a rule based on the rules adopted jointly by the federal banking agencies in 1995,
as amended and superseded by an updated joint framework. On the same day that the OCC announced its plans to rescind the CRA final rule,
the OCC, the FDIC, and the Federal Reserve announced that they are working together to “strengthen and modernize the rules implementing
the CRA.” On May 5, 2022, the OCC, FDIC, and Federal Reserve released a notice of proposed rulemaking regarding the CRA and invited
public comment on the proposed rules. The comment period closed on August 5, 2022. On October 24, 2023, the OCC, the FDIC, and the Federal
Reserve issued the final rule to strengthen and modernize regulations implementing the CRA. The final rule took effect on April 1, 2024;
however, compliance with the majority of the final rule’s provisions will not be required until January 1, 2026, and the data reporting
requirements of the final rule will not take effect until January 1, 2027. The final rules, among other things, include: (i) applying
four new performance tests to evaluate the CRA performance of large banks (assets of $2 billion or more): the Retail Lending Test, Retail
Services and Products Test, Community Development Financing Test, and Community Development Services Test; (ii) retaining a strategic
plan option, with modifications to reflect the new performance tests and updates to the approval standards; (iii) clarifying community
development activities by updating the definition of community development, providing a process by which banks may request confirmation
that an activity is eligible for community development consideration, and providing for a publicly available interagency illustrative
list of qualifying community development activities; (iv) updating delineation requirements for facility-based assessment areas and establishing
new retail lending assessment areas for certain large banks; (v) updating data collection, maintenance, and reporting requirements for
large banks, tailoring those requirements based on large bank asset size and leveraging existing data where possible, while not imposing
new data collection and reporting requirements for small and intermediate banks; and (vi) continuing public file and public notice disclosure
requirements and creating a new public comment process to facilitate public engagement. Several banking industry groups filed a lawsuit
seeking to invalidate the CRA final rule, in which they argued that the federal banking agencies exceeded their statutory authority in
adopting the CRA final rule. In March 2024, a federal judge granted an injunction to extend the CRA final rule’s effective date,
originally set for April 1, 2024. The effective date will be extended each day the injunction remains in place, pending the resolution
of the lawsuit. Management has and will continue to evaluate any changes to the CRA’s regulations and their impact to the Bank.
Fair Lending Requirements. We are subject
to certain fair lending requirements and reporting obligations involving lending operations. A number of laws and regulations provide
these fair lending requirements and reporting obligations, including, at the federal level, the Equal Credit Opportunity Act (“ECOA”),
as amended by the Dodd-Frank Act, and Regulation B, as well as the Fair Housing Act (“FHA”) and regulations implementing the
FHA. ECOA and Regulation B prohibit discrimination in any aspect of a credit transaction based on a number of prohibited factors, including
race or color, religion, national origin, sex, marital status, age, the applicant’s receipt of income derived from public assistance
programs, and the applicant’s exercise, in good faith, of any right under the Consumer Credit Protection Act. ECOA and Regulation
B include lending acts and practices that are specifically prohibited, permitted, or required, and these laws and regulations proscribe
data collection requirements, legal action statute of limitations, and disclosure of the consumer’s ability to receive a copy of
any appraisal(s) and valuation(s) prepared in connection with certain loans secured by dwellings. In January 2023, the OCC revised its
“Fair Lending” booklet of the Comptroller’s Handbook to incorporate clarified details and risk factors for a variety
of examination scenarios addressing fair lending and to update references to supervisory guidance, sound risk management practices, and
applicable legal standards. While this OCC guidance does not apply to the Bank explicitly, it represents best practices guidance for the
Bank. FHA prohibits discrimination in all aspects of residential real-estate related transactions based on prohibited factors, including
race or color, national origin, religion, sex, familial status, and handicap.
In addition to prohibiting discrimination in credit
transactions on the basis of prohibited factors, these laws and regulations can cause a lender to be liable for policies that result in
a disparate treatment of or have a disparate impact on a protected class of persons. In June 2024, the CFPB released its 2023 Fair Lending
Annual Report to Congress, reporting that it took action against Citibank for intentional, illegal discrimination against Armenian Americans
applying for credit cards. The CFPB also identified significant issues around institutions failing to report demographic information required
under the Home Mortgage Disclosure Act (HMDA). If a pattern or practice of lending discrimination is alleged by a regulator, then the
matter may be referred by the agency to the DOJ for investigation. In December 2012, the DOJ and CFPB entered into a Memorandum of Understanding
under which the agencies have agreed to share information, coordinate investigations, and have generally committed to strengthen their
coordination efforts.
In addition to substantive penalties and corrective
measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with fair
lending requirements into account when regulating and supervising other activities of the bank, including in acting on expansionary proposals.
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Consumer Protection Regulations. The
activities of the Bank are subject to a variety of statutes and regulations designed to protect consumers. This includes Title X of the
Dodd-Frank Act, which prohibits engaging in any unfair, deceptive, or abusive acts or practices (“UDAAP”). UDAAP claims involve
detecting and assessing risks to consumers and to markets for consumer financial products and services. Interest and other charges collected
or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The loan operations of the Bank
are also subject to federal laws applicable to credit transactions, such as:
· the Truth-In-Lending Act (“TILA”)
and Regulation Z, governing disclosures of credit and servicing terms to consumer borrowers and including substantial requirements for
mortgage lending and servicing, as mandated by the Dodd-Frank Act;
· the Home Mortgage Disclosure
Act and Regulation C, requiring financial institutions to provide information to enable the public and public officials to determine whether
a financial institution is fulfilling its obligation to help meet the housing needs of the communities they serve;
· ECOA and Regulation B, prohibiting
discrimination on the basis of race, color, religion, or other prohibited factors in any aspect of a credit transaction;
· the Fair Credit Reporting Act,
as amended by the Fair and Accurate Credit Transactions Act and Regulation V, as well as the rules and regulations of the FDIC governing
the use of consumer reports, provision of information to credit reporting agencies, certain identity theft protections and certain credit
and other disclosures;
· the Fair Debt Collection Practices
Act and Regulation F, governing the manner in which consumer debts may be collected by collection agencies and intending to eliminate
abusive, deceptive, and unfair debt collection practices;
· the Real Estate Settlement Procedures
Act (“RESPA”) and Regulation X, which governs various aspects of residential mortgage loans, including the settlement and
servicing process, dictates certain disclosures to be provided to consumers, and imposes other requirements related to compensation of
service providers, insurance escrow accounts, and loss mitigation procedures;
· The Secure and Fair Enforcement
for Mortgage Licensing Act (“SAFE Act”) which mandates a nationwide licensing and registration system for residential mortgage
loan originators. The SAFE Act also prohibits individuals from engaging in the business of a residential mortgage loan originator without
first obtaining and maintaining annually registration as either a federal or state licensed mortgage loan originator;
· The Homeowners Protection Act,
or the PMI Cancellation Act, provides requirements relating to private mortgage insurance on residential mortgages, including the cancelation
and termination of PMI, disclosure and notification requirements, and the requirement to return unearned premiums;
· The Fair Housing Act prohibits
discrimination in all aspects of residential real-estate related transactions based on race or color, national origin, religion, sex,
and other prohibited factors;
· The Servicemembers Civil Relief
Act and Military Lending Act, providing certain protections for servicemembers, members of the military, and their respective spouses,
dependents and others; and
· Section 106(c)(5) of the Housing
and Urban Development Act requires making home ownership available to eligible homeowners.
The deposit operations of the Bank are also subject
to federal laws, such as:
· the Federal Deposit Insurance
Act (“FDIA”), which, among other things, limits the amount of deposit insurance available per insured depositor category to
$250,000 and imposes other limits on deposit-taking;
· the Right to Financial Privacy
Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative
subpoenas of financial records;
· the Electronic Funds Transfer
Act and Regulation E, which governs the rights, liabilities, and responsibilities of consumers and financial institutions using electronic
fund transfer services, and which generally mandates disclosure requirements, establishes limitations on liability applicable to consumers
for unauthorized electronic fund transfers, dictates certain error resolution processes, and applies other requirements relating to automatic
deposits to and withdrawals from deposit accounts;
· The Expedited Funds Availability
Act and Regulation CC, setting forth requirements to make funds deposited into transaction accounts available according to specified time
schedules, disclose funds availability policies to customers, and relating to the collection and return of checks and electronic checks,
including the rules regarding the creation or receipt of substitute checks; and
· the Truth in Savings Act and
Regulation DD, which requires depository institutions to provide disclosures so that consumers can make meaningful comparisons about depository
institutions and accounts.
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In light of the growing concern by regulators about
relationships between chartered financial institutions and their third-party service providers, the FDIC joined the other federal supervisory
agencies in passing the Interagency Guidance on Third-Party Relationships: Risk Management. This new guidance provided risk management
oversight guidelines for financial institutions to incorporate in their ongoing relationships with third party vendors.
The CFPB is an independent regulatory authority housed
within the Federal Reserve. The CFPB has broad authority to regulate the offering and provision of consumer financial products and services.
The CFPB has the authority to supervise and examine depository institutions with more than $10 billion in assets for compliance with
federal consumer laws. The authority to supervise and examine depository institutions with $10 billion or less in assets, such as
us, for compliance with federal consumer laws remains largely with those institutions’ primary regulators. However, the CFPB may
participate in examinations of these smaller institutions on a “sampling basis” and may refer potential enforcement actions
against such institutions to their primary regulators. As such, the CFPB may participate in examinations of the Bank. In addition, states
are permitted to adopt consumer protection laws and regulations that are stricter than the regulations promulgated by the CFPB, and state
attorneys general are permitted to enforce consumer protection rules adopted by the CFPB against certain institutions.
The CFPB has issued a number of significant rules that
impact nearly every aspect of the lifecycle of consumer financial products and services, including rules regarding residential mortgage
loans. These rules implement Dodd-Frank Act amendments to ECOA, TILA and RESPA. On July 18, 2024 regulators, including the CFPB, issued
interagency guidance on reconsideration of value (ROVs) of residential real estate transactions. The CFPB continued its scrutiny of so
called “pay-to-pay” and “junk fee” regimes, proposing rules related to credit card penalties. In March 2024, the
CFPB finalized a rule that addresses late fees charged by card issuers that together with their affiliates have one million or more open
credit card accounts. Further, the CFPB proposed rulemaking related to Residential Property Assessed Clean Energy Financing, quality control
standards for automated valuation models, and personal financial data rights (discussed in more detail above). The CFPB’s focus
on fees was emphasized through its ongoing enforcement activity, including a notable enforcement action taken against Bank of America
that required the payment of more than $100 million to customers, with similar size fines paid to both the CFPB and the OCC.
In February 2025, President Trump took significant
actions affecting the CFPB. He dismissed Director Rohit Chopra and appointed Treasury Secretary Scott Bessent as Acting Director. Subsequently,
Office of Management and Budget Director Russell Vought was named Acting Director, during which time the CFPB’s operations were
halted, its headquarters closed, and its employees instructed to cease work. These moves have been met with legal challenges and public
debate regarding the future of the agency.
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.
OFAC has sent, and will send, our banking regulatory agencies lists of names of persons and organizations suspected of aiding, harboring
or engaging in terrorist acts. If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must
freeze such account, file a suspicious activity report and notify the FBI. The Bank has appointed an OFAC compliance officer to oversee
the inspection of its accounts and the filing of any notifications. The Bank actively checks high-risk OFAC areas such as new accounts,
wire transfers and customer files. The Bank performs these checks utilizing software, which is updated each time a modification is made
to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons.
Anti-Money Laundering and Countering the Financing
of Terrorism (AML/CFT); the USA PATRIOT Act; the Office of Foreign Asset Control. Financial institutions must maintain AML/CFT
programs, including internal policies, compliance officers, training, and independent audits, in accordance with the Bank Secrecy Act
(“BSA”) and other federal laws. They must adhere to know your customer and enhanced due diligence requirements, particularly
for high-risk customers and foreign institutions, to prevent money laundering and terrorism financing. Institutions must also report suspicious
activities to law enforcement and ensure compliance with risk-based customer due diligence procedures. The USA PATRIOT Act amended the
BSA to enhance financial transparency and information-sharing between institutions, regulators, and law enforcement. It mandates customer
identification programs, increased due diligence for non-U.S. persons, and stricter reporting of transactions over $10,000 to FinCEN.
Financial institutions must also monitor and report transactions involving individuals or entities suspected of terrorist financing. Regulators
actively enforce compliance, imposing penalties on institutions failing to meet AML/CFT obligations.
The USA PATRIOT Act amended the Bank Secrecy Act and
provides, in part, for the facilitation of information sharing among governmental entities and financial institutions for the purpose
of combating terrorism and money laundering by enhancing anti-money laundering and financial transparency laws, as well as enhanced information
collection tools and
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enforcement mechanics for the U.S. government, including:
(i) requiring standards for verifying customer identification at account opening; (ii) rules to promote cooperation among financial institutions,
regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; (iii) reports by
nonfinancial trades and businesses filed with the U.S. Treasury Department’s Financial Crimes Enforcement Network for transactions
exceeding $10,000; (iv) filing suspicious activities reports if a bank believes a customer may be violating U.S. laws and regulations;
and (v) requires enhanced due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts
or correspondent accounts for non-U.S. persons. Bank regulators routinely examine institutions for compliance with these obligations and
are required to consider compliance in connection with the regulatory review of applications.
Under the USA PATRIOT Act, the regulators can provide
lists of the names of persons suspected of involvement in terrorist activities. The Bank can be requested, to search its records for any
relationships or transactions with persons on those lists. If the Bank finds any relationships or transactions, it must file a suspicious
activity report and contact the applicable governmental authorities.
The Office of Foreign Assets Control (“OFAC”),
which is a division of the U.S. Department of the Treasury (the “Treasury”), is responsible for helping to ensure that United
States entities do not engage in transactions with “enemies” of the United States, as defined by various Executive Orders
and Acts of Congress. OFAC publishes lists of names of persons and organizations with which the Bank is prohibited from engaging in business.
If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account, file a suspicious
activity report, and notify the FBI. The Bank has appointed an OFAC compliance officer to oversee the inspection of its accounts and the
filing of any notifications. The Bank actively checks high-risk OFAC areas such as new accounts, wire transfers and customer files. The
Bank performs these checks utilizing software, which is updated each time a modification is made to the lists provided by OFAC and other
agencies of Specially Designated Nationals and Blocked Persons.
In August 2023, the FFIEC updated its BSA/AML Examination
Manual to clarify risk-based compliance expectations. The FDIC emphasizes oversight of third-party AML/CFT service providers, with enforcement
actions against institutions that fail to monitor vendors effectively.
The Anti-Money Laundering Act of 2020 led to FinCEN’s
Corporate Transparency Act (“CTA”), requiring many corporate entities to disclose beneficial ownership information. Court
rulings deeming the CTA unconstitutional, creating uncertainty regarding its future enforcement. However, on February 18, 2025, a federal
judge lifted this previous nationwide injunction that had blocked the enforcement of the CTA. In response, FinCEN announced that reporting
companies are now required to comply with the CTA’s beneficial ownership information reporting requirements. To provide entities
additional time to meet these obligations, FinCEN has extended the filing deadline to March 21, 2025. FinCEN also indicated plans to assess
options for further modifying deadlines and intends to initiate a process to revise the BOI reporting rule to reduce burdens for lower-risk
entities, including many U.S. small businesses.
Following Russia’s invasion of Ukraine, OFAC
imposed extensive sanctions under Executive Order 14024, including restrictions on Russian financial institutions, expanded sovereign
debt prohibitions, and increased scrutiny of sanctions evasion. FinCEN issued an alert in March 2022, advising heightened vigilance. Sanctions
enforcement continued through 2023 and 2024. Globally, the Financial Action Task Force (“FATF”) updates its high-risk jurisdiction
lists, affecting due diligence requirements for international transactions. In October 2023, FATF removed Albania, Cayman Islands, Jordan,
and Panama from its monitoring list and added Bulgaria.
Privacy, Data Security and Credit Reporting.
Under privacy protection provisions of the Gramm-Leach-Bliley Act of 1999 (“GLBA”) and related regulations, we are limited
in our ability to disclose non-public information about consumers to nonaffiliated third parties. Financial institutions are required
to disclose their policies for collecting and protecting confidential information. Customers generally may prevent financial institutions
from sharing nonpublic personal financial information with nonaffiliated third parties except under narrow circumstances, such as the
processing of transactions requested by the consumer or if the Bank is jointly sponsoring a product or service with a nonaffiliated third
party. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use
in telemarketing, direct mail marketing or other marketing to consumers. It is the Bank’s policy not to disclose any personal information
unless required by law.
Consumers must be notified in the event of a data breach
under applicable state laws. Multiple states and Congress are considering laws or regulations which could create new individual privacy
rights and impose increased obligations on companies handling personal data. For example, on November 18, 2021, the federal financial
regulatory agencies published a final rule that will impose upon banking organizations and their service providers new notification requirements
for significant cybersecurity incidents. Specifically, the final rule requires banking organizations to notify their primary
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federal regulator as soon as possible and no later
than 36 hours after the discovery of a “computer-security incident” that rises to the level of a “notification incident”
within the meaning attributed to those terms by the final rule. Banks’ service providers are required under the final rule to notify
any affected bank to or on behalf of which the service provider provides services “as soon as possible” after determining
that it has experienced an incident that materially disrupts or degrades, or is reasonably likely to materially disrupt or degrade, covered
services provided to such bank for as much as four hours. The final rule took effect on April 1, 2022 and banks and their service providers
must have complied with the requirements of the rule by May 1, 2022. Effective December 9, 2022, the Federal Trade Commission’s
amendments to GLBA’s Safeguards Rule went into effect and financial institutions are continuing to implement this rule including
its ongoing monitoring and risk assessment protocols.
States continue to take the lead in passing privacy
focused legislation. Nine additional states passed some form of consumer privacy protection laws, only some of which include an exemption
for entities regulated under GLBA. Congress has proposed significant privacy focused legislation largely targeting technology companies,
however, to date, none of these laws have been passed.
The CFPB also took additional action related to consumer
privacy. In October 2024, the CFPB issued a final rule implementing Section 1033 of the Consumer Financial Protection Act, requiring banks
to provide consumers with access to their financial transaction data upon request. This rule is expected to require updates to data access
policies by 2026.
In addition, pursuant to the Fair and Accurate Credit
Transactions Act of 2003 (the “FACT Act”) and the implementing regulations of the federal banking agencies and Federal Trade
Commission, the Bank is required to have in place an “identity theft red flags” program to detect, prevent and mitigate identity
theft. The Bank has implemented an identity theft red flags program designed to meet the requirements of the FACT Act and the joint final
rules. Additionally, the FACT Act amends the Fair Credit Reporting Act to generally prohibit a person from using information received
from an affiliate to make a solicitation for marketing purposes to a consumer, unless the consumer is given notice and a reasonable opportunity
and a reasonable and simple method to opt out of the making of such solicitations.
Federal Home Loan Bank System.
The Bank is a member of the Federal Home Loan Bank ("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.
It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans or advances
to members in accordance with policies and procedures established by the Board of Directors of the FHLB, which are subject to the oversight
of the Federal Housing Financing Board. All advances from the FHLB, which are subject to the oversight of the Federal Housing Finance
Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. On September 30,
2024, the Federal Housing Finance Agency issued a notice of proposed rulemaking on that would improve FHLBs ability to provide liquidity
to members by aligning the treatment of interest-bearing deposit accounts and other authorized overnight investments with the treatment
of Federal Funds sales.
Effect of Governmental Monetary
Policies. Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the U.S. government
and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the
operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation
or combat a recession. The monetary policies of the Federal Reserve have major effects upon the levels of bank loans, investments and
deposits through its open market operations in U.S. government securities and through its regulation of the discount rate on borrowings
of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future
changes in monetary and fiscal policies. In response to the COVID-19 pandemic, in 2020, the Federal Open Market Committee (“FOMC”)
reduced the targeted federal funds interest rate range to 0.0% to 0.25%; however, due in part to rising inflation, throughout 2022 the
target federal funds rate increased to between 4.25% and 4.50%. Throughout 2023, the target federal funds rate increased to 5.50%. In
early 2024, with signs of moderating inflation and a slowing growth outlook, the FOMC initiated a gradual easing of monetary policy, reducing
the target range to approximately 4.0% to 4.25% by the end of 2024. In January 2025, amid mixed economic signals, the FOMC maintained
this target range while emphasizing its readiness to adjust policy further as economic conditions evolve.
Incentive Compensation.
In addition to the potential restrictions on discretionary bonus compensation under the Basel III rules, the federal bank regulatory agencies
have issued guidance on incentive compensation policies (the “Incentive Compensation Guidance”) intended to ensure that the
incentive compensation policies of financial institutions do not undermine the safety and soundness of such institutions by encouraging
excessive risk-taking. The Incentive Compensation Guidance, which covers all employees that have the ability to materially affect the
risk profile of an institution, either individually or as part of a group, is based upon the key principles that a financial institution’s
incentive compensation arrangements should comply with the following principles: (i) provide employees incentives that
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appropriately balance risk and reward;
(ii) be compatible with effective 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 scope and content of federal
bank regulatory agencies’ policies on executive compensation are continuing to develop and are likely to continue evolving in the
near future. In 2016, federal agencies proposed regulations which could significantly change the regulation of incentive compensation
programs at financial institutions. The proposal would create four tiers of institutions based on asset size. Institutions in the top
two tiers would be subject to rules much more detailed and proscriptive than are currently in effect. If interpreted aggressively by the
regulators, the proposed rules could be used to prevent, as a practical matter, larger institutions from engaging in certain lines of
business where substantial commission and bonus pool arrangements are the norm. In the 2016 proposal, the top two tiers included institutions
with more than $50 billion of assets, which would not currently apply to us. We cannot predict what final rules may be adopted, nor how
they may be implemented and, therefore, it cannot be determined at this time whether compliance with such policies will adversely affect
our ability to hire, retain and motivate our key employees.
Corporate Governance .
The Dodd-Frank Act addressed many investor protection, corporate governance and executive compensation matters that affect most U.S. publicly
traded companies. The Dodd-Frank Act (i) grants stockholders of U.S. publicly traded companies an advisory vote on executive compensation
and so-called “golden parachute” payments, (ii) enhances independence requirements for compensation committee members, (iii)
requires the SEC to adopt rules directing national securities exchanges to establish listing standards requiring all listed companies
to adopt incentive-based compensation clawback policies for executive officers, and (iv) provides the SEC with authority to adopt proxy
access rules that would allow stockholders of publicly traded companies to nominate candidates for election as a director and have those
nominees included in a company’s proxy materials. The SEC has completed the bulk (although not all) of the rulemaking necessary
to implement these provisions. However, on October 14, 2021, the SEC signaled a renewed interest in this rulemaking initiative by re-opening
the comment period on a proposed rule issued originally in 2015 regarding clawbacks of incentive-based executive compensation. On October
26, 2022, the SEC adopted final rules implementing the incentive-based compensation recovery (clawback) provisions of the Dodd-Frank Act.
The final rules directed the stock exchanges to establish listing standards requiring listed companies to develop and implement a policy
providing for the recovery of erroneously awarded incentive-based compensation received by current or former executive officers and to
satisfy related disclosure obligations. As of December 1, 2023, the final clawback rules from The NASDAQ Stock Market were effective.
The Company’s updated clawback policies were effective November 21, 2023.
Concentrations in Commercial
Real Estate . Concentration risk exists when FDIC-insured institutions deploy too many assets to any one industry or segment. A
concentration in commercial real estate is one example of regulatory concern. The interagency Concentrations in Commercial Real Estate
Lending, Sound Risk Management Practices guidance (“CRE Guidance”) provides supervisory criteria, including the following
numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations
that may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300% of capital and increasing 50% or more in
the preceding three years or (ii) construction and land development loans exceeding 100% of capital. The CRE Guidance does not limit banks’
levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels
of capital that are commensurate with the level and nature of their commercial real estate concentrations. On December 18, 2015, the federal
banking agencies issued a statement to reinforce prudent risk-management practices related to commercial real estate lending, having observed
substantial growth in many commercial real estate asset and lending markets, increased competitive pressures, rising commercial real estate
concentrations in banks, and an easing of commercial real estate underwriting standards. The federal bank agencies reminded FDIC-insured
institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor and manage
the risks arising from commercial real estate lending. In addition, FDIC-insured institutions must maintain capital commensurate with
the level and nature of their commercial real estate concentration risk.
Based on the Bank’s loan portfolio
as of December 31, 2024, it did not exceed the 300% and 100% guidelines for commercial real estate loans or construction and land development
loans. The Bank will continue to monitor its portfolio to manage this increased risk.
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