| Several risk factors regarding investing in our common stock are discussed below |
| If any of the following risks were to occur, we may not be able to conduct our business as currently planned and our financial condition or operating results could be negatively impacted |
| These matters could cause the trading price of our common stock to decline in future periods |
| 11 _________________________________________________________________ [35]Table of Contents We are geographically concentrated in the upstate region of South Carolina, and changes in local economic conditions impact our profitability |
| We operate primarily in the upstate region of South Carolina and substantially all our loan customers and most of our deposit and other customers live or have operations in that area of South Carolina |
| Accordingly, our success significantly depends upon the growth in population, income levels, deposits and housing starts in that region, along with the continued attraction of business ventures to the area |
| Our profitability is impacted by the changes in general economic conditions in this market |
| Additionally, unfavorable local or national economic conditions could reduce our growth rate, affect the ability of our customers to repay their loans to us and generally affect our financial condition and results of operations |
| We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies |
| Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur |
| If our loan customers do not pay us as they have contracted to, we may experience losses |
| Our principal revenue producing business is making loans |
| If our customers do not repay the loans, we will suffer losses |
| Even though we maintain an allowance for loan losses, the amount of the allowance may not be adequate to cover the losses we experience |
| We attempt to mitigate this risk by a thorough review of the creditworthiness of loan customers |
| Nevertheless, there is risk that our credit evaluation will prove to be inaccurate due to changed circumstances or otherwise |
| Fluctuations in interest rates could reduce our profitability |
| Interest rate fluctuations are caused by many factors which, for the most part, are not under our direct control |
| For example, national monetary policy plays a significant role in the determination of interest rates |
| Additionally, competitor pricing and the resulting negotiations that occur with our customers also impact the rates we collect on loans and the rates we pay on deposits |
| As interest rates change, we expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa |
| In either event, if market interest rates should move contrary to our position, this “gap” may work against us, and our earnings may be negatively affected |
| Changes in the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings |
| A decline in the market value of our assets may limit our ability to borrow additional funds |
| As a result, we could be required to sell some of our loans and investments under adverse market conditions, upon terms that are not favorable to us, in order to maintain our liquidity |
| If those sales are made at prices lower than the amortized costs of the investments, we will incur losses |
| Changes in interest rates can have differing effects on our volume of mortgage loans originated |
| In periods of declining interest rates, demand for mortgage loans typically increases, particularly for mortgage loans related to refinancing of existing loans |
| The refinancing of existing loans currently comprises approximately 36dtta67prca of our loan volume |
| In periods of rising interest rates, such as have occurred recently, demand for mortgage loans typically declines |
| Our income from our mortgage banking division would significantly decrease following a decline in demand for mortgage loans in South Carolina, which is the area in which we originate our mortgage loans |
| 12 _________________________________________________________________ [36]Table of Contents The banking industry is highly competitive |
| The banking industry in our market area is highly competitive |
| We compete with many different financial and financial service institutions, including: • other commercial and savings banks and savings and loan associations; • credit unions; • finance companies; • mortgage companies; • brokerage and investment banking firms; and • asset-based non-bank lenders |
| A substantial number of the commercial banks in our market area are branches or subsidiaries of much larger organizations affiliated with statewide, regional, or national banking companies, and as a result may have greater resources and lower cost of funds |
| Additionally, we face competition from de novo community banks, including those with senior management who were previously with other local banks or those controlled by investor groups with strong local business and community ties |
| These competitors aggressively solicit customers within their market area by advertising through direct mail, the electronic media, and other means |
| Many of these competitors have been in business longer, and are substantially larger, than us |
| These competitors may offer services, such as international banking services, that we can offer only through correspondents, if at all |
| Additionally, larger competitors have greater capital resources and, consequently, higher lending limits |
| We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects |
| Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of and experience in the South Carolina community banking industry |
| The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy |
| Our success depends to a significant degree upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel and upon the continued contributions of our management and personnel |
| In particular, our success has been and continues to be highly dependent upon the abilities of our Chief Executive Officer, William G Stevens, who has expertise in community banking and experience in the markets we serve and have targeted for future expansion |
| We are also dependent upon a number of other key executives who are integral to implementing our business plan |
| The loss of the services of any one of our senior executive management team or other key executives could have a material adverse effect on our business, financial condition, results of operations and cash flows |
| Our growth strategy will require future increases in capital that we may not be able to accomplish |
| We are required by banking regulators to maintain various ratios of capital to assets |
| As our assets grow, we expect our capital ratios to decline unless we can increase our earnings or raise new capital sufficiently to keep pace with asset growth |
| If we are unable to limit a capital ratio decline by increasing our capital, we will have to restrict our asset growth as we approach the minimum required capital to asset ratios |
| Provisions in our articles of incorporation and South Carolina law may discourage or prevent takeover attempts, and these provisions may have the effect of reducing the market price for our stock |
| Our articles of incorporation include several provisions that may have the effect of discouraging or preventing hostile takeover attempts, and therefore of making the removal of incumbent management difficult |
| The provisions include staggered terms for our board of directors and requirements of supermajority votes to approve certain business transactions |
| In addition, South Carolina law contains several provisions that may make it more difficult for a third party to acquire control of us without the approval of our board of directors, and may make it more difficult or expensive for a third party to acquire a majority of our outstanding common stock |
| To the extent that these provisions are effective in discouraging or preventing takeover attempts, they may tend to reduce the market price for our stock |
| 13 _________________________________________________________________ [37]Table of Contents We are subject to governmental regulation which could change and increase our cost of doing business or have an adverse effect on our business |
| We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various federal and state agencies |
| Our compliance with the requirements of these agencies is costly and may limit our growth and restrict certain of our activities, including, payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, and locations of offices |
| We are also subject to capitalization guidelines established by federal authorities and our failure to meet those guidelines could result, in an extreme case, in our bank’s being placed in receivership |
| Supervision, regulation and examination of banks and bank holding companies by financial institution regulatory agencies are intended for the protection of depositors and our other customers rather than the holders of our common stock |
| The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the impact of these changes on our business or profitability |
| Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably |
| Changes in accounting standards could impact reported earnings |
| The accounting standard setters, including the FASB, SEC and other regulatory bodies, periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements |
| These changes can be hard to predict and can materially impact how it records and reports its financial condition and results of operations |
| In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements |
| We are susceptible to changes in monetary policy and other economic factors which may adversely affect our ability to operate profitably |
| Changes in governmental, economic and monetary policies may affect the ability of our bank to attract deposits and make loans |
| The rates of interest payable on deposits and chargeable on loans are affected by governmental regulation and fiscal policy as well as by national, state and loan economic conditions |
| The preparation of our financial statements requires the use of estimates that may vary from actual results |
| The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant estimates that affect the financial statements |
| Due to the inherent nature of this estimate, we cannot provide absolute assurance that we will not significantly increase the allowance for credit losses that are significantly higher than the provided allowance |
| For more information on the sensitivity of this estimate, refer to the Critical Accounting Policies section |
| We rely on communications, information, operating and financial control systems technology from third-party service providers, and we may suffer an interruption in those systems that may result in lost business and we may not be able to obtain substitute providers on terms that are as favorable if our relationships with our existing service providers are interrupted |
| We rely heavily on third-party service providers for much of our communications, information, operating and financial control systems technology |
| Any failure or interruption or breach in security of these systems could result in failures or interruptions in our customer relationship management, general ledger, deposit, servicing and/or loan origination systems |
| We cannot assure you that such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely |
| The occurrence of any failures or interruptions could have a material adverse effect on our business, financial condition, results of operations and cash flows |
| If any of our third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to locate alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all |
| Any of these circumstances could have a material adverse effect on our business, financial condition, results of operations and cash flows |
| 14 _________________________________________________________________ [38]Table of Contents If the business continuity and disaster recovery plans that we have in place are not adequate to continue our operations in the event of a disaster, the business disruption can adversely impact our operations |
| External events, including terrorist or military actions, or an outbreak of disease, such as Asian Influenza, or “bird flu,” and resulting political and social turmoil could cause unforeseen damage to our physical facilities, or could cause delays or disruptions to operational functions, including information processing and financial market settlement functions |
| Additionally, our customers, vendors and counterparties could suffer from such events |
| Should these events affect us, or the customers, vendors or counterparties with which we conduct business, our results of operations could be adversely affected |
| Litigation Risk From time to time, we are subject to claims and litigation from customers and other individuals |
| Whether such claims and legal action are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may result in significant financial liability and/or adversely affect the market perception of us and our products and services |
| Any financial liability or reputation damage could have a material adverse effect on our business and financial performance |
| Even though our common stock is currently traded on the Nasdaq Stock Market’s National Market, it has less liquidity than the average stock quoted on a national securities exchange |
| The trading volume in our common stock on the Nasdaq National Market has been relatively low when compared with larger companies listed on the Nasdaq National Market or the stock exchanges |
| As a result, it may be more difficult for shareholders to sell a substantial number of shares for the same price at which shareholders could sell a smaller number of shares |
| We also cannot predict the effect, if any, that future sales of our common stock in the market, or the availability of shares of common stock for sale in the market, will have on the market price of our common stock |
| We can give no assurance that sales of substantial amounts of common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair our future ability to raise capital through sales of our common stock |
| The market price of our common stock may fluctuate in the future, and these fluctuations may be unrelated to our performance |
| General market price declines or overall market volatility in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices |
| Our common stock is not insured, so you could lose your total investment |
| Our common stock is not a deposit or savings account, and will not be insured by the Federal Deposit Insurance Corporation or any other government agency |
| Should our business fail, you could lose your total investment |