2022 Shareholder letters

Dear Shareholders,

Our 2021 return on equity was 25.92%, the highest of all 47 banks chartered in South Carolina and over three times the state average. The appraised value of our shares increased from $498 to $712, an increase of 43%.

Now that I have your attention, I will explain how these results occurred, what it means for the years ahead, and what challenges we face.

Every quarter, all U. S. banks file a detailed report with the FDIC on their financial condition and performance. This 88-page report contains a detailed
analysis of the bank. They are filed electronically and are immediately available for the world to see, i.e., it is public information. A number of private companies use these filings to generate various comparative reports and sell them to interested parties, mainly other banks monitoring their performance relative to their competitors. From these reports, we learn such fun facts as these compared to other South Carolina banks:

We have the lowest amount of assets per employee, only $3.9 million per employee. This suggests we are grossly inefficient and perhaps mismanaged.
We have the second-most employees (354), and branches (25). Do we need more employees and more branches than banks twice our size?
Our bad debt expense as a percent of total loans is the highest in the state at 0.52% versus an average of 0.05%. Should we be concerned that our loan losses are ten times the average?

How can we reconcile eye-popping profitability and a soaring stock price with these nasty facts?

We’re different. Here’s how.

First……….

“We have the best bankers…..”

I don’t mean this as merely an expression of support and admiration. I mean we have intentionally and strategically sought the best bankers at the most opportune times, usually after a merger. Mergers have a marvelous way of rendering asunder the bond between the best bankers and their employers and when it happens, we’re there to help.

Second……….

“……giving their best effort.”

The best bankers will naturally give their best efforts because that’s who they are but we intentionally support and empower them in giving their best. We purposely maintain a decentralized management structure. This requires we carefully hire leaders whose values we share beyond our corporate values of Leadership, Teamwork, The Golden Rule, Going the Extra Mile, and Ownership, but also family and community values, as well as personal growth and development values. In this environment, trust occurs naturally but empowerment is our management choice. When you empower the best, high performance is the result.

Third………….

“A proprietary business model.”

Our performance is driven by five “Pillars of Performance.” By contrast, most community banks are driven by two.

- We are a high-performing community bank doing all the expected community bank things like commercial real estate loans, business lines of credit, personal and commercial deposit products, etc. In last year’s letter, I cited the song title ‘Anything You Can Do, I Can Do Better’ regarding how we compare to our peer banks. It’s still true. This is the largest “Pillar” and the biggest driver of our performance.
- Conventional residential mortgages we originate for other investors or government agencies. These are 30-year mortgages at low fixed rates. This department, our Home Mortgage Center, is rapidly ascending in importance and its contribution to our performance.

Here is where we part company with other community banks. Typically, a bank our size will do these two things and only these two things. For us, this is just where it gets interesting.

- Deposit account income. One of our main focuses is attracting “retail” or personal checking accounts, for this reason. Every personal checking account has a debit card. Everybody pays for everything with their debit card. Every time a debit card is swiped “an angel gets his wings” (My apologies to “It’s a Wonderful Life.”), meaning we earn a few pennies with every swipe. Over the course of a year, these pennies add up to a “goodish pile.” (More apologies to author P. G. Wodehouse). Because we make our checking accounts very attractive, i.e., cheap and convenient, we have a disproportionate number of small accounts with a disproportionate amount of debit card activity which results in a disproportionate amount of interchange income.

The next two Pillars are the “pillars de resistance” in terms of distinction that puts distance between us and our peers. To borrow from last year’s letter:

“We are a subprime consumer lender. Before you clutch your pearls, let me explain. This territory is rarely if ever, serviced by banks but normally serviced by finance companies. For example, the December 31, 2021, Uniform Bank Performance Report indicates our peer banks had less than 3% of their loans in non-real estate consumer loans while we had 35%. This is not new. It has been a focus of ours for decades. Consumer lending is a line of business for us but for our peer banks, it is merely an accommodation for deposit and commercial customers. We know how to serve this market segment profitably. Plus, our rates are typically half or less of what finance companies charge providing thousands in savings for our customers!” (I would add we are proud to serve these folks in a way that makes a positive difference in their lives).

We’re doing well by doing good!

Our market for these consumer loans is “people who produce a paycheck and consume it all in the ordinary course of living and have a credit score between 550-660.”
We serve them in two ways:

- We finance their transportation, used cars and trucks, needed to get to work and accommodate a family. The average loan size is $20,000.
  Dealers across South Carolina, North Carolina, and Georgia submit loan applications for their customers to us for financing the purchase of a vehicle. The industry term for this is ‘subprime indirect auto lending.’ It’s a specialized field, conducted by professionals, misunderstood by examiners, avoided by bankers, and embraced by us.
- While most bank branches sit relatively idle, ours are busy making consumer loans, often over 1000 per month. Our biggest challenge is one we’ve pledged to overcome; educating the market that we offer a better way to borrow at ABB. “We can save you thousands, in minutes, on your finance company loan,” to quote a recent billboard. Our goal is to disrupt the hold high rate finance companies have on working people with a better way to borrow.

Our consumer lending shines a spotlight in other less flattering areas; loan losses. Banking is an industry that abhors loan losses and views them as an indication of risk. In subprime consumer lending, losses are a part of the business. So while we typically have annual loan losses in the millions, they are expected, predictable, and accommodated in our loan pricing. High expected loan losses are not an indication of high risk, unexpected losses are.

“The best bankers giving their best effort in a proprietary business model” is our Strategic Advantage. We don’t claim to have “cracked the code” in community banking but we have developed a powerful model that will provide steady and superior returns for years to come. In the words of Warren Buffett, this enduring strategic advantage is our “moat,” difficult to disrupt and tough to duplicate. It’s also organic, it was discovered not created, lesson by lesson, year after year. It’s who we are.

Being different can pay well but is not without its challenges.

Managing five “Pillars” is possible only because we have the “best bankers” that specialize in their field and leaders that trust and empower them. However, regulators are not impressed by our high performance but rather view it with suspicion. Our model has to pass the highest test of safety and soundness. We have to prove ourselves and our model exam after exam.

We cannot attribute all of our 2021 performance to our Strategic Advantage as we reaped the benefit of highly unusual non-re-occurring income. Three come to mind:

PPP fee income of $5.8 million. There will never be another PPP…. we’re going to miss it.
Bad debt expense dropped dramatically, by $2.7 million as borrowers were awash with government cheese.
Interest expense dropped by $3.7 million as the government dropped interest rates to artificially low levels.

Without this extraordinary income, our return on equity would still have been impressive at about 20%. Our first quarter 2022 ROE of over 20% validates this claim and our Strategic Advantage.

Our greatest accomplishment in 2021 was our success in attracting the best bankers. We hired 78 new employees for the year, many of them ‘best bankers’ and we’re glad to provide a platform for their continued success and honored they chose us as their new home. Some other notable deeds for the year:

Renovation of the facades for our ten buildings on Main Street Mullins. We’ll finish our Mullins facelift in 2022.
Created a new position of Consumer Loan Director to coach and encourage performance and production of our direct consumer loans.
Opened our new Call Center in Aynor. We’ll soon be expanding hours to nights and weekends.
Opened and staffed our new Training Center in Mullins. So needed for so long! Consistent, reliable training is a must in banking today. You can’t build a bank faster than you develop your people.
Accountant Smith Brooks accepted the position of Directors’ Audit Committee Chairman. Smith’s years of accounting and audit experience gives this committee the independence and competency required. We have the best directors too!
Secured three future branch sites in Florence, Sumter, and North Myrtle Beach.
Added five loan officers to our indirect lending team to expand into Georgia and improve service to all our nearly 200 auto dealer partners.
Secured $15 million in subordinated debt to maintain our capital ratios and support our growth in assets.
Commenced the journey to originate mortgages for Fannie and Freddie. This is a challenge requiring broad improvement in all areas of our Home Mortgage Center.
Appointed a Senior Loan Officer to support our robust growth in commercial lending.
Renovated Conway Main Street office for improved drive-up service.
Plans are being made to accommodate our extraordinary growth and need for space in Conway, Myrtle Beach, and North Myrtle Beach. More on this in the 2022 letter!
We installed a new leadership and commercial lending team in Florence. Early returns are beyond promising!
Nothing denotes banking momentum like core deposit growth. Horry County core deposits grew $233 million; 44%!

I have provided few numbers in this letter, as they are provided elsewhere in this report. They speak for themselves. Powerfully. Additionally, on March 31 the Board of Directors approved a quarterly dividend of $2.00 per share payable April 15 and quarterly thereafter contingent on sufficient bank performance and condition.

As I'm wrapping up this letter, I cannot finish without a word to and about our employees. This is my 42nd year as an employee and 29th as CEO. I never imagined we'd be $1.5 billion with industry-leading profitability. My role is that of a supportive teammate to the leaders that are actually making it happen. I could not be more grateful for their contribution or admiring of their diligence and ability.

Our stockholders' meeting will be held Thursday, May 26, 2022, at 11 :00 am at our Conference Center on Main Street in Mullins.

Prior Shareholder Letters:

2021