Item 1A. Risk Factors
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report and the risk factors discussed below, you should carefully consider the factors discussed in Part I, Item 1A. “RISK FACTORS” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which could materially affect our business, financial condition or future results. The risks described in our annual report on Form 10-K and below are not the only the risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results in the future.
The COVID-19 pandemic is expected to continue to adversely affect our business, financial condition and results of operations. The ultimate effects of the pandemic on our business, financial condition and results of operations will depend on the severity, scope and duration of the pandemic, its cumulative economic effects, and the effectiveness of governmental actions in response to the pandemic.
The ongoing COVID-19 national health emergency has significantly disrupted the United States and international economies and financial markets. We expect that the COVID-19 pandemic and its effects will continue to adversely affect our business, financial condition and results of operations in future periods. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reductions in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability. The State of Alabama and many other states have taken preventative and protective actions, such as imposing a statewide mask mandate, restrictions on travel, business operations, public gatherings, social distancing, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of non-essential businesses. Though certain of these measures have been relaxed or eliminated, recent increases in reported cases could cause these measures to be re-established.
The travel, hospitality and food and beverage industries, restaurants, retailers and auto manufacturers, and their suppliers have been severely affected. A significant number of layoffs, furloughs of employees, as well as remote work have occurred in these and other industries, including government offices, schools and universities. Auburn University held virtual classes only from March 16, 2020 through the summer session. Auburn University’s guidelines for the fall semester of 2020 involve both remote and in person instructions as well as social distancing measures. The economic impact of these measures is not presently known. Hyundai’s Montgomery and Kia’s West Point, Georgia plants were closed for a portion of the first quarter of 2020, but began a phased reopen in the second quarter of 2020 in response to COVID-19.
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The ultimate effects of the COVID-19 pandemic on the economy, generally, our markets, and on us cannot be predicted. The timing and effects of the COVID-19 pandemic on our business, results of operations and financial condition may include, among various other consequences, the following. These effects depend on the severity, scope and duration of the pandemic, its cumulative economic effects, and the effectiveness of healthcare, business and governmental actions addressing the pandemic’s effects.
• Employees’ health could be adversely affected, necessitating their recovery away from work;
• Unavailability of key personnel necessary to conduct our business activities;
• Our operating effectiveness may be reduced as our employees work from home or suffer from the COVID-19 virus;
• Shelter in place, or other restrictions and interruptions of our business and contact with our customers;
• Sustained closures of our branch lobbies or the offices of our customers;
• Declines in demand for loans and other banking services and products, and reduced interchange fees on payment cards;
• Additional stimulus efforts have been agreed to by the Congress and the executive branch and the related uncertainty may increase economic and market risks and volatility;
• Reduced consumer spending and economic activity due to both job losses, health concerns and required practices, such as social distancing and shelter in place, attributable to the COVID-19 pandemic, and to the discontinuation of Federal stimulus payments on July 25, 2020;
• Reduced interchange revenue from reduced retail sales, travel and payment card usage, generally;
• Significant volatility in United States financial markets and our investment securities portfolio, including credit concerns over state, county and municipal securities;
• Our growth has been slowed, and may slow further, or our asset size may decline;
• Reduced economic activity and reduced customer income and cash flows from normal business and employment could reduce the amounts of our deposits, increase deposit costs, and adversely affect our liquidity, financial condition and results of operations;
• Declines in the credit quality of our loan portfolio, owing to the effects of the COVID-19 pandemic in the markets we serve, leading to increased provisions for loan losses and increases in our allowance for possible credit losses;
• Declines in the value of collateral for loans, including real estate collateral, especially in industries such as travel, hospitality, restaurants and retailers;
• Declines in the net worth and liquidity of borrowers, impairing their ability to pay timely their loan obligations to us;
• Decreases in market interest rates that are expected to reduce our net interest income and our profitability;
• Loan deferrals and loan modifications, and mortgage foreclosure moratoria, including those mandated by law, or which are encouraged by our regulators, may increase our expense and risks of collectability, reduce our cash flows and liquidity and adversely affect our results of operations and financial condition;
• The end of temporary regulatory accounting and capital relief for banks regarding the effects of the COVID-19 pandemic, including loan deferrals and modifications, could increase our TDRs and require additions to our allowance for loan losses, which may adversely affect our income, financial condition and capital;
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• Our waiver of various fees and service charges to support our customers and communities will adversely affect our results of operation and our liquidity and financial position;
• The COVID-19 pandemic may change customer financial behaviors and payment practices. Electronic banking could become more popular with less customers doing business at our offices;
• Certain of our assets, including loans and securities, may become impaired, which would adversely affect our results of operation and financial condition and mortgage loan foreclosure moratoria may limit our ability to timely act to protect our interests in the loan collateral;
• Reductions in income or losses will adversely affect our capital and growth of capital, including our capital for bank regulatory purposes;
• Losses or reductions in net income may adversely affect the growth or amount of dividends we can pay on our common stock;
• The effects of government fiscal and monetary policies, including changes in such policies, or the effects of discontinuing COVID-19 relief programs, on the economy and financial stability, generally, and on our business, results of operations and financial condition cannot be predicted;
• The restoration of financial stability and economic growth may depend on the health care system developing and deploying COVID-19 testing and contact tracing, and drugs that better address COVID-19, and vaccines to prevent COVID-19, which promote consumer and employee health and confidence in the economy.
These factors, together or in combination with other events or occurrences that are unknown or anticipated, may materially and adversely affect our business, financial condition and results of operations.
Our stock price may reflect securities market conditions
The ongoing COVID-19 pandemic has resulted in substantial securities market losses, especially for bank stocks and has, and may continue to, adversely affect the market of our common stock. The spread, intensification and duration of COVID-19 pandemic, as well as the effectiveness of governmental, fiscal and monetary policies, and regulatory responses to the pandemic, further affect the financial markets and the market prices for securities generally, and the market prices for bank stocks, including our common stock. Uncertainty and volatility in the capital markets may increase as a result of the 2020 federal and state elections.
The COVID-19 global pandemic could result in deterioration of asset quality and an increase in credit losses.
Many businesses have or will have lower revenues and cash flows and many consumers will have lower income. These could result in an inability to repay loans timely in full, reduce our asset quality and reduce our deposits. Loan modifications and payment deferrals may also increase our credit risks, especially if temporary regulatory relief for these actions expires. Our business, results of operations, liquidity and financial condition could be adversely affected.
The COVID-19 pandemic has resulted in increased operational risks.
The COVID-19 pandemic has resulted in heightened operational risks. Much of our workforce has been working remotely, and increased levels of remote access create additional cybersecurity risk and opportunities for cybercriminals to exploit vulnerabilities. Cybercriminals may increase their attempts to compromise business and consumer emails, including an increase in phishing attempts, and fraudulent vendors or other parties may view the pandemic as an opportunity to prey upon consumers and businesses during this time. This could result in increased fraud losses to us or our clients. The increase in online and remote banking activities may also increase the risk of fraud against our customers. State and local orders and regulations regarding the conduct of in-person business operations have affected and may continue to affect our ability to operate at normal levels and to restore operations to their pre-pandemic level for an unknown period of time. Separately, our third-party service providers have also been affected by the pandemic. To date, these disruptions have not been material and we have developed solutions to these disruptions, but we may experience additional disruption in the future, which could adversely affect our business, results of operations and financial condition.
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The COVID-19 global pandemic may continue to cause uncertainty in markets and may result in an increase in our cost of funds.
The COVID-19 global pandemic has caused a great amount of uncertainty in markets, causing credit markets to seize and forcing companies, including our clients, to seek liquidity in the face of uncertain future cash flows. To the extent the clients’ funds are not used as working capital and not placed on deposit with us, we could be faced with funding draws of committed lending facilities, along with requests for new credit facilities from our clients. As clients use deposit balances to fund their businesses, this may put funding pressure on us, which may cause us to pay higher rates than normal for deposits and other funding.
As a participating lender in the PPP, the Bank is subject to additional risks of litigation from the Bank’s customers or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.
The CARES Act and the PPP and Healthcare Enhancement Act included an approximately $659 billion loan for the PPP administered through by the SBA and the U.S. Department of the Treasury. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved PPP lenders, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. As of September 30, 2020, we have secured funding of approximately 422 loans totaling $36.5 million through the PPP program. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress approved approximately $310 billion of additional funding for the PPP on April 24, 2020. The PPP closed on August 8, 2020 and the SBA no longer accepts PPP applications from participating lenders, and proposed extension of the PPP have not been approved by Congress through mid-October, 2020. Since the opening of the PPP, various other banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. We may be exposed to the risk of litigation, from both customers and non-customers that approached the Bank regarding PPP loans, regarding its procedures used in processing applications for the PPP. If any such litigation is filed against the Bank and is not resolved favorably to the Bank, it may result in financial liability or adversely affect our reputation. Litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse effect on our business, financial condition and results of operations.
The Bank also has credit risk on PPP loans, if the SBA determines deficiencies in the manner in which PPP loans were originated, funded or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, or obtain forgiveness of a PPP properly, including those related to the ambiguity in the laws, rules and guidance regarding the PPP’s operation. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there were one or more deficiencies in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the PPP loan guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company. Similar issues may also result in the denial of forgiveness of PPP loans, which would adversely affect and could result in losses, including possible bankruptcies, which may expose us to further costs and potential losses.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.