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Item 1A. Risk Factors

2023-03-31 compared with 2022-03-31 · 103 added, 92 removed, 310 unchanged (39% of the section changed)

An investment in our common stock is subject to risks inherent in our business.

Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this report.

Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this Form 10-K.

The risks described below are not the only ones we face.

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The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.

This report is qualified in its entirety by these risk factors.

This Form 10-K is qualified in its entirety by these risk factors.

Risks Related to Macroeconomic Conditions

The COVID-19 pandemic has impacted the way we conduct business which may adversely impact our financial results and those of our clients.

The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic continues to negatively impact economic and commercial activity and financial markets, both globally and within the United States.

In our market areas, stay-at-home orders, travel restrictions and closure of non-essential businesses and similar orders imposed across the United States to restrict the spread of COVID-19 in 2020 resulted in significant business and operational disruptions, including business closures, supply chain disruptions, and significant layoffs and furloughs.

Although local jurisdictions have subsequently lifted stay-at-home orders and moved to the opening of businesses, worker shortages, vaccine and testing requirements, new variants of COVID-19 and other health and safety recommendations have impacted the ability of businesses to return to pre-pandemic levels of activity and employment.

While the overall economy has improved, disruptions to supply chains continue and significant inflation has been seen in the market.

If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in our Form 10-K could be exacerbated, including the following risks of COVID-19, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations of the Company:

● effects on key employees, including operational management personnel and those charged with preparing, monitoring, and evaluating our financial reporting and internal controls;

● declines in demand for loans and other banking services and products, as well as a decline in the credit quality of our loan portfolio, owing to the effects of COVID-19 in the markets we serve;

● if the economy is unable to remain open in an efficient manner, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

● collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

● allowance for loan losses may increase if borrowers experience financial difficulties, which will adversely affect net income;

● the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments;

● as long as the Federal Reserve Board’s target federal funds rate remains near 0%, the yield on assets may decline to a greater extent than the decline in cost of interest-bearing liabilities, reducing net interest margin and spread and reducing net income;

● higher operating costs, increased cybersecurity risks and potential loss of productivity as the result of an increase in the number of employees working remotely;

● increasing or protracted volatility in the price of the Company’s common stock, which may also impair our goodwill;

● risks to capital markets that may impact the performance of our investment securities portfolio, as well as limit our access to capital markets and other funding sources.

Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent of COVID-19’s effects on our business, operations, or the global economy as a whole.

Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, possible future virus variants, the effectiveness of our work-from-home arrangements, third party providers’ ability to support our operations, and any actions taken by governmental authorities and other third parties in response to the pandemic.

The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.

Our business may be adversely affected by downturns in the national economy and the regional economies in which we operate.

Our operations are significantly affected by national and regional economic conditions.

Weakness in the national economy or the economies of the markets in which we operate could have a material adverse effect on our financial condition, results of operations and prospects.

We provide banking and financial services primarily to businesses and individuals in the states of California, Colorado, Washington, and New Mexico.

We provide banking and financial services primarily to businesses and individuals in the states of California, Colorado, New Mexico and Washington.

All of our branches and most of our deposit clients are located in these four states.

A return of recessionary conditions or adverse economic conditions in the markets we serve may reduce our rate of growth, affect our customers’ ability to repay loans and adversely impact our business, financial condition, and results of operations.

Further, as a result of a high concentration of our client base in the San Francisco Bay area, the deterioration of businesses in this market, or one or more businesses with a large employee base in this market, could have a material adverse effect on our business, financial condition and results of operations.

Weakness in the global economy has adversely affected many businesses operating in our markets that are dependent upon international trade and it is not known how changes in tariffs being imposed on international trade may also affect these businesses.

In addition, adverse weather conditions as well as decreases in market prices for agricultural products grown in our primary markets can adversely affect agricultural businesses in our markets.

Deteriorations in economic conditions in the market areas we serve, in particular the San Francisco Bay Area, Denver, Colorado, Seattle, Washington, and Central New Mexico and the agricultural region of the California Central Valley, could result in the following consequences, any of which could have a material adverse effect on our business, financial condition and results of operations:

General economic conditions, including inflation, unemployment and money supply fluctuations, also may adversely affect our profitability.

Weakness in the global economy and global supply chain issues have adversely affected many businesses operating in our markets that are dependent upon international trade and it is not known how changes in tariffs being imposed on international trade may also affect these businesses.

Changes in agreements or relationships between the United States and other countries may also affect these businesses.

In addition, adverse weather conditions as well as decreases in market prices for agricultural products grown in our markets can adversely affect agricultural businesses in our markets.

A deterioration in economic conditions in the market areas we serve, in particular the San Francisco Bay Area, Southern California Area, Denver, Colorado, Seattle, Washington, Central New Mexico and the agricultural region of the California Central Valley, could result in the following consequences, any of which could have a material adverse effect on our business, financial condition and results of operations:

● demand for our products and services may decline;

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● the amount of our low-cost or noninterest bearing deposits may decrease.

A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse.

Moreover, a decline in local or regional economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse.

Many of the loans in our portfolio are secured by real estate or fixtures attached to real estate.

At December 31, 2021, approximately 85.9% of total loans was comprised of loans with real estate as a primary or secondary component of collateral.

Deterioration in

the real estate markets where collateral for a mortgage loan is located could negatively affect the borrower’s ability to repay the loan and the value of the collateral securing the loan.

Real estate values are affected by various other factors, including changes in general or regional economic conditions, governmental rules or policies, and natural disasters such as earthquakes, floods, fires and mudslides.

Deterioration in the real estate markets where collateral for a mortgage loan is located could negatively affect the borrower’s ability to repay the loan and the value of the collateral securing the loan.

Real estate values are affected by various other factors, including changes in local or regional economic conditions, governmental rules or policies, and natural disasters such as earthquakes, floods, fires and mudslides.

If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected.

Inflation can have an adverse impact on our business and on our customers.

Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money.

Inflation has risen sharply since the end of 2021 to levels not seen in more than 40 years.

Small to medium-sized businesses may be impacted more during periods of high inflation, as they are not able to leverage economics of scale to mitigate cost pressures compared to larger businesses.

Consequently, the ability of our business customers to repay their loans may deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact our results of operations and financial condition.

Furthermore, a prolonged period of inflation could cause wages and other costs to the Company to increase, which could adversely affect our results of operations and financial condition.

The economic impact of the COVID-19 pandemic could continue to affect our financial condition and results of operations.

The COVID-19 pandemic caused significant economic dislocation in the United States and internationally, resulting in a slow-down in economic activity, increased unemployment levels, and disruptions in global supply chains and financial markets.

The pandemic and related government actions to curb its spread also resulted in closures of many organizations and the institution of social distancing requirements in many states and communities.

Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry.

In response to the pandemic, various state governments and federal agencies required lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees).

Federal banking agencies encouraged financial institutions to prudently work with affected borrowers and legislation provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak.

The spread of the coronavirus also caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences.

Given the ongoing dynamic nature of variants of COVID-19, it is difficult to predict the full impact of the COVID-19 pandemic outbreak on our business.

As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to a number of risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, results of operations, ability to execute our growth strategy, and ability to pay dividends.

These risks include, but are not limited to, changes in demand for our products and services;

increased loan losses or other impairments in our loan portfolios and increases in our allowance for loan losses;

a decline in collateral for our loans, especially real estate;

unanticipated unavailability of employees;

increased cyber security risks as employees work remotely;

a prolonged weakness in economic conditions resulting in a reduction of future projected earnings could necessitate a valuation allowance against our current outstanding deferred tax assets;

a triggering event leading to impairment testing on our goodwill or core deposit and customer relationships intangibles, which could result in an

impairment charge;

and increased costs as the Company and our regulators, customers and vendors adapt to evolving pandemic conditions.

Risks Related to Our Lending Activities

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In such cases, any repossessed collateral for a defaulted agricultural operating loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation or because the assessed value of the collateral exceeds the eventual realization value.

Loans originated under the SBA Paycheck Protection Program subject us to credit, forgiveness and guarantee risk.

As of December 31, 2021, we hold and service a portfolio of 323 loans originated under the PPP with a balance of $69.6 million.

The PPP loans are subject to the provisions of the CARES Act and CAA, 2021 and to complex and evolving rules and guidance issued by the SBA and other government agencies.

We expect that the great majority of our PPP borrowers will seek full or partial forgiveness of their loan obligations.

We have credit risk on PPP loans if the SBA determines that there is a deficiency in the manner in which we originated, funded or serviced loans, including any issue with the eligibility of a borrower to receive a PPP loan.

We could face additional risks in our administrative capabilities to service our PPP loans, and risk with respect to the determination of loan forgiveness, depending on the final procedures for determining loan forgiveness.

In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which we originated, funded or serviced a PPP loan, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if the SBA has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.

The success of our SBA lending program is dependent upon the continued availability of SBA loan programs, our status as a preferred lender under the SBA loan programs and our ability to comply with applicable SBA lending requirements.

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For the year ended December 31, 2022, we sold a total of $34.0 million in SBA loans (guaranteed portion) for a net gain of $2.7 million.

There can be no assurance that we will be able to continue originating these loans, that a secondary market

will exist or that we will continue to realize premiums upon the sale of the guaranteed portion of these loans.

There can be no assurance that we will be able to continue originating these loans, that a secondary market will exist or that we will continue to realize premiums upon the sale of the guaranteed portion of these loans.

When we sell the guaranteed portion of our SBA 7(a) loans, we incur credit risk on the retained, non-guaranteed portion of the loans.

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Deterioration in economic conditions, new information regarding existing loans, identification of additional problem loans or relationships, and other factors, both within and outside of our control, may increase our loan charge-offs and/or otherwise require an increase in our provision for loan losses.

The acquisition method of

accounting requires that acquired loans are initially recorded at fair value at the time of acquisition, and therefore no corresponding allowance for loan losses is recorded for these loans at acquisition because credit quality, among other elements, was considered in the determination of fair value.

The acquisition method of accounting requires that acquired loans are initially recorded at fair value at the time of acquisition, and therefore no corresponding allowance for loan losses is recorded for these loans at acquisition because credit quality, among other elements, was considered in the determination of fair value.

To the extent that our estimates of fair value are too high, we will incur impairment losses associated with the acquired loans.

In addition, the FASB has adopted a new accounting standard referred to as Current Expected Credit Loss, or CECL, which will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses.

This will change the current method of providing allowances for credit losses only when they have been incurred and are probable, which may require us to increase our allowance for loan losses and may greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for credit losses.

This accounting pronouncement is expected to be applicable to us for our first fiscal year after December 15, 2022.

We are evaluating the impact the CECL accounting model will have on our accounting but expect to recognize a onetime cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective.

We cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our financial condition or results of operations.

In addition, the FASB has adopted an accounting standard referred to as Current Expected Credit Loss, or CECL, which will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses.

This will change the current method of providing allowances for credit losses only when they have been incurred and are probable, which is expected to require us to increase our allowance for loan losses and greatly increase the types of data we need to collect and review to determine the appropriate level of the allowance for credit losses.

This accounting pronouncement is applicable to us effective January 1, 2023.

As of the implementation date, following sensitivity analyses and considering changes in economic conditions, credit quality of the loan portfolio and changes in interest rates, management estimates that our adoption of the CECL model will result in a $1 million to $3 million increase to our allowance for credit losses for loans.

Once finalized, the impact as a result of the adoption of this guidance will be recorded as a cumulative-effect, net of tax, adjustment to retained

earnings effective January 1, 2023.

The magnitude of the change in the Company’s allowance for credit losses at the adoption date will depend upon the nature and characteristics of the portfolio at the adoption date, as well as macroeconomic conditions and forecasts at that time, other management judgements, and continued refinement and validation of the model and methodologies.

See also, “Note 1 — Organization and Summary of Significant Accounting Policies – Recent Accounting Guidance Not Yet Effective” in the Notes to the Consolidated Financial Statements contained in “Item 8.

Financial Statements and Supplementary Data” of this Form 10-K.

The federal banking regulators, including the Federal Reserve and the FDIC, have adopted a rule that gives a banking organization the option to phase in over a three- year period the day-one adverse effects of CECL on its regulatory capital.

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Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board.

In March 2020, in response to the COVID-19 pandemic, the Federal Open Market Committee (“FOMC”) of the Federal Reserve reduced the targeted federal funds rate 150 basis points to a range of 0.00% to 0.25%.

The reduction in the targeted federal funds rate has resulted in a decline in overall interest rates which has negatively impacted our net interest income.

However, the FOMC has recently indicated it expects to increase rates starting in 2022.

Since March 2022, in response to inflationary pressures, the Federal Open Market Committee (“FOMC”) of the Federal Reserve Board has increased the target range for the federal funds rate 425 basis points, including 125 basis points during the fourth calendar quarter of 2022, to a range of 4.25% to 4.50% as of December 31, 2022.

As it seeks to control inflation without creating a recession, the FOMC has indicated further increases are expected during 2023.

If the FOMC increases the targeted federal funds rates, overall interest rates will likely rise, which will positively impact our net interest income, but may negatively impact both the housing market, by reducing refinancing activity and new home purchases and the U.S.

In addition, deflationary pressures, while possibly lowering our operational costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of collateral securing loans which could negatively affect our financial performance.

We principally manage interest rate risk by managing volume and mix of our earning assets and funding liabilities.

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As is the case with many banks our emphasis on increasing core deposits has resulted in an increasing percentage of our deposits being comprised of certificates of deposit and other deposits yielding no or a relatively low interest rate, having a shorter duration than our assets.

At December 31, 2021, we had $194.5 million in certificates of deposit that mature within one year and $1.8 billion

in noninterest bearing checking, NOW checking, savings and money market accounts.

At December 31, 2022, we had $221.4 million in certificates of deposit that mature within one year and $1.8 billion in demand deposits, NOW accounts and savings, and money market accounts.

We would incur a higher cost of funds to retain these deposits in a rising interest rate environment.

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The process for determining whether impairment of a security is other-than-temporary usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security to assess the probability of receiving all contractual principal and interest payments on the security.

There can be no assurance that the declines in market value will not result in other-than-temporary impairments of these assets and lead to accounting charges that could have a material adverse effect on our net income and capital levels.

For the year ended December 31, 2022, we did not incur any other-than-temporary impairments on our securities portfolio.

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We performed our test for goodwill impairment at December 31, 2022 and the test concluded that recorded goodwill was not impaired.

Our test of goodwill for potential impairment is based on a qualitative assessment by

management that takes into consideration macroeconomic conditions, industry and market conditions, cost or margin factors, financial performance and share price.

Our test of goodwill for potential impairment is based on a qualitative assessment by management that takes into consideration macroeconomic conditions, industry and market conditions, cost or margin factors, financial performance and share price.

Our evaluation of the fair value of goodwill involves a substantial amount of judgment.

If our judgment was incorrect, or if events or circumstances change, and an impairment of goodwill was deemed to exist, we would be required to write down our goodwill resulting in a charge against operations, which would adversely affect our results of operations, perhaps materially;

however, it would have no impact on our liquidity, operations, or regulatory capital.

If our judgment was incorrect, or if events or circumstances change, and an impairment of goodwill was deemed to exist, we would be required to write down our goodwill resulting in a charge against operations, which may materially adversely affect our results of operations.

Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition and could result in further losses in the future.

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In addition, the resolution of nonperforming assets requires significant commitments of time from management and our directors, which can be detrimental to the performance of their other responsibilities.

The Company’s reported financial results depend on management’s selection of accounting methods and certain assumptions and estimates, which, if incorrect, could cause unexpected losses in the future.

The Company’s accounting policies and methods are fundamental to how the Company records and reports its financial condition and results of operations.

The Company’s management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with generally accepted accounting principles and reflect management’s judgment regarding the most appropriate manner to report the Company’s financial condition and results of operations.

In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances, yet might result in the Company’s reporting materially different results than would have been reported under a different alternative.

Certain accounting policies are critical to presenting the Company’s financial condition and results of operations.

They require management to make difficult, subjective or complex judgments about matters that are uncertain.

Materially different amounts could be reported under different conditions or using different assumptions or estimates.

These critical accounting policies include the allowance for loan losses, estimations of fair value and income taxes.

Because of the uncertainty of estimates involved in these matters, the Company may be required to do one or more of the following:

significantly increase the allowance for loan losses and/or sustain credit losses that are significantly higher than the reserve provided, recognize significant losses on the remeasurement of certain asset and liability balances, or significantly increase its accrued taxes liability.

For more information, refer to “Critical Accounting Estimates” included in Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.

Risks Related to Cybersecurity, Third Parties and Technology

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We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us.

We could also suffer significant reputational damage.

Security breaches in our internet banking activities could further expose us to possible liability and damage our reputation.

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We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data.

services, or other businesses, additional regulatory scrutiny or penalties, or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations.

Although we have developed and continue to invest in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security, these precautions may not protect our systems from compromises or breaches of our security measures, and could result in losses to us or our clients, our loss of business and/or clients, damage to our reputation, the incurrence of additional expenses, disruption to our business, our inability to grow our online services, or other businesses, additional regulatory scrutiny or penalties, or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations.

Our security measures may not protect us from system failures or interruptions.

While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do.

We have established policies and procedures to prevent or limit the impact of system breaches, failures and interruptions.

In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers.

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We cannot assure you that such breaches, 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.

We may not be insured against all types of losses as a result of third-party failures and insurance coverage may be inadequate to cover all losses resulting from breaches, system failures, or other disruptions.

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 identify 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.

Further, the occurrence of any systems failure or interruption could damage our reputation and result in a loss of clients and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability.

Further, while we believe we maintain adequate insurance to cover these risks, our insurance coverage may not cover all losses resulting from breaches, system failures or other disruptions.

The occurrence of any systems failure or interruption could damage our reputation and result in a loss of clients and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability.

Any of these occurrences could have a material adverse effect on our financial condition and results of operations.

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The banking industry is extensively regulated.

Federal banking regulations are designed primarily to protect the deposit insurance funds and consumers, not to benefit a company’s shareholders.

Federal banking regulations are designed primarily to protect the deposit insurance funds and customers, not to benefit a company’s shareholders.

These regulations may sometimes impose significant limitations on our operations.

The significant federal and state banking regulations that affect us are described in this report under the heading “Item 1.

Business — Supervision and Regulation”.

These regulations, along with the currently existing tax, accounting, securities, insurance, privacy and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures.

The significant federal and state banking regulations that affect us are described

in this Form 10-K under the heading “Item 1.

Business — Supervision and Regulation.” These regulations, along with the currently existing tax, accounting, securities, insurance, privacy and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures.

These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time.

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However, as with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified.

Climate change and related legislative and regulatory initiatives may materially affect the Company’s business and results of operations.

The effects of climate change continue to create an alarming level of concern for the state of the global environment.

As a result, the global business community has increased its political and social awareness surrounding the issue, and the United States has entered into international agreements in an attempt to reduce global temperatures, such as reentering the Paris Agreement.

Further, the U.S.

Congress, state legislatures and federal and state regulatory agencies continue to

propose numerous initiatives to supplement the global effort to combat climate change.

Similar and even more expansive initiatives are expected under the current administration, including potentially increasing supervisory expectations with respect to banks’ risk management practices, accounting for the effects of climate change in stress testing scenarios and systemic risk assessments, revising expectations for credit portfolio concentrations based on climate-related factors and encouraging investment by banks in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change.

The lack of empirical data surrounding the credit and other financial risks posed by climate change render it difficult, or even impossible, to predict how specifically climate change may impact our financial condition and results of operations;

however, the physical effects of climate change may also directly impact us.

Specifically, unpredictable and more frequent weather disasters may adversely impact the real property, and/or the value of the real property, securing the loans in our portfolios.

Additionally, if insurance obtained by our borrowers is insufficient to cover any losses sustained to the collateral, or if insurance coverage is otherwise unavailable to our borrowers, the collateral securing our loans may be negatively impacted by climate change, natural disasters and related events, which could impact our financial condition and results of operations.

Further, the effects of climate change may negatively impact regional and local economic activity, which could lead to an adverse effect on our customers and impact the communities in which we operate.

Overall, climate change, its effects and the resulting, unknown impact could have a material adverse effect on our financial condition and results of operations.

Risks Related to Our Business and Industry Generally

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We have certain loans and investment securities, indexed to LIBOR to calculate the interest rate.

The continued availability of the LIBOR index is not guaranteed after 2021 and by June 2023, LIBOR is scheduled to be eliminated entirely.

We cannot predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted.

ICE Benchmark Administration, the authorized and regulated administrator of LIBOR, ended publication of the one-week and two-month LIBOR (for U.S.

dollars) tenors on December 31, 2021 and the remaining LIBOR (for U.S.

dollars) tenors will end publication in June 2023.

Financial services regulators and industry groups have collaborated to develop alternate reference rate indices or reference rates.

The transition to a new reference rate requires changes to contracts, risk and pricing models, valuation tools, systems, product design and hedging strategies.

At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR (with the exception of overnight repurchase agreements, which are expected to be based on the Secured Overnight Financing Rate, or SOFR).

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If a trigger is satisfied, contracts and financial instruments may give the calculation agent discretion over the substitute index or indices for the calculation of interest rates to be selected.

The implementation of a substitute index or indices for the calculation of interest rates under our loan agreements with our borrowers or our existing borrowings may result in our incurring significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept the substitute index or indices, and may result in disputes or litigation with clients and creditors over the appropriateness or comparability to LIBOR of the substitute index or indices, which could have an adverse effect on our results of operations.

The implementation of a substitute index or indices for the calculation of interest

rates under our loan agreements with our borrowers or our existing borrowings may result in our incurring significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept the substitute index or indices, and may result in disputes or litigation with clients and creditors over the appropriateness or comparability to LIBOR of the substitute index or indices, which could have an adverse effect on our results of operations.

Ineffective liquidity management could adversely affect our financial results and condition.

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Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable to us could be impaired by factors that affect us specifically, or the financial services industry or economy in general.

Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated, negative operating results, or adverse regulatory action against us.

Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our loans and deposits are concentrated, negative operating results, or adverse regulatory action against us.

Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry or deterioration in credit markets.

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Several of our large depositors have relationships with each other, which creates a higher risk that one client’s withdrawal of its deposit could lead to a loss of other deposits from clients within the relationship, which, in turn, could force us to fund our business through more expensive and less stable sources.

As of December 31, 2021, our ten largest non-brokered depositors accounted for $198.6 million in deposits, or approximately 10.0% of total deposits.

As of December 31, 2022, our ten largest depositors, none of which include brokered deposits, accounted for $215.1 million in deposits, or approximately 11.0% of total deposits.

Several of our large depositors are affiliated locals of labor unions or have business, family, or other relationships with each other, which creates a risk that any one client’s withdrawal of its deposit could lead to a loss of other deposits from clients within the relationship.

At December 31, 2022, $666.8 million, or 32.0%, of our total deposits were comprised of deposits from labor unions, representing 704 different local unions with an average deposit balance per local union of approximately $842,000.

At December 31, 2021, six labor unions had aggregate deposits of $10.0 million or more, totaling $116.2 million, or 5.9% of our total deposits.

At December 31, 2022, nine labor unions had aggregate deposits of $10.0 million or more, totaling $132.5 million, or 6.8% of our total deposits.

Given our use of these high average balance deposits as a source of funds, the inability to retain these funds could have an adverse effect on our liquidity.

In addition, these deposits are primarily demand deposit accounts or short-term deposits and therefore may be more sensitive to changes in interest rates.

If we are forced to pay higher rates on these deposits to retain the funds, or if we are unable to retain the funds and are forced to turn to borrowing and other funding

sources for our lending and investment activities, the interest expense associated with such borrowings may be higher than the rates we are paying on these deposits, which could adversely affect our net margin and net income.

If we are forced to pay higher rates on these deposits to retain the funds, or if we are unable to retain the funds and are forced to turn to borrowing and other funding sources for our lending and investment activities, the interest expense associated with such borrowings may be higher than the rates we are paying on these deposits, which could adversely affect our net margin and net income.

We may also be forced, as a result of any material withdrawal of deposits, to rely more heavily on other, potentially more expensive and less stable funding sources.

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If the services of any of our key personnel should become unavailable for any reason, we may not be able to identify and hire qualified persons on terms acceptable to us, which could have an adverse effect on our business, financial condition and results of operations.

Severe weather, natural disasters, or other catastrophes could significantly impact our business.

Severe weather, natural disasters, widespread disease or pandemics, acts of war or terrorism or other adverse external events could have a significant impact on our ability to conduct business.

In addition, such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans and leases, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue or cause us to incur additional expenses.

The occurrence of any of these events in the future could have a material adverse effect on our business, financial condition or results of operations.

Climate change may materially adversely affect the Company's business and results of operations.

Concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts.

Consumers and businesses also may change their behavior on their own as a result of these concerns.

We and our clients will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns.

We and our clients may face cost increases, asset value reductions and operating process changes.

The impact on our clients will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities.

Among the impacts to us could be a drop in demand for our products and services, particularly in certain industry sectors.

In addition, we could face reductions in creditworthiness on the part of some clients or in the value of assets securing loans.

Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.

I ncreasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.

Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social and governance (“ESG”) practices and disclosure.

Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions and human rights.

Increased ESG related compliance costs could result in increases to our overall operational costs.

Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, and our stock price.

New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure.

Unresolved Staff Comments

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

What changed 10-K

Item 1A. Risk Factors