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Item 1A. Risk Factors

2024-03-15 compared with 2023-03-31 · 153 added, 177 removed, 236 unchanged (58% of the section changed)

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

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.

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

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

Further, because a high concentration of our client base is 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.

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.

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.

Changes in agreements or relationships between the United States and other countries may further 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;

● loan delinquencies, problem assets and foreclosures may increase;

● collateral for loans, especially real estate, may decline in value, in turn reducing clients’ borrowing power, reducing the value of assets and collateral associated with existing loans;

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

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

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.

A downturn in economic conditions in the market areas we serve, in particular the San Francisco Bay Area, Southern California, Denver, Colorado, Seattle, Washington, Central New Mexico and the agricultural region of the California Central Valley, whether due to inflation, recessionary trends, geopolitical conflicts, adverse weather, or other factors, could have a material adverse effect on our business, financial condition, and results of operations, including but not limited to:

● Reduced demand for our products and services , potentially leading to a decline in our overall loans or assets.

● Elevated levels of loan delinquencies, problematic assets , and foreclosures .

● An increase in our allowance for credit losses on loans.

● Depreciation in collateral values linked to our loans, thereby diminishing borrowing capacities and asset values tied to existing loans .

● Reduced net worth and liquidity of loan guarantors , possibly impairing their ability to meet commitments to us .

● Reduction in our low-cost or noninterest -bearing deposits.

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.

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.

Any deterioration in the real estate markets associated with the collateral securing mortgage loans could significantly impact borrowers' repayment capabilities and the value of collateral.

Real estate values are affected by various other factors, including economic conditions, regulatory changes, 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.

External economic factors, such as changes in monetary policy and inflation and deflation, may have an adverse effect on our business, financial condition and results of operations.

Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve.

Actions by monetary and fiscal authorities, including the Federal Reserve, could lead to inflation, deflation, or other economic phenomena that could adversely affect our financial performance.

Inflation has risen sharply since the end of 2021 and throughout 2022 at levels not seen for over 40 years.

Inflationary pressures, while easing recently, remained elevated throughout the first half of 2023.

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

Consequently, the ability of our business clients to repay their loans may deteriorate 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.

Virtually all of our assets and liabilities are monetary in nature.

As a result, interest rates tend to have a more significant impact on our performance than general levels of inflation or deflation.

Interest rates do not necessarily move in the same direction or by the same magnitude as the prices of goods and services.

Risks Related to Our Lending Activities

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.

Nonperforming assets adversely affect our earnings in various ways.

We do not record interest income on nonaccrual loans or foreclosed assets, and nonaccrual loans and foreclosed assets increase our loan administration costs.

Upon foreclosure or similar proceedings, we record the repossessed asset at the estimated fair value, less costs to sell, which may result in a write-down or loss.

A significant increase in the level of nonperforming assets from current levels would also increase our risk profile and may impact the capital levels our regulators believe are appropriate in light of the increased risk profile.

While we attempt to reduce problem assets through collection efforts, asset sales and workouts and restructurings, decreases in the value of the underlying collateral, or in the borrower’s performance or financial condition, could adversely affect our business, results of operations and financial condition.

In addition, the resolution of nonperforming assets can require significant commitments of time from management, diverting their attention from other aspects of our operations.

Many of our loans are to commercial borrowers, which have a higher degree of risk than other types of loans .

At December 31, 2022, we had $1.9 billion of commercial loans, consisting of $1.7 billion of commercial real estate and construction and land loans, representing 84.4% of total loans, and $188.5 million of commercial and industrial loans, representing 9.3% of total loans and for which real estate is not the primary source of collateral.

At December 31, 2023, we had $1.8 billion of commercial loans, consisting of $1.7 billion of commercial real estate and construction and land loans, representing 87.1% of total loans, and $162.9 million of commercial and industrial loans, representing 8.4% of total loans, where real estate is not the primary source of collateral.

The $1.7 billion of commercial real estate loans includes $249.5 million of multifamily loans and $9.6 million of commercial construction and land loans.

The $188.5 million of commercial and industrial loans include $11.1 million of PPP loans.

Commercial loans typically involve higher principal amounts than other types of loans, and some of our commercial borrowers have more than one loan outstanding with us.

Commercial loans typically involve higher principal amounts than other types of loans, with some of our commercial borrowers have more than one loan outstanding with us.

Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one-to-four family residential mortgage loan.

Because payments on such loans are often dependent on the cash flow of the commercial venture and the successful operation or development of the property or business involved, repayment of such loans is often more sensitive than other types of loans to adverse conditions in the real estate market or the general business climate and economy in one of our markets or in occupancy rates where a property is located.

Repayments of loans secured by non-owner occupied properties depend primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream.

Accordingly, a downturn in the real estate market or a challenging business and economic environment may increase our risk related to commercial loans.

Because payments on such loans are often dependent on the cash flow of the commercial venture and the successful operation or development of the property/business involved, repayment of such loans is often more sensitive than other types of loans to adverse conditions in the real estate market or the general business climate and economy.

Repayments of loans secured by non-owner occupied properties rely heavily on tenant rent payments, and any downturn in the real estate market or economic conditions heightens our risk.

In addition, many of our commercial real estate loans are not fully amortizing and require large balloon payments upon maturity.

Such balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or nonpayment.

Our commercial and industrial loans are primarily made based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans.

The borrowers’ cash flow may prove to be unpredictable, and collateral securing these loans may fluctuate in value.

Most often, this collateral consists of accounts receivable, inventory and equipment.

Significant adverse changes in our borrowers’ industries and businesses could cause rapid declines in values and collectability of those business assets, which could result in inadequate collateral coverage for our commercial and industrial loans and expose us to future losses.

In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its clients.

Inventory and equipment may depreciate over time, be difficult to appraise, be illiquid and fluctuate in value based on the success of the business.

If the cash flow from business operations is reduced, the borrower’s ability to repay the loan may be impaired.

Meanwhile, our commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower.

A borrower’s cash flow may prove to be unpredictable, and collateral securing these loans may fluctuate in value.

Most often, this collateral includes accounts receivable, inventory, equipment or real estate.

of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its clients.

Other collateral securing commercial business loans may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business.

An increase in specific reserves and charge offs related to our commercial and industrial loan portfolio could have a material adverse effect on our business, financial condition, results of operations and future prospects.

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Accordingly, the federal banking regulatory agencies have expressed concerns about weaknesses in the current commercial real estate market.

Failures in our risk management policies, procedures and controls could adversely affect our ability to manage this portfolio going forward and could result in an increased rate of delinquencies in, and increased losses from, this portfolio, which, accordingly, could have a material adverse effect on our business, financial condition and results of operations.

Failures in our risk management policies, procedures and controls could adversely affect our ability to manage this portfolio going forward and could result in an increased rate of delinquencies in, and increased losses from, this portfolio, which could have a material adverse effect on our business, financial condition and results of operations.

Construction loans are based upon estimates of costs and values associated with the complete project.

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Construction and land development loans totaled $9.6 million, or 0.5% of total loans as of December 31, 2023, of which $1.6 million were commercial real estate construction loans and $8.0 million were residential real estate construction loans.

These loans involve additional risks because funds are advanced upon the security of the project, which is of uncertain value prior to its completion, and costs may exceed realizable values in declining real estate markets.

These loans involve additional risks because funds are advanced based on the project’s uncertain value prior to its completion, and costs may exceed realizable values in declining real estate markets.

Because of the uncertainties inherent in estimating construction costs and the realizable market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to accurately evaluate the total funds required to complete a project and the related loan-to-value ratio.

Higher than anticipated building costs may cause actual results to vary significantly from those estimated.

For these reasons, this type of lending also typically involves higher loan principal amounts and may be concentrated with a small number of builders.

A downturn in the commercial real estate market could increase delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure.

Some of the builders we deal with have more than one loan outstanding with us.

Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss.

In addition, during the term of some of our construction loans, no payment from the borrower is required since the accumulated interest is added to the principal of the loan through an interest reserve.

As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest.

If our appraisal of the value of the completed project proves to be overstated, or market values or rental rates decline, we may have inadequate security for the repayment of the loan upon completion of construction of the project.

In addition, construction loans involve additional cost as a result of the need to actively monitor the building process, including cost comparisons and on-site inspections.

Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold, which complicates the process of working with our problem construction loans.

If we are forced to foreclose on a project prior to or at completion due to a default, we may not be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.

In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it.

Further, in the case of speculative construction loans, there is the added risk associated with the borrower obtaining a take-out commitment for a permanent loan.

Loans on land under development or held for future construction also pose additional risk because of the lack of income production by the property and the potential illiquid nature of the collateral.

Further, this type of lending often involves larger loan principal amounts and might be concentrated among a limited number of builders.

A downturn in the commercial real estate market could increase delinquencies, defaults, foreclosures, and significantly impair the value of our collateral, hindering our ability to sell the collateral upon foreclosure.

Dealing with builders who have multiple loans with us exposes us to heightened risks where adverse developments in one credit relationship could substantially increase our risk exposure.

During the term of some of our construction loans, borrowers are not required to make payments as accumulated interest is added to the principal through an interest reserve.

Therefore, repayment is contingent, in part, on the project's success and the borrower's ability to sell or lease the property, rather than solely on the borrower's repayment capacity.

Overstating the completed project's value, a decline in market values, or rental rate drops might leave us with insufficient security for loan repayment post-construction.

Monitoring the building process involves additional costs, including on-site inspections and cost comparisons.

Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold, complicating the handling of problem construction loans.

If we foreclose on a defaulted construction loan prior to or at project completion, we might not recover the entire unpaid balance, accrued interest, and foreclosure and holding costs.

Further, additional funding may be needed to complete the project and we may have to hold the property for an unspecified period of time while we attempt to dispose of it.

Our construction loans include those with a sales contract or permanent loan in place for the finished homes and those for which purchasers for the finished homes may not be identified either during or following the construction period, known as speculative construction loans.

Speculative construction loans pose additional risks, especially regarding finding end-purchasers for finished projects.

We also offer loans on land under development or held for future construction.

These loans carry additional risks due to longer development periods, vulnerability to real estate value declines, economic fluctuations delaying projects, political changes affecting land use, and the collateral's illiquid nature.

During this extended financing-to-completion period, the collateral often generates no cash flow.

Our business may be adversely affected by credit risk associated with residential property.

At December 31, 2022, $110.6 million, or 5.5% of total loans, was secured by first liens on one-to-four family residential loans.

At December 31, 2023, $86.0 million, or 4.5% of total loans, was secured by first liens on one-to-four family residential real estate.

In addition, at December 31, 2023, our home equity loans and lines of credit totaled $5.9 million.

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In addition, many farms are dependent on a limited number of key individuals whose injury or death may significantly affect the successful operation of the farm.

If the cash flow from a farming operation is diminished, the borrower’s ability to repay the loan may be impaired.

If the cash flow from a farming operation is diminished, the borrower’s ability to repay the loan may be impaired and the Bank may be unable to collect all principal and interest contractually due.

Consequently, agricultural loans may involve a greater degree of risk than other types of loans, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets such as farm equipment (some of which is highly specialized with a limited or no market for resale), or assets such as livestock or crops.

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When weaknesses are identified, the SBA may request corrective actions or impose other restrictions, including revocation of the lender’s Preferred Lender status.

If we lose our status as a Preferred Lender, we may lose our ability to compete effectively with other SBA Preferred Lenders, and as a result we would experience a material adverse effect to our financial results.

If we lose our status as a Preferred Lender, we may be unable to compete effectively with other SBA Preferred Lenders, which could have a material adverse effect on our financial results.

Any changes to the SBA program, including changes to the level of guaranty provided by the federal government on SBA loans or changes to the level of funds appropriated by the federal government to the various SBA programs, may also have an adverse effect on our business, results of operations and financial condition.

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These sales have resulted in gains or premiums on the sale of the loans and have created a stream of future servicing income.

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.

For the year ended December 31, 2023, we sold a total of $7.2 million in SBA loans (guaranteed portion) for a net gain of $508,000.

There can be no assurance that we will be able to continue originating these loans, that a secondary market will continue to 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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To meet our growth objectives, we may originate or purchase loans outside of our market area which could affect the level of our net interest margin and nonperforming loans.

In order to achieve our desired loan portfolio growth, we anticipate that we may, from time to time, opportunistically originate or purchase loans outside of our market area either individually, through participations, or in bulk or “pools.” In the past, we have also originated loans outside of our market areas as an accommodation to current clients and acquired loans outside of our market areas through our acquisitions of other financial institutions.

We will perform certain due diligence procedures and may re- underwrite these loans to our underwriting standards prior to purchase, and anticipate acquiring loans subject to customary limited indemnities;

however, we may be exposed to a greater risk of loss as we acquire loans of a type or in geographic areas where management may not have substantial prior experience and which may be more difficult for us to monitor.

Further, when determining the purchase price, we are willing to pay to acquire loans, management will make certain assumptions about, among other things, how borrowers will prepay their loans, the real estate market and our ability to collect loans successfully and, if necessary, to dispose of any real estate that may be acquired through foreclosure.

To the extent that our underlying assumptions prove to be inaccurate or the basis for those assumptions change (such as an unanticipated decline in the real estate market), the purchase price paid may prove to have been excessive, resulting in a lower yield or a loss of some or all of the loan principal.

For example, if we purchase “pools” of loans at a premium and some of the loans are prepaid before we anticipate, we will earn less interest income on the acquired loans than expected.

Our success in increasing our loan portfolio through loan purchases will depend on our ability to price the loans properly and on general economic conditions in the geographic areas where the underlying properties or collateral for the loans acquired are located.

To achieve our desired loan portfolio growth, we have sought and may continue seeking opportunities to originate or purchase loans outside of our market area, whether individually, through participations, or in bulk or “pools.” Prior to purchase, we perform certain due diligence procedures and may re-underwrite these loans to our underwriting standards.

Although we anticipate acquiring loans with customary limited indemnities, this approach exposes us to heightened risks, particularly when acquiring loans in unfamiliar geographic areas or of a type where our management lacks substantial prior experience.

Monitoring such loans also may pose greater challenges for us.

Further, when determining the purchase price for these loans, management will make certain assumptions about, among other things, whether and when borrowers will prepay their loans, real estate market conditions, and our ability to successfully manage loan collections and, if necessary, dispose of acquired real estate through foreclosure.

To the extent that our underlying assumptions prove inaccurate or undergo unexpected changes, such as an unanticipated decline in the real estate market, the purchase price paid these loans could exceed the actual value, resulting in a lower yield or a loss of some or all of the loan principal.

For instance, purchasing loan "pools" at a premium and experiencing earlier-than-expected loan prepayments would yield lower interest income than initially projected.

Our success in growing our loan portfolio through loan purchases depends on our ability to price the loans properly and relies on the economic conditions in the geographic areas where the underlying properties or collateral for the acquired loans are located.

Inaccurate estimates or declines in economic conditions or real estate values in the markets where we purchase loans could significantly adversely affect the level of our nonperforming loans and our results of operations.

Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio.

As with most financial institutions, we maintain an allowance for loan losses to reflect potential defaults and nonperformance, which represents management's best estimate of probable loans losses inherent in the loan portfolio.

The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans.

In determining the amount of the allowance for loan losses, we review loans and our historical loss and delinquency experience and evaluate economic conditions.

Management also recognizes that significant new growth in loan portfolios, new loan products, and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner and will increase the risk that our allowance may be insufficient to absorb losses without significant additional provisions.

If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover actual losses, resulting in additional provisions for loan losses to replenish the allowance for loan losses.

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.

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 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.

In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs based on their judgment about information available to them at the time of their examination.

Any increases in the provision for loan losses will result in a decrease in net income and may have a material adverse effect on our financial condition, results of operations, and capital.

Our allowance for credit losses may prove to be insufficient to absorb losses in our loan portfolio.

As with most financial institutions, we maintain an allowance for credit losses on loans to reserve for estimated potential losses on loans from defaults, which represents management's best estimate of expected credit losses inherent in the loan portfolio.

Determining the appropriate level of the allowance for credit losses on loans involves estimating future losses at the time a loan is originated or acquired, incorporating a broad range of information and potential future economic scenarios.

The determination of the appropriate level of the allowance for credit losses on loans inherently involves a high degree of subjectivity and requires us to make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans.

In determining the amount of the allowance for credit losses on loans, we review loans and our historical loss and delinquency experience and evaluate economic conditions.

Management also recognizes that significant new growth in loan portfolios, new loan products, and the refinancing of existing loans can result in

portfolios comprised of unseasoned loans that may not perform consistent with a historical or projected manner and will increase the risk that our allowance for credit losses on loans may be insufficient to absorb credit losses without significant additional provisions.

If our assumptions are incorrect, our allowance for credit losses on loans may not be sufficient to cover actual losses, requiring additional provisions for credit losses on loans to replenish the allowance for credit losses on loans.

In addition, bank regulatory agencies periodically review our allowance for credit losses on loans.

Based on their assessment, they and may require increased provisions or loan charge-offs.

Any increase in the provision for credit losses on loans negatively affects net income and could materially impact our financial condition, results of operations, and capital.

Risks Related to Market and Interest Rate Changes

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Our earnings and cash flows are largely dependent upon our net interest income.

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.

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.

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

During 2023, in response to continued inflationary pressures, the Federal Open Market Committee (“FOMC”) of the Federal Reserve Board increased the target range for the federal funds rate 100 basis points to a range of 5.25% to 5.50%.

A sustained and substantial change in market interest rates could significantly impact our financial condition, liquidity, and results of operations.

Furthermore, fluctuations in interest rates could adversely affect the valuation of our assets and liabilities, ultimately affecting our earnings.

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

Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings, but could also affect (i) our ability to originate and/or sell loans and obtain deposits, (ii) the fair value of our financial assets and liabilities, which could negatively impact shareholders’ equity, and our ability to realize gains from the sale of such assets, (iii) our ability to obtain and retain deposits in competition with other available investment alternatives, (iv) the ability of our borrowers to repay adjustable or variable rate loans, and (v) the average duration of our investment securities portfolio and other interest-earning assets.

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A significant portion of our loans have fixed interest rates and longer terms than our deposits and borrowings.

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, 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.

As is the case with many banks, we attempt to increase our proportion of deposits comprising either no or relatively low-interest-bearing accounts, which has been challenging over the last couple of years.

At December 31, 2023, our deposit composition included $372.4 million in certificates of deposit maturing within one year and $1.7 billion in noninterest-bearing, NOW checking, 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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Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations.

Also, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our balance sheet or projected operating results.

Also, our interest rate risk modeling techniques and assumptions likely will not fully predict or capture the impact of actual interest rate changes on our balance sheet or projected operating results.

For further discussion of how changes in interest rates could impact us, see “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Sensitivity and Market Risk,” of this Form 10-K for a discussion of interest rate risk modeling and the inherent risks in modeling assumptions.

We may incur losses on our securities portfolio as a result of changes in interest rates.

We may incur losses on our securities portfolio as a result of increases in interest rates.

Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities.

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Our strategy of pursuing acquisitions exposes us to financial, execution, compliance and operational risks that could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

A substantial part of our historical growth has been a result of acquisitions of other financial institutions.

We intend to continue our strategy of evaluating and selectively acquiring other financial institutions that serve clients or markets we find desirable.

The market for acquisitions remains highly competitive and we may be unable to find satisfactory acquisition candidates in the future that fit our acquisition strategy and standards.

Our ability to compete will depend on our available financial resources to fund acquisitions, including the amount of cash and cash equivalents and the liquidity and market price of our common stock.

In addition, increased competition may also drive up the price that we will be required to pay for acquisitions.

Acquisition prices may fluctuate with market conditions.

We have experienced times during which acquisitions could not be made in specific markets at acceptable prices and expect that we will experience this condition in the future.

If we are able to identify attractive acquisition opportunities, we must generally satisfy a number of conditions prior to completing any such transaction, including certain bank regulatory approvals, which can be burdensome, time-consuming and unpredictable.

An important component of our growth strategy may not be realized if we are unable to find suitable acquisition targets.

A substantial part of our historical growth has been a result of acquisitions of other financial institutions, a strategy we plan to continue by evaluating and selectively acquiring entities that align with our client base and desired markets.

However, the acquisition market is fiercely competitive, and we may encounter challenges in identifying suitable candidates that meet our acquisition standards and strategy.

Our ability to compete relies on our financial resources, including cash reserves, liquidity, and the market price of our common stock.

Increased competition may also drive up acquisition costs, which fluctuate with market conditions.

There have been instances in the past where we were unable to secure acquisitions at acceptable prices, and we anticipate similar challenges in the future.

Furthermore, identifying attractive acquisition opportunities often involves meeting various conditions, such as obtaining regulatory approvals, a process that can be burdensome, time-consuming and unpredictable.

Sustaining our historical growth rate may be difficult if we are unable to identify and acquire suitable acquisition targets.

We have completed ten full bank acquisitions since 2010, which has enhanced our growth rate over the years.

Our pursuit of acquisitions may disrupt our business, and any equity that we issue as merger consideration may have the effect of diluting the value of your investment.

Additionally, any future acquisition may not produce the revenue, earnings or synergies that we anticipated.

Our acquisition activities strategy involves a number of significant risks, including the following:

• incurring time and expense associated with identifying, evaluating and negotiating potential acquisitions which could divert management’s attention from the operation of our existing business;

• using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect to the target company or the assets and liabilities that we seek to acquire;

• exposure to potential asset quality and credit quality;

Our acquisition activities strategy involves a number of significant risks, including:

Diverting management attention and resources toward identifying, evaluating, and negotiating potential acquisitions, potentially detracting from our existing business operations.

Reliance on estimates and judgments, which could be inaccurate, in evaluating credit, operational, management, and market risks of the target company or the assets and liabilities we aim to acquire.

Exposure to potential asset quality and credit risks.

Higher than expected deposit attrition;

• potential exposure to unknown or contingent liabilities of banks and businesses we acquire, including, without limitation, liabilities for regulatory and compliance issues;

• inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and other projected benefits of the acquisition;

• incurring time and expense required to integrate the operations and personnel of the combined businesses;

• inconsistencies in standards, procedures, and policies that would adversely affect our ability to maintain relationships with clients and employees;

• experiencing higher operating expenses relative to operating income from the new operations;

• creating an adverse short-term effect on our results of operations;

• significant problems relating to the conversion of the financial and client data of the entity;

• integration of acquired clients into our financial and client product systems;

• borrowing funds to finance acquisitions or pursuing other forms of financing, such as issuing voting and/or non-voting common stock or convertible preferred stock, which may have high dividend rights or may be highly dilutive to our existing shareholders, may increase our leverage and diminish our liquidity;

Potential exposure to unknown or contingent liabilities from acquired banks and businesses, including regulatory and compliance issues.

The risk of not realizing expected revenue increases, cost savings, geographic or product expansions, or other projected acquisition benefits.

Costs and time required to integrate operations and personnel from the combined businesses.

Inconsistencies in standards, procedures, and policies that may adversely affect client and employee relationships;

Potential increase in operating expenses relative to operating income from the new operations.

Short-term adverse effects on our financial results, such as increases in general and administrative expenses initially, which potentially adversely affects our efficiency ratio.

Challenges related to the conversion and integration of financial and client data.

Borrowing funds or alternative financing methods, such as issuing common or convertible preferred stock, that may increase leverage, diminish liquidity, and result in dilution for existing shareholders.

Risks of impairment to goodwill, which would require a charge to earnings.

Any of the foregoing could have an adverse effect on our business, financial condition, and results of operation.

Any of the foregoing could have a material adverse effect on our business, financial condition, and results of operations.

Any expansion into new markets or new lines of business might not be successful.

As part of our ongoing strategic plan, we may consider expansion into new geographic markets.

Such expansion might take the form of the establishment of de novo branches or the acquisition of existing banks or branches.

As part of our strategic plan, we may consider expansion into new geographic markets.

Such expansion might take the form of de novo branches or the acquisition of existing banks or branches.

There are substantial risks associated with such efforts, including risks that (i) revenues from such activities might not be sufficient to offset the development, compliance, and other implementation costs, (ii) competing products and services and shifting market preferences might affect the profitability of such activities, and (iii) our internal controls might be inadequate to manage the risks associated with new activities.

Furthermore, it is possible that our unfamiliarity with new markets or lines of business might adversely affect the success of such actions.

Furthermore, our unfamiliarity with new markets or lines of business might adversely affect the success of such actions.

External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also affect the ultimate implementation of a new line of business or offerings of new products, product enhancements or services.

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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 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.

Nonperforming assets adversely affect our earnings in various ways.

We do not record interest income on nonaccrual loans or foreclosed assets, thereby adversely affecting our income and increasing our loan administration costs.

Upon foreclosure or similar proceedings, we record the repossessed asset at the estimated fair value, less costs to sell, which may result in a write down or loss.

If we experience increases in nonperforming loans and nonperforming assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our financial condition and results of operations, as our loan administration costs could increase, each of which could have an adverse effect on our net income and related ratios, such as return on assets and equity.

While we reduce problem assets through collection efforts, asset sales, workouts and restructurings, decreases in the value of the underlying collateral, or in these borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition.

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.

If our judgment were 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.

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.

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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.

Certain accounting policies, most notably the allowance for credit losses, 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.

We are subject to an extensive body of accounting rules and best practices.

Periodic changes to such rules may change the treatment and recognition of critical financial line items and affect our profitability.

Our business operations are significantly influenced by the extensive body of accounting regulations in the United States.

Regulatory bodies periodically issue new guidance, altering accounting rules and reporting requirements, which

can substantially affect the preparation and reporting of our financial statements.

These changes might necessitate retrospective application, potentially leading to restatements of prior period financial statements.

One such significant change from 2022 was the implementation of the CECL model, which we adopted on January 1, 2023.

Under the CECL model, financial assets carried at amortized cost, such as loans and held-to-maturity debt securities, are presented at the net amount expected to be collected.

This forward-looking approach in estimating expected credit losses contrasts starkly with the former GAAP's "incurred loss" model, delaying recognition until a loss is probable.

CECL mandates considering historical experience, current conditions, and reasonable forecasts affecting collectability, leading to periodic adjustments of financial asset values.

However, this forward-looking methodology, reliant on macroeconomic variables, introduces the potential for increased earnings volatility due to unexpected changes in these indicators between periods.

An additional consequence of CECL is an accounting asymmetry between loan-related income, recognized periodically based on the effective interest method, and credit losses, recognized upfront at origination.

This asymmetry might create the perception of reduced profitability during loan expansion periods due to the immediate recognition of expected credit losses.

Conversely, periods with stable or declining loan levels might seem relatively more profitable as income accrues gradually for loans where losses had been previously recognized.

As a result of the change in methodology from the incurred loss method to the CECL model, on January 1, 2023, the Company recognized an increase in the allowance for credit loss on loans totaling $1.5 million and an increase to the allowance for credit losses on unfunded commitments of $45,000, as a cumulative effect adjustment from change in accounting policies, with a corresponding after-tax decrease to opening retained earnings of $491,000.

Risks Related to Cybersecurity, Third Parties and Technology

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Any compromise of our security could deter clients from using our internet banking services that involve the transmission of confidential information.

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

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.

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

While we select third-party vendors carefully, we do not control their actions.

If our third-party providers encounter difficulties including those resulting from breakdowns or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher transaction volumes, cyber-attacks and security breaches or if we otherwise have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our ability to deliver products and services to our clients and otherwise conduct business operations could be adversely impacted.

While we select third-party

vendors carefully, we do not control their actions.

If our third-party providers encounter difficulties including those resulting from breakdowns or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher transaction volumes, cyber-attacks or security breaches or if we otherwise have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our ability to deliver products and services to our clients and otherwise conduct business operations could be adversely impacted.

Replacing these third-party vendors could also entail significant delay and expense.

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

The Board of Directors oversees the risk management process, including the risk of cybersecurity breaches, and engages with management on cybersecurity issues.

We are subject to certain risks in connection with our data management or aggregation.

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While we have policies and procedures designed to prevent such losses, there can be no assurance that such losses will not occur.

Risk Related to Regulatory and Compliance Matters

The financial services market is undergoing rapid technological changes, and if we are unable to stay current with those changes, we will not be able to effectively compete.

The financial services market, including banking services, is undergoing rapid changes with frequent introductions of new technology-driven products and services.

Our future success will depend, in part, on our ability to keep pace with technological changes and to use technology to satisfy and grow customer demand for our products and services and to create additional efficiencies in our operations.

We expect that we will need to make substantial investments in our technology and information systems to compete effectively and to stay current with technological changes.

Some of our competitors have substantially greater resources to invest in technological improvements and will be able to invest more heavily in developing and adopting new technologies, which may put us at a competitive disadvantage.

We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.

As a result, our ability to effectively compete to retain or acquire new business may be impaired, and our business, financial condition or results of operations may be adversely affected .

Risks Related to Regulatory and Compliance Matters

The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.

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These regulations may sometimes impose significant limitations on our operations.

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

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

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.

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Failure to comply with these regulations could result in fines or sanctions and limit our ability to get regulatory approval of acquisitions.

Recently several banking institutions have received large fines for non- compliance with these laws and regulations.

While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations.

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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.

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.

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Disruptions or failures in the physical infrastructure or operating systems that support our business and clients, or cyber-attacks or security breaches of the networks, systems or devices that our clients use to access our products and services could result in client attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition.

We will be required to transition from the use of the London Interbank Offered Rate ("LIBOR") in the future.

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

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).

Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans, and to a lesser extent securities in our portfolio, and may impact the availability and cost of hedging instruments and borrowings.

The language in our LIBOR-based contracts and financial instruments has developed over time and may have various events that trigger when a successor rate to the designated rate would be selected.

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.

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

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As of December 31, 2023, our ten largest depositors, none of which include brokered deposits, accounted for $246.0 million in deposits, or approximately 11.5% 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.

Several of our large depositors are 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 deposits could lead to a loss of other deposits from clients within the relationship.

At December 31, 2023, $658.3 million, or 30.9%, of our total deposits were comprised of deposits from labor unions, representing 714 different local unions with an average deposit balance per local union of approximately $814,000.

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.

At December 31, 2023, 22 labor unions had aggregate deposits of $10.0 million or more, totaling $399.7 million, or 18.7% 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.

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.

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 borrowings and other funding sources for our lending and investment activities, the interest expense associated with such borrowings or other funding sources 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.

Consequently, the occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.

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If we cannot raise additional capital or issue additional debt when needed, our ability to further expand our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected.

In addition, any additional capital we obtain may result in the dilution of the interests of existing holders of our common stock.

In addition, any additional capital we obtain may dilute the interests of existing holders of our common stock.

Further, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse regulatory action.

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We rely heavily on our management team and could be adversely affected by the unexpected loss of key officers and relationship managers.

We are led by an experienced management team with substantial experience in the markets that we serve and the financial products that we offer.

We are led by a management team with substantial experience in the markets we serve and the financial products that we offer.

Our operating strategy focuses on providing products and services through long-term relationship managers.

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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