Item 1A. Risk Factors
ITEM 1A. Risk Factors
In addition to the other information set forth in this Report, we refer you to Item 1A. “Risk Factors” of our Annual Report on Form 10-K for December 31, 2022, filed with the SEC. Other than the risk factors set
forth below, there have been no material changes in the risk factors disclosed in our Annual Report on Form 10-K for December 31, 2022.
We have a concentration in commercial real estate lending that could cause our regulators to restrict our ability to grow.
As a part of their regulatory oversight, the federal regulators have issued guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices, or the CRE Concentration Guidance, with
respect to a financial institution’s concentrations in CRE lending activities. The CRE Concentration Guidance identifies certain concentration levels that, if exceeded, will expose the institution to additional supervisory analysis with regard
to the institution’s CRE concentration risk. The CRE Concentration Guidance is designed to promote appropriate levels of capital and sound loan and risk management practices for institutions with a concentration of CRE loans. In general, the
CRE Concentration Guidance establishes the following supervisory criteria as preliminary indications of possible CRE concentration risk: (1) the institution’s total construction, land development and other land loans represent 100% or more of
total capital; or (2) total CRE loans as defined in this guidance, or Regulatory CRE, represent 300% or more of total capital, and the institution’s Regulatory CRE has increased by 50% or more during the prior 36-month period. Pursuant to the
CRE Concentration Guidance, loans secured by owner occupied CRE are not included for purposes of the CRE concentration calculation.
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As of March 31, 2023, our Regulatory CRE represented 290.49% of our total Bank capital and our construction, land development and other land loans represented 86.38% of our total Bank capital, as compared to
304.72% and 101.20% as of December 31, 2022, respectively. During the prior 36-month period, our Regulatory CRE has decreased 61.73%. We are actively working to manage our Regulatory CRE concentration, and we believe that our underwriting
policies, management information systems, independent credit administration process, and monitoring of real estate loan concentrations are currently sufficient to address the CRE Concentration Guidance. We utilize enhanced CRE monitoring
techniques as expected by banking regulators as our concentrations have approached or exceeded the regulatory guidance. Nevertheless, the Federal Reserve could become concerned about our CRE loan concentrations, and it could limit our ability
to grow by restricting its approvals for the establishment or acquisition of branches, or approvals of mergers or other acquisition opportunities, or by requiring us to raise additional capital, reduce our loan concentrations or undertake other
remedial actions.
Adverse developments affecting the banking industry, such as recent bank failures or concerns involving liquidity, may have material adverse effects on our operations.
Recent high-profile events impacting the banking industry during the first few months of 2023, have resulted in decreased confidence in the safety and soundness of regional and community banks among deposit
customers, investors, and other counterparties. Additionally, these events have caused significant disruption, volatility and reduced valuations of equity and other securities of banks in the capital markets. These events occurred during a
period of rapidly rising interest rates, which, among other things, has resulted in unrealized losses in our available for sale debt securities portfolio and increased competition for bank deposits. These events could lead to increases in our
interest expense, as it has raised and may continue to raise interest rates paid to depositors in order to compete with other banks, and in an effort to replace deposits, seek borrowings which carry higher interest rates.
Recent bank failures have caused concern and uncertainty regarding the liquidity adequacy of the banking sector as a whole and resulted in some regional and community bank customers choosing to maintain deposits
with larger financial institutions. A significant reduction in our deposits could materially, adversely impact our liquidity, ability to fund loans, and results of operations. In addition to customer deposits, we borrow on an overnight and
short-term basis from third parties in the form of federal funds purchased and repurchase agreements and through lines of credit and borrowings from the FHLB and FRB. If we are not able to access borrowings through those facilities due to an
increase in demand from other banks or due to insufficient levels of pledgeable assets, our ability to borrow funds may be materially adversely impacted.
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