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Item 1A. Risk Factors

2024-03-13 compared with 2023-03-10 · 15 added, 60 removed, 144 unchanged (34% of the section changed)

2 unchanged sentences

Any risk factor discussed below could by itself, or combined with other factors, materially and adversely affect the Company’s business, results of operations, financial condition, capital position, liquidity, competitive position or reputation, including by materially increasing expenses or decreasing revenues, which could result in material losses or a decrease in earnings.

Risks Related to COVID-19 Pandemic

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

The COVID-19 pandemic has caused significant economic dislocation in the United States.

Although the domestic and global economies have begun to recover from the COVID-19 pandemic as many health and safety restrictions have been lifted and vaccine distribution has increased, certain adverse consequences of the pandemic continue to impact the macroeconomic

environment and may persist for some time, including labor shortages and disruptions of global supply chains.

The growth in economic activity and in the demand for goods and services, coupled with labor shortages and supply chain disruptions, has also contributed to rising inflationary pressures.

As a result of the COVID-19 pandemic and the related adverse economic consequences, we could be subject to the following risks, among others, any of which individually or in combination with others could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

• demand for our products and services may decline, making it difficult to grow assets and income;

• if high levels of unemployment continue for an extended period of time, 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;

• limitations may be placed on our ability to foreclose on properties we hold as collateral;

• our allowance for loan losses may have to be increased if borrowers experience financial difficulties, which will adversely affect our net income;

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

• our cybersecurity risks are increased as the result of an increase in the number of employees working remotely;

• we rely on third-party vendors for certain services and the unavailability of a critical service due to the COVID-19 pandemic could have an adverse effect on us;

• Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.

Risks Related to Our Lending Activities

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Our nonperforming assets adversely affect our net income in various ways.

We do not record interest income on non-accrual loans or real estate owned.

We do not record interest income on nonaccrual loans or real estate owned.

We must reserve for probable losses, which results in additional provisions for loan losses.

1 unchanged sentence

Additionally, we have legal fees associated with the resolution of problem assets as well as additional costs, such as taxes, insurance and maintenance related to our other real estate owned.

The resolution of nonperforming assets also requires the active involvement of management, which can adversely affect the amount of time we devote to the income-producing activities of the Bank.

The resolution of nonperforming assets also requires the active involvement of management, which can adversely affect the amount of time we devote to the income-producing

activities of the Bank.

If our estimate of the allowance for loan losses is inadequate, we will have to increase the allowance accordingly.

If the Company’s allowance for loan losses is not sufficient to cover actual loan losses, the Company’s results of operations would be negatively affected.

In determining the adequacy of the allowance for loan losses, the Company analyzes its loss and delinquency experience by loan categories and considers the effect of existing economic conditions.

In addition, the Company makes various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of its borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of the loans.

If the results of these analyses are incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in the portfolio, which would require additions to the allowance and would reduce net income.

In addition, bank regulators periodically review the Company’s allowance for loan losses and may require it to increase the allowance for loan losses or recognize further loan charge-offs.

Any increase in the allowance for loan losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on the Company’s financial condition and results of operations.

The Financial Accounting Standard Board ("FASB") has issued an accounting standard update that will result in a significant change in how we recognize credit losses and may have a material impact on our financial condition or results of operations.

In 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .

For assets held at amortized cost basis, ASU 2016-13 eliminates the probable initial recognition threshold in current accounting principles generally accepted in the United States of America ("GAAP") and instead requires an entity to reflect its estimate of all current expected credit losses ("CECL").

Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and debt securities, at the net amount expected to be collected.

The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

This measurement will take place at the time the financial asset is first added to the Statements of Financial Condition and periodically thereafter.

This differs significantly from the incurred loss model required under current GAAP, which delays recognition until it is probable a loss has been incurred.

Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses.

Moreover, the CECL model may create more volatility in the level of our allowance for loan losses.

If we are required to materially increase our level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations.

In November 2019, the FASB approved a delay of the required implementation date of ASU 2016-13 for smaller reporting companies resulting in a required implementation date for the Company as of January 1, 2023.

Upon adoption, the Company expects to record a cumulative effect adjustment to retained earnings that will increase stockholders’ equity by $2.1 million, net of tax.

See Note 1 of the consolidated financial statements for additional detail.

If the Company’s allowance for credit losses is not sufficient to cover actual credit losses, the Company’s results of operations would be negatively affected.

We maintain an allowance for credit losses which represents management's best estimate of credit losses within the existing portfolio of loans.

The allowance, in the judgement of management, is appropriate to reserve for estimated credit losses and risks inherent in the loan portfolio.

The level of the allowance for credit losses reflects management's continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic conditions and unidentified losses in the current loan portfolio.

The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks using existing qualitative and quantitative information, all of which may undergo material changes.

Changes in economic conditions or forecasts, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for credit losses.

In addition, bank regulators periodically review the Company’s allowance for credit losses and may require it to increase the allowance for credit losses or recognize further loan charge-offs.

Any increase in the allowance for credit losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on the Company’s financial condition and results of operations.

Risk Related to Changes in Market Interest Rates

47 unchanged sentences

Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits.

This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition

due to potential negative publicity.

If a breakdown occurs in the internal controls system, improper operation of systems or improper employee actions, the Company could incur financial loss, face regulatory action and suffer damage to its reputation.

8 unchanged sentences

Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

The occurrence of any system failures, interruption or breach of security could damage the Company’s reputation and result in a loss of customers and business thereby, subjecting it to additional regulatory scrutiny, or could expose it to litigation and possible financial liability.

and possible financial liability.

Although the Company has not experienced any system failures, interruption or breach of security to date, any of these events could have a material adverse effect on its financial condition and results of operations.

9 unchanged sentences

Accordingly, the Company could suffer losses if it fails to properly anticipate and manage these risks.

Reforms to and uncertainty regarding LIBOR may adversely affect our business.

In 2017, the Chief Executive of the United Kingdom Financial Conduct Authority ("FCA"), which regulates the London Inter-bank Offered Rate (“LIBOR”), announced in July 2017 that the sustainability of LIBOR cannot be guaranteed.

The administrator for LIBOR announced on March 5, 2021 that it will permanently cease to publish most LIBOR settings beginning on January 1, 2022 and cease to publish the overnight, one-month, three-month, six-month and 12-month USD LIBOR settings on July 1, 2023.

Accordingly, the FCA has stated that is does not intend to persuade or compel banks to submit to LIBOR after such respective dates.

Until such time, however, FCA panel banks have agreed to continue to support LIBOR.

It is impossible to 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 in the United Kingdom or elsewhere.

A committee of private-market derivative participants and their regulators convened by the Federal Reserve, the Alternative Reference Rates Committee (“ARRC”), was created to identify an alternative reference interest rate to replace LIBOR.

The ARRC announced Secured Overnight Financing Rate (“SOFR”), a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, as its preferred alternative to LIBOR.

Subsequently, the Federal Reserve announced final plans for the production of SOFR, which resulted in the commencement of its published rates by the FRB of New York on April 2, 2018.

Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question and the future of LIBOR at this time is uncertain.

The uncertainty as to the nature and effect of such reforms and actions and the political discontinuance of LIBOR may adversely affect the value of and return on our financial assets and liabilities that are based on or are linked to LIBOR, our results of operations or financial condition.

In addition, these reforms may also require extensive changes to the contracts that

govern these LIBOR based products, as well as our systems and processes.

The implementation of a substitute index or indices for the calculation of interest rates under our loan agreements with our borrowers 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 customers over the appropriateness or comparability to LIBOR of the substitute index or indices, which could have an adverse effect on our results of operations.

Currently, the manner and impact of this transition and related developments, as well as the effect of these developments on our funding costs, securities portfolio and business, is uncertain.

Risks Related to Accounting Matters

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In addition, inflation increases the cost of goods and services we use in our business operations, such as electricity and other utilities, which increases our noninterest expenses.

Furthermore, our customers are also affected by inflation and the

rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with us.

Furthermore, our customers are also affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with us.

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

16 unchanged sentences

Further, the Company may be required to expend additional capital resources on professional advisors, which could increase operational expenses and therefore negatively impact our net income.

ITEM 1B UNRESOLVED STAFF COMMENTS

Not applicable

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