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Item 1A. Risk Factors

2020-11-25 compared with 2019-11-27 · 81 added, 53 removed, 131 unchanged (51% of the section changed)

5 unchanged sentences

In addition to the risks set forth below and the other risks described in this Annual Report, there may be risks and uncertainties that are not currently known to us or that we currently deem to be immaterial that could materially and adversely affect our business, financial condition or operating results.

Risks Related to Macroeconomic Conditions

The impact of the COVID-19 pandemic on our customers, employees and business operations has had, and will likely continue to have, a significant adverse effect on our business, results of operations and financial condition.

The COVID-19 pandemic created a global public-health crisis that resulted in challenging economic conditions for households and businesses.

The economic impact of the COVID-19 pandemic impacted a broad range of industries.

Many areas of consumer spending have rebounded since the initial onset of the COVID-19 pandemic, but generally not related to travel and entertainment.

There is increasing concern about the longer lasting impact on local business, as well as travel and entertainment, resulting from the COVID-19 pandemic.

There is also concern about resurgences of COVID-19 as we move into the winter months.

The Federal Reserve returned to a zero-interest rate policy in March 2020 and the U.S.

government enacted several fiscal stimulus measures to counteract the economic disruption caused by the COVID-19 pandemic and provide economic assistance to businesses and households.

The dramatic lowering of market interest rates in a short period of time had an adverse effect on the Company's asset yields.

The majority of the fiscal assistance provided by the federal government to businesses and households significantly tapered off by September 30, 2020, which could adversely impact the ability of borrowers to repay their loans.

The Company's financial performance is dependent upon the ability of borrowers to repay their loans.

The COVID-19 pandemic resulted in changes to our business operations during the current year and could continue to result in changes to operations in future periods.

Depending on the severity and length of the COVID-19 pandemic, which is impossible to predict, we could experience significant disruptions in our business operations if key personnel or a significant number of employees were to become unavailable due to the effects of, and restrictions resulting from, the COVID-19 pandemic, as well as decreased demand for our products and services.

There is pervasive uncertainty surrounding the future economic conditions that will emerge in the months and years following the start of the COVID-19 pandemic.

As a result, management is confronted with a significant and unfamiliar degree of uncertainty in estimating the impact of the pandemic on credit quality, revenues and asset values.

Asset quality may deteriorate and the amount of our ACL may not be sufficient for future loan losses we may experience.

This could require us to increase our reserves and recognize more expense in future periods.

The changes in market rates of interest and the impact that has on our ability to price our products may reduce our net interest income in the future or negatively impact the demand for our products.

There is some risk that operational costs could continue to increase as we maintain existing facilities in accordance with health guidelines as well as potentially have staff work remotely.

The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

Changes in interest rates could have an adverse impact on our results of operations and financial condition.

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Quantitative and Qualitative Disclosures About Market Risk" for additional information about the Bank's interest rate risk management.

An economic downturn, especially one affecting our geographic market areas and certain regions of the country where we have correspondent loans secured by one- to four-family properties, could adversely impact our business and financial results.

Our primary lending emphasis is the origination and purchase of one- to four-family first mortgage loans secured by residential properties;

therefore, we are particularly exposed to downturns in regional housing markets and, to a lesser extent, the U.S.

housing market, along with changes in the levels of unemployment or underemployment.

We monitor the current status and trends of local and national employment levels and trends and current conditions in the real estate and housing markets in our local market areas and certain areas where we have correspondent loans secured by one- to four-family properties.

Adverse conditions in our local economies and in certain areas where we have correspondent loans secured by one- to four-family properties, such as inflation, unemployment, recession, natural disasters or pandemics, or other factors beyond our control, could impact the ability of our borrowers to repay their loans.

Any one or a combination of these events may have an adverse impact on borrowers' ability to repay their loans, which could result in increased delinquencies, non-

performing assets, loan losses, and future loan loss provisions.

Decreases in local real estate values could adversely affect the value of the property used as collateral for our loans, which could cause us to realize a loss in the event of a foreclosure.

Risks Related to Lending Activities

The increase in commercial loans in our loan portfolio exposes us to increased lending and credit risks, which could adversely impact our financial condition and results of operations.

A growing portion of our loan portfolio consists of commercial loans.

These loan types tend to be larger than and in different geographic regions from most of our existing loan portfolio and are generally considered to have different and greater risks than one- to four-family residential real estate loans and may involve multiple loans to groups of related borrowers.

A growing commercial loan portfolio also subjects us to greater regulatory scrutiny.

Furthermore, these loan types can expose us to a greater risk of delinquencies, non-performing assets, loan losses, and future loan loss provisions than one- to four-family residential real estate loans because repayment of such loans often depends on the successful operation of a business or of the underlying property.

Repayment of such loans may be affected by factors outside the borrower's control, such as adverse conditions in the real estate market, the economy, environmental factors, natural disasters or pandemics, and/or changes in government regulation.

Also, there are risks inherent in commercial real estate construction lending as the value of the project is uncertain prior to the completion of construction and subsequent lease-up.

A sudden downturn in the economy or other unforeseen events could result in stalled projects or collateral shortfalls, thus exposing us to increased credit risk.

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 a borrower's industries and businesses could cause rapid declines in values of, and collectability associated with, 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, may be difficult to appraise, may be illiquid and may 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.

An increase in valuation allowances and charge-offs related to our commercial and industrial loan portfolio could have an adverse effect on our business, financial condition, results of operations and future prospects.

If our ACL is not sufficient to cover actual loan losses, it could adversely impact our financial results.

We make several assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our 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 ACL that is adequate to absorb inherent losses in the loan portfolio, management analyzes and considers several elements, such as current economic conditions, loan modification programs and activity, performance of our loan portfolio, loan growth and concentrations, and industry and peer charge-off and ACL information.

If actual results differ significantly from our assumptions, our ACL may not be sufficient to cover inherent losses in our loan portfolio, resulting in additions to our ACL and an increase in the provision for credit losses.

Bank regulators also periodically review our loan portfolio, the ACL, and our assumptions underlying the determinations we have made regarding the ACL, and as a result may require us to increase our ACL and/or recognize additional loan charge-offs, both resulting in an increase in the provision for credit losses.

We may be required to provide remedial consideration to borrowers whose loans we purchase from correspondent and nationwide lenders if it is discovered that the originating company did not properly comply with lending regulations during the origination process.

We purchase whole one- to four-family loans from correspondent and nationwide lenders.

While loans purchased on a loan-by-loan basis from correspondent lenders are underwritten by the Bank's underwriters and loans purchased in bulk packages from correspondent and nationwide lenders are evaluated on a certain set of criteria before being purchased, we are still subject to some risks associated with the loan origination process itself.

By law, loan originators are required to comply with lending regulations at all times during the origination process.

Even though the Bank can contractually pursue the originating company, certain compliance-related risks associated with the origination process itself may shift from the originating company to the Bank once the Bank purchases the loan.

Should it be discovered, at any point, that an instance of

noncompliance occurred by the originating company during the origination process, the Bank may still be held responsible and required to remedy the issue for the loans it purchased from the originator.

Remedial actions can include refunding interest paid by the borrower and adjusting the contractual interest rate on the loan to the current market rate if advantageous to the borrower.

The Bank no longer purchases loans in bulk from nationwide lenders due primarily to these risks.

The expected discontinuation of LIBOR, and the identification and use of alternative replacement reference rates, may adversely affect our results of operations and subject the Company to litigation risk.

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We may also receive inquiries and other actions from regulators in respect to the Company's preparation and readiness for the replacement of LIBOR with alternative reference rates.

Risks Related to Cybersecurity, Third Parties, and Technology

The occurrence of any information system failure or interruption, breach of security or cyber-attack, at the Company, at its third-party service providers or counterparties may have an adverse effect on our business, reputation, financial condition or results of operations.

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While we regularly conduct security and risk assessments on our systems and those of our third-party service providers, there can be no assurance that their information security protocols are sufficient to withstand a cyber-attack or other security breach.

The Company has not experienced any material breaches.

Across our industry, the cost of minimizing these risks and investigating incidents has continued to increase with the frequency and sophistication of these threats.

To date, the Company has no knowledge of a material information security breach affecting its systems.

The occurrence of any of the foregoing could subject us to litigation or regulatory scrutiny, cause us significant reputational damage or erode confidence in the security of our information systems, products and services, cause us to lose customers or have greater difficulty in attracting new customers, have an adverse effect on the value of our common stock or subject us to financial losses that may not be covered by insurance, any of which could have a material adverse effect on our business, financial condition or results of operations.

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Furthermore, there continues to be heightened legislative and regulatory focus on privacy, data protection and information security.

New or revised laws and regulations may significantly impact our current and planned privacy, data protection and information security-related practices, the collection, use, sharing, retention and safeguarding of consumer and employee information, and current or planned business activities.

New or revised laws and regulations may significantly impact our current and planned privacy, data protection and

information security-related practices, the collection, use, sharing, retention and safeguarding of consumer and employee information, and current or planned business activities.

Compliance with current or future privacy, data protection and information security laws could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could have a material adverse effect on our business, financial condition or results of operations.

Our customers are also the target of cyber-attacks and identity theft.

Our customers are also targets of cyber-attacks and identity theft.

There continues to be instances involving financial services and consumer-based companies reporting the unauthorized disclosure of client or customer information or the destruction or theft of corporate data.

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We have implemented certain safeguards against these types of activities but they may not fully protect us from fraudulent financial losses.

The occurrence of a breach of security involving our customers' information, regardless of its origin, could damage our reputation and result in a loss of customers and business

and subject us to additional regulatory scrutiny, and could expose us to litigation and possible financial liability.

The occurrence of a breach of security involving our customers' information, regardless of its origin, could damage our reputation and result in a loss of customers and business and subject us to additional regulatory scrutiny, and could expose us to litigation and possible financial liability.

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

An economic downturn, especially one affecting our geographic market area and certain regions of the country where we have correspondent one- to four-family loans, could adversely impact our business and financial results.

Our primary lending emphasis is the origination and purchase of one- to four-family first mortgage loans on residential properties;

therefore, we are particularly exposed to downturns in regional housing markets and, to a lesser extent, the U.S.

housing market, along with changes in the levels of unemployment or underemployment.

Adverse conditions in our local economies and in certain areas where we have correspondent one- to four-family loans, such as inflation, unemployment, recession, natural disasters, or other factors beyond our control, could impact the ability of our borrowers to repay their loans.

Any one or a combination of these events may have an adverse impact on borrowers' ability to repay their loans, which could result in increased delinquencies, non-performing assets, loan losses, and future loan loss provisions.

Decreases in local real estate values could adversely affect the value of the property used as collateral for our loans, which could cause us to realize a loss in the event of a foreclosure.

The increase in commercial loans in our loan portfolio exposes us to increased lending and credit risks, which could adversely impact our financial condition and results of operations.

A growing portion of our loan portfolio consists of commercial loans.

In addition, as a result of the acquisition of CCB in August 2018, it is anticipated that commercial lending will continue to be a growing portion of our business.