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Risks Related to Macroeconomic Conditions
−Removed: The impact of the COVID-19 pandemic on our customers, employees and business operations has had, and will likely continue to have, an adverse effect on our business, results of operations and financial condition.
−Removed: The COVID-19 pandemic created a global public-health crisis that resulted in challenging economic conditions for households and businesses.
−Removed: The economic impact of the COVID-19 pandemic impacted a broad range of industries.
−Removed: Many areas of consumer spending have rebounded since the initial onset of the COVID-19 pandemic.
−Removed: There is uncertainty surrounding the future economic conditions that will emerge in the months and years following the start of the COVID-19 pandemic.
−Removed: 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.
−Removed: The Bank continues to have commercial borrowers that have deferred payments on their loans, and we recognize that those borrowers in the hotel and convention center industries are experiencing a slower recovery than certain other industries.
−Removed: The Bank has deferred foreclosures on
−Removed: one- to four-family loans as a result of federal and state foreclosure moratoriums, and when foreclosures resume, we could experience losses on the impacted loans.
−Removed: The Bank has been forced to leave staff positions unfilled, as qualified candidates for open positions have been difficult to find.
−Removed: The changes in market rates of interest and their impact on our ability to price our products may continue to reduce our net interest income or negatively impact the demand for our products.
−Removed: The Company continues to follow Centers for Disease Control and Prevention (CDC) guidelines and governmental mandates regarding COVID-19 protocols and vaccinations.
−Removed: While it is not possible to predict the administrative costs, compliance costs or impacts to our available workforce, the Company continues to develop compliance processes for implementation of the Occupational Safety and Health Administration (OSHA) testing and vaccination mandates.
−Removed: In addition, we are monitoring legal actions and pending state legislation regarding the mandates for further guidance.
−Removed: 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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Changes in interest rates could have an adverse impact on our results of operations and financial condition because the majority of our interest-earning assets are long-term, fixed-rate loans, while the majority of our interest-bearing liabilities are shorter term, and therefore subject to a greater degree of interest rate fluctuations.
−Removed: This type of risk is known as interest rate risk and is affected by prevailing economic and competitive conditions, including monetary policies of the FRB and fiscal policies of the United States federal government.
+Added: This type of risk is known as interest rate risk and is affected by prevailing economic and competitive conditions, including inflationary trends and/or monetary policies of the FRB and fiscal policies of the United States federal government.
The impact of changes in interest rates is generally observed on the income statement.
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As this occurs, the amount of interest-earning assets repricing could diminish to the point where interest-bearing liabilities reprice to a higher interest rate at a faster pace than interest-earning assets, thus negatively impacting the Bank's net interest income.
+Added: For additional information about the interest-rate risk we face, see "Part II, Item 7A.
+Added: Quantitative and Qualitative Disclosures about Market Risk."
Changes in interest rates can also have an adverse effect on our financial condition as available-for-sale ("AFS") securities are reported at estimated fair value.
−Removed: We increase or decrease our stockholders' equity, specifically accumulated other comprehensive income (loss) ("AOCI"), by the amount of change in the estimated fair value of our AFS securities, net of deferred taxes.
−Removed: Increases in interest rates generally decrease the fair value of AFS securities.
−Removed: Decreases in the fair value of AFS securities would, therefore, adversely impact stockholders' equity.
+Added: Stockholders' equity, specifically accumulated other comprehensive income (loss) ("AOCI"), is increased or decreased by the amount of change in the estimated fair value of our AFS securities, net of deferred income taxes.
+Added: Increases in interest rates generally decrease the fair value of AFS securities, which adversely impacts stockholders' equity.
+Added: For additional information, see "Part II, Item 7.
+Added: Management's Discussion and Analysis of Financial Condition and Results of Operations - Stockholders' Equity" and "Part II, Item 8.
+Added: Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 15.
+Added: Accumulated Other Comprehensive Income."
Changes in interest rates, as they relate to customers, can also have an adverse impact on our financial condition and results of operations.
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Fluctuations in interest rates also affect customer demand for deposit products.
−Removed: Local competition could affect our ability to attract deposits, or could result in us paying more than competitors for deposits.
+Added: Competition from other financial institutions and/or brokerage firms could affect our ability to attract and retain deposits and could result in us paying more for deposits.
In addition to general changes in interest rates, changes that affect the shape of the yield curve could negatively impact the Bank.
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As a result, a steeper yield curve, meaning long-term interest rates are significantly higher than short-term interest rates, would provide the Bank with a better opportunity to increase net interest income.
−Removed: When the yield curve is flat, meaning long-term interest rates and short-term interest rates are essentially the same, or when the yield curve is
−Removed: inverted, meaning long-term interest rates are lower than short-term interest rates, the yield between interest-earning assets and interest-bearing liabilities that reprice is compressed or diminished and would likely negatively impact the Bank's net interest income.
+Added: When the yield curve is flat, meaning long-term interest rates and short-term interest rates are essentially the same, or when the yield curve is inverted, meaning long-term interest rates are lower than short-term interest rates, the yield between interest-earning assets and interest-bearing liabilities that reprice is compressed or diminished and would likely negatively impact the Bank's net interest income.
See "Part II, Item 7A.
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housing and commercial real estate markets, along with changes in the levels of unemployment or underemployment.
−Removed: 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, as well as commercial real estate markets, in our local market areas and certain areas where we have correspondent loans and commercial participation loans.
+Added: 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, as well as commercial real estate markets, in our local market areas and certain areas where we have correspondent loans and commercial real estate participation loans.
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.
−Removed: Adverse conditions in our local economies and in certain areas where we have correspondent loans and commercial participation loans, 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.
+Added: Adverse conditions in our local economies and in certain areas where we have correspondent loans and commercial real estate participation loans, such as inflation, unemployment, supply chain disruptions, 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.
+Added: The Company may not be able to attract and retain skilled employees.
+Added: The Company's success depends, in large part, on its ability to attract and retain key people.
+Added: Competition for the best people can be intense, and the Company spends considerable time and resources attracting and hiring qualified people for its operations.
+Added: The unexpected loss of the services of one or more of the Company's key personnel could have an adverse impact on the Company's business because of their skills, knowledge of the Company's market, and years of industry experience, as well as the difficulty of promptly finding qualified replacement personnel.
Risks Related to Lending Activities
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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.
−Removed: 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.
+Added: A sudden downturn in the economy, labor and/or supply chain issues, 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.
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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.
−Removed: 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.
−Removed: LIBOR is used extensively in the United States as a reference rate for various financial contracts, including adjustable-rate loans, asset-backed securities, and interest rate swaps.
−Removed: In July 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021.
−Removed: On November 30, 2020, authorities announced a plan to extend the date that most U.S.
−Removed: LIBOR values would cease being published from December 31, 2021 to June 30, 2023.
−Removed: The announcement means the continuation of LIBOR cannot be guaranteed after June 30, 2023.
−Removed: In the United States, the Alternative Reference Rate Committee ("ARRC"), a group of diverse private-market participants assembled by the Federal Reserve Board and the Federal Reserve Bank of New York, was tasked with identifying alternative reference interest rates to replace LIBOR.
−Removed: The Secured Overnight Finance Rate ("SOFR") has emerged as the ARRC's preferred alternative rate for LIBOR;
−Removed: however, other market alternatives have been developed.
−Removed: SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities in the repurchase agreement market.
−Removed: The use of SOFR continues to steadily grow.
−Removed: At this time, it is not possible to predict how markets will respond to alternative reference rates as markets continue to transition away from LIBOR.
−Removed: The Company's LIBOR steering committee is composed of individuals from lending, compliance/risk, treasury and legal.
−Removed: The LIBOR steering committee has been charged with overseeing the coordination of the Company's enterprise-wide LIBOR transition program and evaluating and mitigating the risks associated with the transition from LIBOR.
−Removed: The LIBOR transition program includes a comprehensive review by management of the financial products, agreements, contracts and business processes that may use LIBOR as a reference rate.
−Removed: As financial products, agreements, contracts and business processes that use LIBOR are identified, the LIBOR steering committee works with management to develop a strategy to transition away from LIBOR.
−Removed: During the strategy development process, management and the LIBOR steering committee considers the financial, customer/counterparty, regulatory and legal impacts of all proposed strategies.
−Removed: As of September 30, 2021, the Company has identified $268.6 million of adjustable-rate one- to four-family loans in its portfolio for which the repricing index was tied to LIBOR and the loan maturity date is after December 31, 2021.
−Removed: The majority of these loans have maturity dates after June 30, 2023.
−Removed: Our one- to four-family loan agreements generally allow the Bank to choose a new alternative reference rate based upon comparable information if the current index is no longer available.
−Removed: During the June 30, 2019 quarter, the Bank discontinued the use of LIBOR for the origination of adjustable-rate one- to four-family loans and no longer purchases correspondent one- to four-family loans that use LIBOR.
−Removed: The Bank began using the one-year Constant Maturity Treasury ("CMT") index for newly originated and correspondent purchased one- to four-family adjustable-rate loans.
−Removed: At September 30, 2021, none of the consumer or commercial loans in the Company's portfolio use a repricing index tied to LIBOR.
−Removed: The Bank's swap agreements are governed by the International Swap Dealers Association ("ISDA").
−Removed: ISDA is in the process of developing fallback language for swap agreements and is expected to establish a protocol to allow counterparties to modify legacy trades to include the new fallback language.
−Removed: During fiscal year 2021, the Bank began to preemptively transition its FHLB advances and interest rate swaps that were tied to LIBOR into SOFR instruments.
−Removed: The early transition was driven by the FHLB policy that no longer allows LIBOR-based advances with a maturity beyond December 31, 2021.
−Removed: The Bank has interest rate swaps maturing on December 1, 2021 with a notional amount of $100.0 million at September 30, 2021 that are tied to LIBOR.
−Removed: The market transition away from LIBOR to an alternative reference rate is complex.
−Removed: If LIBOR rates are no longer available, and we are required to implement replacement reference rates for the calculation of interest rates under our loan agreements with borrowers, we may incur significant expense in effecting the transition and we may be subject to disputes or litigation with our borrowers over the appropriateness or comparability to LIBOR of the replacement reference rates.
−Removed: The replacement reference rates could also result in a reduction in our interest income.
−Removed: We may also receive inquiries and other actions from regulators with 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
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Cyber criminals use a variety of tactics, such as ransomware, denial of service, and theft of sensitive business and customer information to extort payment or other concessions from victims.
−Removed: In some cases, these attacks have caused significant impacts on other businesses' access to data and ability to provide services.
+Added: In some cases, these attacks have caused
+Added: significant impacts on other businesses' access to data and ability to provide services.
We are not able to anticipate or implement effective preventive measures against all incidents of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources, including attacks on third party vendors and their applications and products used by the Bank.
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Furthermore, there continues to be heightened legislative and regulatory focus on privacy, data protection and information security.
−Removed: New or revised laws and regulations may significantly impact our current and planned privacy, data protection and
−Removed: information security-related practices, the collection, use, sharing, retention and safeguarding of consumer and employee information, and current or planned business activities.
+Added: 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 an adverse effect on our business, financial condition and results of operations.
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however, vendors may remain vulnerable to breaches, unauthorized access, misuse, computer viruses, and/or other malicious attacks that could ultimately compromise sensitive information.
−Removed: We have developed procedures and processes for selecting and monitoring third party vendors, but ultimately we are dependent on these third party vendors to secure their information.
+Added: We have developed procedures and processes for selecting and monitoring third party vendors, but ultimately are dependent on these third party vendors to secure their information.
If these vendors encounter any of these types of issues, or if we have difficulty communicating with them, we could be exposed to disruption of operations, loss of service or connectivity to customers, reputational damage, and litigation risk that could have an adverse effect on our business, financial condition and results of operations.
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If the Bank were to falter in any of these areas, it could have an adverse effect on our business, financial condition and results of operations.
+Added: There are operational and reputation risks associated with the planned digital transformation.
+Added: Management is in the process of implementing a new core processing system ("digital transformation") for the Bank, which is expected to be operational by September 2023.
+Added: The digital transformation is expected to better position the Bank for the future and allow for the introduction of new products and services to enhance customer experiences.
+Added: This project may subject the Company to operational risks, such as disruptions in technology systems impacting customers.
+Added: The Company will work to remediate any such disruptions, if they occur, but no assurance can be given that a potential adverse development will be quickly or completely remediated.
+Added: If an adverse development arising from the digital transformation is not sufficiently remediated or is not remediated in a timely fashion, the Company's reputation could be significantly impacted which could result in loss of customer business, subject the Company to regulatory scrutiny, or expose the Company to possible litigation, any of which could have a material impact on the Company's financial condition and results of operations.
Risks Related to Competition
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We compete primarily on the basis of the interest rates offered to depositors, the terms of loans offered to borrowers, and the benefits afforded to customers as a local institution and portfolio lender.
−Removed: Our pricing strategy for loan and deposit products includes setting interest rates based on secondary market prices
−Removed: and local competitor pricing for our local markets, and secondary market prices and national competitor pricing for our correspondent lending markets.
Should we face competitive pressure to increase deposit rates or decrease loan rates, our net interest income could be adversely affected.
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We operate in a highly regulated environment which limits the manner and scope of our business activities, and we may be adversely affected by new and/or changes in laws and regulations or interpretation of existing laws and regulations.
−Removed: We are subject to extensive regulation, supervision, and examination by the OCC, FRB, and the FDIC.
+Added: We are subject to extensive regulation, supervision, and examination by the OCC, the FRB, and the FDIC.
These regulatory authorities exercise broad discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on a bank's operations, reclassify assets, determine the adequacy of a bank's ACL, and determine the level of deposit insurance premiums assessed.
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Moreover, bank regulatory agencies have been active in responding to concerns and trends identified in examinations and have issued formal enforcement orders requiring capital ratios in excess of regulatory requirements and/or assessing monetary penalties.
−Removed: Bank regulatory agencies, such as the OCC and the FDIC, govern the activities in which we may engage, primarily for the protection of depositors, and not for the protection or benefit of investors.
+Added: Bank regulatory agencies, such as the OCC, the FRB and the FDIC, govern the activities in which we may engage, primarily for the protection of depositors, and not for the protection or benefit of investors.
The CFPB enforces consumer protection laws and regulations for the benefit of the consumer and not the protection or benefit of investors.
−Removed: In addition, new laws and regulations may continue to increase our costs of regulatory compliance and of doing business, and otherwise affect our operations.
+Added: In addition, new laws and regulations, including those related to environmental, social, and governance initiatives, may continue to increase our costs of regulatory compliance and of doing business, and otherwise affect our operations.
New laws and regulations may significantly affect the markets in which we do business, the markets for and value of our loans and securities, the products we offer, the fees we can charge and our ongoing operations, costs, and profitability.
−Removed: The Company is also directly subject to the requirements of entities that set and interpret the accounting standards such as the Financial Accounting Standards Board, and indirectly subject to the actions and interpretations of the Public Company Accounting Oversight Board, which establishes auditing and related professional practice standards for registered public accounting firms and inspects registered firms to assess their compliance with certain laws, rules, and professional standards in public company audits.
+Added: The Company is also directly subject to the requirements of entities that set and interpret accounting standards such as the Financial Accounting Standards Board, and indirectly subject to the actions and interpretations of the Public Company Accounting Oversight Board, which establishes auditing and related professional practice standards for registered public accounting firms and inspects registered firms to assess their compliance with certain laws, rules, and professional standards in public company audits.
These regulations, along with the currently existing tax, accounting, securities, and monetary laws, regulations, rules, standards, policies and interpretations, control the methods by which financial institutions and their holding companies conduct business, engage in strategic and tax planning, implement strategic initiatives, and govern financial reporting.
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The Company's ability to pay dividends is subject to the ability of the Bank to make capital distributions to the Company.
−Removed: The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company, and also on the availability of cash at the holding company level in the event
−Removed: earnings are not sufficient to pay dividends.
+Added: The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company, and on the availability of cash at the holding company level in the event earnings are not sufficient to pay dividends.
Under certain circumstances, capital distributions from the Bank to the Company may be subject to regulatory approvals.
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If conditions or circumstances arise that expose flaws or gaps in our risk management or compliance programs, or if our controls do not function as designed, the performance and value of our business could be adversely affected.
−Removed: The Company may not be able to attract and retain skilled employees.
−Removed: The Company's success depends, in large part, on its ability to attract and retain key people.
−Removed: Competition for the best people can be intense, and the Company spends considerable time and resources attracting and hiring qualified people for its operations.
−Removed: The unexpected loss of the services of one or more of the Company's key personnel could have an adverse impact on the Company's business because of their skills, knowledge of the Company's market, and years of industry experience, as well as the difficulty of promptly finding qualified replacement personnel.
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.