What changed in this filing

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Item 1A. Risk Factors

2021-03-08 compared with 2020-03-10 · 137 added, 121 removed, 170 unchanged (60% of the section changed)

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In such cases, the trading price of our common stock could decline.

RISKS RELATED TO ECONOMIC CONDITIONS

Our business may be adversely affected by conditions in the financial markets and economic conditions generally.

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Economic conditions have a significant impact on the demand for our products and services, as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources.

natural disasters, pandemics and election outcomes or other factors could impact economic conditions and, in turn, could have a material adverse effect on our financial condition and results of operations.

For example, it was reported in January 2020 that a novel strain of coronavirus, which first surfaced in China, had spread to several other countries, resulting in various uncertainties, including the potential impact to global economies, trade and consumer and corporate clients.

To the extent uncertainty regarding the U.S.

or global economy negatively impacts general economic conditions, consumer confidence and consumer credit factors, our business, financial condition and results of operations could be significantly and adversely affected.

A significant decline in general economic conditions caused by inflation, recession, tariffs, unemployment, changes in securities markets, changes in housing market prices, geopolitical uncertainties, natural disasters, pandemics and election outcomes or other factors could impact economic conditions and, in turn, could have a material adverse effect on our financial condition and results of operations.

In particular, the COVID-19 pandemic, restrictions intended to prevent and mitigate its spread, challenges related to vaccination rollout and new variants of the virus has and is expected to continue to (and the future outbreak of other highly infectious or contagious diseases likely would) significantly and negatively impact financial markets and economic conditions in our markets, the United States and globally.

As a result, consumer confidence and consumer credit factors have been, and may be further, negatively impacted.

Consequently, our business, financial condition and results of operations have been and could be further significantly and adversely affected.

See also “ The COVID-19 pandemic is expected to continue to cause adverse economic conditions and could have an adverse impact on our financial condition and our results of operations and other aspects of our business.

Deterioration in the markets for residential real estate, including secondary residential mortgage loan markets, could reduce our net income and profitability.

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If interest rates paid on deposits or other borrowings were to increase at a faster rate than the interest rates earned on loans and investments, our net income would be adversely affected.

The COVID-19 pandemic is expected to continue to cause adverse economic conditions and could have an adverse impact on our financial condition and our results of operations and other aspects of our business.

We are closely monitoring developments related to the COVID-19 pandemic to assess its impact on our business.

While still evolving, the COVID-19 pandemic has caused significant economic and financial turmoil both in the U.S.

and around the world, and has fueled concerns that it may lead to a global recession.

These conditions are expected to continue and worsen in the near term.

At this time, it is not possible to estimate how long it will take to halt the spread of the virus or the long term

effects that the COVID-19 pandemic could have on our business.

The extent to which the COVID-19 pandemic impacts our business, results of operations, financial condition, liquidity or prospects will depend on future developments which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic and the actions taken to contain or address its impact.

While we have implemented risk management and contingency plans and taken preventive measures and other precautions, no predictions of specific scenarios can be made with respect to the COVID-19 pandemic and such measures may not adequately predict the impact on our business from such events.

Currently, many of our employees have been working remotely for an extended period of time.

An extended period of remote work arrangements could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business.

Increased economic uncertainty and increased unemployment resulting from the economic impacts of the spread of COVID-19 may also adversely impact the ability of borrowers to repay outstanding loans, or could substantially weaken the value of collateral securing those loans.

In addition, any resulting downward pressure on real estate values could increase the potential for problem loans and thus have a direct impact on our consolidated results of operations.

We participate as an approved lender pursuant to the Paycheck Protection Program, which was established under the congressionally-approved Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S.

Small Business Administration (the “SBA”).

The Paycheck Protection Program gives small businesses and self-employed individuals guaranteed loans and loan forgiveness to stay in business during the COVID-19 pandemic, subject to certain requirements.

As an SBA-approved lender, we secured more than $139 million in authorized funding for our customers under the Paycheck Protection Program.

As a result of factors including the fact that the Paycheck Protection Program is a new program that was created urgently in response to the COVID-19 outbreak, lenders and customers have experienced, and may experience further, challenges in the administration and debt forgiveness process.

While governmental and non-governmental organizations are engaging in efforts to combat the spread and severity of the COVID-19 pandemic and related public health issues, these measures may not be effective.

We also cannot predict how legal and regulatory responses to concerns about the COVID-19 pandemic and related public health issues will impact our business.

Such events or conditions could result in regulation or restrictions affecting the conduct of our business in the future.

Acts or threats of terrorism and political or military actions by the United States or other governments could adversely affect general economic industry conditions.

Geopolitical conditions may affect our earnings.

Acts or threats of terrorism and political actions taken by the United States or other governments in response to terrorism, or similar activity, could adversely affect general or industry conditions and, as a result, our consolidated financial condition and results of operations.

RISKS RELATED TO OUR BUSINESS AND OPERATIONS

We are subject to interest rate risk.

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Our net interest income will be adversely affected if market interest rates change such that the interest we pay on deposits and borrowings increase faster than the interest earned on loans and investments.

Although the United States is currently in a low interest rate environment, there exists current speculation that interest rates may be even further reduced as a result of the economic impacts of the coronavirus.

As a result of the economic impacts of the COVID-19 pandemic, interest rates in the United States have been reduced, and may be even further reduced.

The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time.

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The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk.

In particular, reduced interest rates negatively impact our results of operations.

We are subject to lending risk.

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These risks include the impact of changes in interest rates and changes in the economic conditions in the markets we serve, as well as those across the United States.

An increase in interest rates or weakening economic conditions (such as high levels of unemployment) could adversely impact the ability of borrowers to repay outstanding loans, or could substantially weaken the value of collateral securing those loans.

An increase in interest rates or weakening economic conditions (such as high levels of unemployment), including weakening economic conditions as a result of the COVID-19 pandemic, has and could further adversely impact the ability of borrowers to repay outstanding loans, or could substantially weaken the value of collateral securing those loans.

As of December 31, 2020, the Bank had $61.0 million of loan modifications remaining due to pandemic-related borrower requests.

See “Allowance for Loan Losses” for discussion of COVID-19 qualitative factors, and related provision for loan losses.

Downward pressure on real estate values could increase the potential for problem loans and thus have a direct impact on our consolidated results of operations.

See also “ The COVID-19 pandemic pandemic is expected to continue to cause adverse economic conditions and could have an adverse impact on our financial condition and our results of operations and other aspects of our business.

We are subject to higher lending risks with respect to our commercial and agricultural banking activities which could adversely affect our financial condition and results of operations.

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Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.

Agricultural non-real estate loans carry significant risks as they may involve larger balances concentrated with a single borrower or group of related borrowers.

Agricultural operating loans carry significant risks as they may involve larger balances concentrated with a single borrower or group of related borrowers.

In addition, repayment of such loans depends on the successful operation or management of the farm property securing the loan for which an operating loan is utilized.

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The level of the allowance reflects management’s continuing evaluation of various factors, including specific credit risks, historical loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions, and unidentified losses inherent in the current loan portfolio.

Determining the appropriate level of the allowance for loan losses involves a high

degree of subjectivity and requires us to make estimates of significant credit risks, which may undergo material changes.

Determining the appropriate level of the allowance for loan losses involves a high degree of subjectivity and requires us to make estimates of significant credit risks, which may undergo material changes.

In evaluating our impaired loans, we assess repayment expectations and determine collateral values based on all information that is available to us.

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Any additional loan loss provision will reduce our net income or increase our net loss, which could have a direct material adverse effect on our financial condition and results of operations.

A new accounting standard may require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.

The Financial Accounting Standards Board (“FASB”) has adopted a new accounting standard that will be effective for the Company for our first fiscal year after December 15, 2022.

This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses.

This will change the current method of providing allowances for loan losses that are probable, which may require us to increase our allowance for loan losses, and to greatly increase the types of data we will need to collect and review to determine the appropriate level of the allowance for loan losses Banking regulators expect the new accounting standard will increase the allowance for loan losses.

Any change in the allowance for loan losses at the time of adoption will be an adjustment to retained earnings and would change the Bank’s capital levels.

Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial condition and results of operations.

Changes in the fair value or ratings downgrades of our securities may reduce our stockholders’ equity, net earnings, or regulatory capital ratios.

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We compete with commercial banks, trust companies, mortgage banking firms, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms.

Our market area is also served by commercial banks and savings associations that are substantially larger than us in terms of deposits and loans and have greater

human and financial resources.

Our market area is also served by commercial banks and savings associations that are substantially larger than us in terms of deposits and loans and have greater human and financial resources.

This competitive climate can make it difficult to establish, maintain and retain relationships with new and existing customers and can lower the rate we are able to charge on loans, increase the rates we must offer on deposits, and affect our charges for other services.

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We may not be successful in introducing new products and services, achieving market acceptance of our products and services, or developing and maintaining loyal customers, which in turn, could adversely affect our results of operations and profitability.

Acts or threats of terrorism and political or military actions by the United States or other governments could adversely affect general economic industry conditions.

Geopolitical conditions may affect our earnings.

We operate in a highly regulated environment, and are subject to changes, which could increase our cost structure or have other negative impacts on our operations.

The banking industry is extensively regulated at the federal and state levels.

Insured depository institutions and their holding companies are subject to comprehensive regulation and supervision by financial regulatory authorities covering all aspects of their organization, management and operations.

We are also subject to regulation by the SEC.

Our compliance with these regulations, including compliance with regulatory commitments, is costly.

Regulation includes, among other things, capital and reserve requirements, permissible investments and lines of business, mergers and acquisitions, restrictions on transactions with insiders and affiliates, anti-money laundering regulations, dividend limitations, community reinvestment requirements, limitations on products and services offered, loan limits, geographical limits, and consumer credit regulations.

The system of supervision and regulation applicable to us establishes a comprehensive framework for our operations and is intended primarily for the protection of the Deposit Insurance Fund, our depositors and the public, rather than our stockholders.

Failure to comply with applicable laws, regulations or policies could result in sanction by regulatory agencies, civil monetary penalties, and/or damage to our reputation, which could have a material adverse effect on our business, consolidated financial condition and results of operations.

In addition, any change in government regulation could have a material adverse effect on our business.

Federal law restricts the amount of voting stock of a bank holding company or a bank that a person or group may acquire without the prior approval of banking regulators.

Under the federal Change in Bank Control Act and the regulations thereunder, a person or group must give advance notice to the Federal Reserve before acquiring control of any bank holding company, such as the Company, and the OCC before acquiring control of any national bank, such as the Bank.

Under the BHCA and Federal Reserve guidance thereunder, a person or group will be presumed to control a bank holding company if they acquire a certain percentage of the bank holding company or if one or more other control factors are present.

The Federal Reserve recently finalized a new rule, which will go into effect on April 1, 2020, that makes certain modifications and clarifications to the ownership levels and control factors that create the presumption of control.

The overall effect of the BHCA is to make it more difficult to acquire a bank holding company and a bank by tender offer or similar means than it might be to acquire control of

another type of corporation.

Consequently, shareholders of the Company may be less likely to benefit from the rapid increases in stock prices that may result from tender offers or similar efforts to acquire control of other companies.

Investors should be aware of these requirements when acquiring shares of our stock.

We have become subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or limit our ability to pay dividends or repurchase shares.

The Basel III Rules, which became effective for us on January 1, 2015, included new minimum risk-based capital and leverage ratios and refines the definition of what constitutes “capital” for calculating these ratios.

The new minimum capital requirements are:

(i) a new common equity Tier 1 capital ratio of 4.5%;

(ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%);

(iii) a total capital ratio of 8% (unchanged from prior rules);

and (iv) a Tier 1 leverage ratio of 4%.

The Basel III Rules also establish a “capital conservation buffer” of 2.5%, and, when fully phased in, will result in the following minimum ratios:

(i) a common equity Tier 1 capital ratio of 7.0%;

(ii) a Tier 1 to risk-based assets capital ratio of 8.5%;

and (iii) a total capital ratio of 10.5%.

The capital conservation buffer was fully phased in on January 1, 2019.

An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the buffer amount.

The application of more stringent capital requirements could, among other things, result in lower returns on equity, and result in regulatory actions if we are unable to comply with such requirements.

Furthermore, the imposition of liquidity requirements in connection with the implementation of the Basel III Rules could result in our having to lengthen the term of our funding sources, change our business models or increase our holdings of liquid assets.

Specifically, the Bank’s ability to pay dividends will be limited if it does not have the capital conservation buffer required by the new capital rules, which may further limit the Company’s ability to pay dividends to stockholders.

We are subject to increases in FDIC insurance premiums and special assessments by the FDIC, which will adversely affect our earnings.

We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance.

For example, during 2008 and 2009, higher levels of bank failures dramatically increased resolution costs of the FDIC and depleted the Deposit Insurance Fund.

On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which, in part, permanently raised the current standard maximum deposit insurance amount to $250,000 per customer (up from $100,000).

These programs placed additional stress on the Deposit Insurance Fund.

In order to maintain a strong funding position and restore reserve ratios of the Deposit Insurance Fund, the FDIC increased assessment rates of the insured institutions.

If additional bank or financial institution failures increase, or if the cost of resolving prior failures exceeds expectations, we may be required to pay even higher FDIC premiums than the current levels.

Any future increases or required prepayments of FDIC insurance premiums may adversely impact our earnings and financial condition.

Customers may decide not to use banks to complete their financial transactions, which could result in a loss of income to us.

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Moreover, it could limit our ability to take advantage of what we believe to be good market opportunities for expanding our loan portfolio.

The success of the F&M Merger and the ongoing integration of F&M into the Company’s operations will depend on a number of uncertain factors.

We completed our acquisition of F&M in July 2019.

The success of the F&M Merger, including without limitation the realization of anticipated benefits and cost savings, will depend on a number of factors, including, without limitation:

• the Company’s ability to integrate F&M Bank operations into the Bank’s current operations;

• the Company’s ability to limit the outflow of deposits held by its new customers in the acquired branch offices and to successfully retain and manage loans acquired in the F&M Merger;

• the Company’s ability to control the incremental non-interest expenses from the acquired branch offices;

• the Company’s ability to retain and attract the appropriate personnel to staff the acquired branch offices;

• the Company’s ability to successfully combine and integrate the businesses of the Company and F&M in a manner that permits growth opportunities.

Integrating the acquired operations continues to be a significant undertaking, and may be affected by general market and economic conditions or government actions affecting the financial industry generally.

No assurance can be given that the Company will be able to integrate the acquired operations successfully, and the integration process could result in the loss of key employees, the disruption of ongoing business, the diversion of management attention and resources, or inconsistencies in standards, controls, procedures and policies that adversely affect the Company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the F&M Merger.

The Company may also encounter unexpected difficulties or costs during the integration that could adversely affect its earnings and financial condition.

Additionally, no assurance can be given that the operation of the acquired branches will not adversely affect the Company’s existing profitability, that the Company will be able to achieve results in the future similar to those achieved by its existing banking business, or that the Company will be able to manage any growth resulting from the F&M Merger effectively.

If the Company experiences difficulties with the integration process and attendant systems conversion, the anticipated benefits of the F&M Merger may not be realized fully or at all, or may take longer to realize than expected.

These integration matters could have an adverse effect on each of the Company and F&M during this transition period and for an undetermined period after completion of the F&M Merger on the combined company.

In addition, the actual cost savings of the F&M Merger could be less than anticipated.

Our growth strategy includes selectively acquiring businesses through acquisitions of other banks, and our ability to consummate these acquisitions on economically advantageous terms acceptable to us in the future is unknown.

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This competition could increase prices for potential acquisitions that we believe are attractive.

Any such acquisitions could be funded through cash from operations, the issuance of equity and/or the incurrence of additional indebtedness, which amount may be material, or a combination thereof.

Any such acquisitions could be funded through cash from operations, the issuance of equity and/or the incurrence of additional

indebtedness, which amount may be material, or a combination thereof.

Any acquisition could be dilutive to our earnings and stockholders’ equity per share of our common stock.

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Acquisition and expansion activities may disrupt our business, dilute existing stockholders and adversely affect our operating results.

We recently acquired F&M in July 2019.

We acquired United Bank in October 2018.

We acquired WFC in August 2017 and CBN in May 2016.

We acquired F&M in July 2019, United Bank in October 2018, WFC in August 2017 and CBN in May 2016.

We intend to continue to evaluate potential acquisitions and expansion opportunities in the normal course of our business.

Although the integration of WFC and CBN have been successfully completed and the integration of United Bank into our operations is proceeding well, we cannot assure you that we will be able to adequately or profitably manage the ongoing integration of F&M or any such future acquisitions.

Acquiring other banks or financial service companies, such as F&M, as well as other geographic and product expansion activities, involve various risks including:

Although the integration of F&M, United Bank, WFC and CBN have been successfully completed, we cannot assure you that we will be able to adequately or profitably manage the ongoing integration of any such future acquisitions.

Acquiring other banks or financial service companies, as well as other geographic and product expansion activities, involve various risks including:

• risks of unknown or contingent liabilities;

• unanticipated costs and delays;

• risks that acquired new businesses do not perform consistent with our growth and profitability

• expectations;

• risks that acquired new businesses do not perform consistent with our growth and profitability expectations;

• risks of entering new markets or product areas where we have limited experience;

• risks that growth will strain our infrastructure, staff, internal controls and management, which may

• require additional personnel, time and expenditures;

• risks that growth will strain our infrastructure, staff, internal controls and management, which may require additional personnel, time and expenditures;

• exposure to potential asset quality issues with acquired institutions;

• difficulties, expenses and delays of integrating the operations and personnel of acquired institutions, and

• start-up delays and costs of other expansion activities;

• difficulties, expenses and delays of integrating the operations and personnel of acquired institutions, and start-up delays and costs of other expansion activities;

• potential disruptions to our business;

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See Item 9A “Controls and Procedures” for further discussion of our internal controls.

Our reporting obligations as a public company are costly.

Reporting requirements of a public company change depending on the reporting classification in which the Company falls as of the end of its second quarter of each fiscal year.

The Company is currently a “smaller reporting company” which allows us to provide certain simplified and scaled disclosures in our filings.

Although we remain a smaller reporting company, we have become an “accelerated filer” because our public float exceeds $75 million.

As such we have become subject to the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that an independent registered public accounting firm provide an attestation report on the effectiveness of internal control over financial reporting, making the public reporting process more costly.

We may not be able to attract or retain key people.

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Bianchi and Mr.

Broucek are under employment agreements expiring in 2022, unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our local markets, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

Broucek are under employment agreements expiring in 2022, unexpected loss of services of one or more of our key personnel could have a

material adverse impact on our business because of their skills, knowledge of our local markets, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

We continually encounter technological change.

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Furthermore, the storage and transmission of such data is regulated at the federal and state level.

Privacy information security laws and regulation changes, and compliance therewith, may result in cost increases due to system

changes and the development of new administrative processes.

Privacy information security laws and regulation changes, and compliance therewith, may result in cost increases due to system changes and the development of new administrative processes.

If we fail to comply with applicable laws and regulations or experience a data security breach involving the misappropriation, loss or other unauthorized disclosure of confidential information, whether by us or our vendors, our reputation could be damaged, possibly resulting in lost future business, and we could be subject to fines, penalties, administrative orders and other legal risks as a result of a breach or non-compliance.

Our ability to pay dividends depends primarily on dividends from our banking subsidiary, the Bank, which is subject to regulatory and other limitations.

We are a bank holding company and our operations are conducted primarily by our banking subsidiary, the Bank.

Since we receive substantially all of our revenue from dividends from the Bank, our ability to pay dividends on our common stock depends on our receipt of dividends from the Bank.

The Company is a legal entity separate and distinct from the Bank.

As a bank holding company, the Company is subject to certain restrictions on its ability to pay dividends under applicable banking laws and regulations.

Federal bank regulators are authorized to determine under certain circumstances relating to the financial condition of a bank holding company or a bank that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof.

In particular, federal bank regulators have stated that paying dividends that deplete a banking organization’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings.

In addition, in the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.

The ability of the Bank to pay dividends to us is also subject to its profitability, financial condition, capital expenditures and other cash flow requirements.

The Bank may not be able to generate adequate cash flow to pay us dividends in the future.

The Company’s ability to pay dividends is also subject to the terms of its Subordinated Note Purchase Agreement dated August 27, 2020 and Business Note Agreement dated August 1, 2018, each of which prohibits the Company from declaring or paying dividends while an event of default has occurred and is continuing under each respective agreement.

The Company has pledged 100% of Bank stock as collateral for the loan and credit facilities provided for by the Business Note Agreement.

The inability to receive dividends from the Bank could have an adverse effect on our business and financial condition.

Furthermore, holders of our common stock are only entitled to receive the dividends as our Board of Directors may declare out of funds legally available for such payments.

Although we have historically paid cash dividends on our common stock, we are not required to do so and our Board of Directors could reduce or eliminate our common stock dividend in the future.

This could adversely affect the market price of our common stock.

Our shares of common stock are thinly traded and our stock price may be more volatile.

Because our common stock is thinly traded, its market price may fluctuate significantly more than the stock market in general or the stock prices of similar companies, which are exchanged, listed or quoted on the NASDAQ Stock Market.

We believe there are 10,356,276 shares of our common stock held by nonaffiliates as of March 8, 2021.

Thus, our common stock will be less liquid than the stock of

companies with broader public ownership, and as a result, the trading prices for our shares of common stock may be more volatile.

Among other things, trading of a relatively small volume of our common stock may have a greater impact on the trading price of our stock than would be the case if our public float were larger.

REGULATORY AND COMPLIANCE RISKS

A new accounting standard may require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.

The Financial Accounting Standards Board (“FASB”) has adopted a new 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 loan losses.

The FASB extended the effective date of CECL from January 2021 to January 2023 for smaller reporting companies such as the Company.

Once effective, this will change the current method of providing allowances for loan losses that are probable, which may require us to increase our allowance for loan losses, and to greatly increase the types of data we will need to collect and review to determine the appropriate level of the allowance for loan losses.Banking regulators expect the new accounting standard will increase the allowance for loan losses.

Any change in the allowance for loan losses at the time of adoption will be an adjustment to retained earnings and would change the Bank’s capital levels.

We operate in a highly regulated environment, and are subject to changes, which could increase our cost structure or have other negative impacts on our operations.

The banking industry is extensively regulated at the federal and state levels.

We are also subject to regulation by the SEC.

Our compliance with these regulations, including compliance with regulatory commitments, is costly.

In addition, any change in government regulation could have a material adverse effect on our business.

Federal law restricts the amount of voting stock of a bank holding company or a bank, that a person or group may acquire, without the prior approval of banking regulators.

On January 31, 2020, the Federal Reserve Board approved the issuance of a final rule (which became effective October 1, 2020) that clarified and codified the Federal Reserve’s standards for determining whether one company has control over another.

The final rule established four categories of tiered presumptions of noncontrol that are based on the percentage of voting shares held by the investor (less than 5%, 5-9.9%, 10-14.9% and 15-24.9%) and the presence of other indicia of control.

As the percentage of ownership increases, fewer indicia of control are permitted without falling outside of the presumption of noncontrol.

These indicia of control include nonvoting equity ownership, director representation, management interlocks, business relationship and restrictive contractual covenants.

Under the final rule, investors can hold up to 24.9% of the voting securities and up to 33% of the total equity of a company without necessarily having a controlling influence.

The overall effect of the BHCA is to make it more difficult to acquire a bank holding company and a bank by tender offer or similar means than it might be to acquire control of another type of corporation.

Investors should be aware of these requirements when acquiring shares of our stock.

The Basel III Rules, which became effective for us on January 1, 2015, included new minimum risk-based capital and leverage ratios and refined the definition of what constitutes “capital” for calculating these ratios.

The new minimum capital requirements are:

(i) a new common equity Tier 1 capital ratio of 4.5%;

(ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%);

(iii) a total capital ratio of 8% (unchanged from prior rules);

and (iv) a Tier 1 leverage ratio of 4%.

Basel III Rules also established a “capital conservation buffer” of 2.5%.

The 2.5% capital conservation buffer was phased in incrementally over time, and became effective for us on January 1, 2019, resulting in the following minimum capital plus capital conservation buffer ratios:

(i) a common equity Tier 1 capital ratio of 7.0%;

(ii) a Tier 1 to risk-based assets capital ratio of 8.5%;

and (iii) a total capital ratio of 10.5%.

An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the buffer amount.

We are subject to increases in FDIC insurance premiums and special assessments by the FDIC, which will adversely affect our earnings.

We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance.

For example, during 2008 and 2009, higher levels of bank failures dramatically increased resolution costs of the FDIC and depleted the Deposit Insurance Fund.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, in part, permanently raised the current standard maximum deposit insurance amount to $250,000 per customer (up from $100,000).

These programs placed additional stress on the Deposit Insurance Fund.

In order to maintain a strong funding position and restore reserve ratios of the Deposit Insurance Fund, the FDIC increased assessment rates of the insured institutions.

Any future increases or required prepayments of FDIC insurance premiums may adversely impact our earnings and financial condition.

Our reporting obligations as a public company are costly.

Reporting requirements of a public company change depending on the reporting classification in which the Company falls as of the end of its second quarter of each fiscal year.

The Company is currently a “smaller reporting company” which allows us to provide certain simplified and scaled disclosures in our filings.

We will remain a smaller reporting company for so long as the market value of the Company’s common stock held by non-affiliates as of the end of its most recently completed second fiscal quarter is less than $250 million, or as of the same period the Company’s annual revenues are less than $100 million and its public float is less than $700 million.

Historically, we have been categorized as a smaller reporting company and an “accelerated filer” and, thus, subject to the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that an independent registered public accounting firm provide an attestation report on the effectiveness of internal control over financial reporting.

On March 12, 2020, the SEC adopted amendments to the accelerated filer definitions in Rule 12b-2 under the Securities Exchange Act of 1934.

Under the new definitions, a smaller reporting company with less than $100 million in revenue that previously met the definition of an accelerated filer, like the Company, will now be considered a “non-accelerated” filer and will not be required to obtain an attestation of their internal control over financial reporting as required under Section 404(b) of the Sarbanes-Oxley Act and will not be required to comply with the shorter SEC filing deadlines that apply to accelerated filers.

As such, the Company is not subject to Section 404(b) of the Sarbanes-Oxley Act.

However, if the Company’s revenues increase above $100 million, we would again become subject to the provisions of Section 404(b) of the Sarbanes-Oxley Act, making the public reporting process more costly.

Changes in federal or state tax laws could adversely affect our business, financial condition and results of operations.

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The Tax Act was enacted in December 2017.

Among other things, the Tax Act reduces the corporate federal income tax rate for the Company from 34 percent to 24.5 percent for 2018, and 21 percent for 2019, which would result in changes in the valuation of deferred tax asset and liabilities, and includes a number of provisions that will have an impact on the banking industry, borrowers and the market for single-family residential real estate.

Among other things, the Tax Act reduces the corporate federal income tax rate for the Company from 34 percent to 24.5 percent for 2018, and 21 percent for 2019 and 2020, which would result in changes in the valuation of deferred tax asset and liabilities, and includes a number of provisions that will have an impact on the banking industry, borrowers and the market for single-family residential real estate.

We revalued our net deferred tax assets to account for the future impact of the lower corporate tax rates.

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Some of these policies require the use of estimates and assumptions that may affect the value of our assets or liabilities and financial results.

Some of our accounting policies are critical because they require management to make subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions.

Some of our accounting policies are critical because they require

management to make subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions.

If such estimates or assumptions underlying our financial statements are incorrect, we may experience material losses.

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The implementation of such changes could have a material adverse effect on our financial condition and results of operations.

Our ability to pay dividends depends primarily on dividends from our banking subsidiary, the Bank, which is subject to regulatory and other limitations.

We are a bank holding company and our operations are conducted primarily by our banking subsidiary, the Bank.

Since we receive substantially all of our revenue from dividends from the Bank, our ability to pay dividends on our common stock depends on our receipt of dividends from the Bank.

The Company is a legal entity separate and distinct from its banking subsidiary.

As a bank holding company, the Company is subject to certain restrictions on its ability to pay dividends under applicable banking laws and regulations.

The ability of the Bank to pay dividends to us is also subject to its profitability, financial condition, capital expenditures and other cash flow requirements.

The Bank may not be able to generate adequate cash flow to pay us dividends in the future.

The Company’s ability to pay dividends is also subject to the terms of its Business Note Agreement dated August 1, 2018, which prohibits the Company from making dividend payments while an event of default has occurred and is continuing under the loan agreement or from allowing payment of a dividend which would create an event of default.

The Company has pledged 100% of Bank stock as collateral for the loan and credit facilities.

The inability to receive dividends from the Bank could have an adverse effect on our business and financial condition.

Furthermore, holders of our common stock are only entitled to receive the dividends as our Board of Directors may declare out of funds legally available for such payments.

Although we have historically paid cash dividends on our common stock, we are not required to do so and our Board of Directors could reduce or eliminate our common stock dividend in the

This could adversely affect the market price of our common stock.

Our shares of common stock are thinly traded and our stock price may be more volatile.

We believe there are 10,667,886 shares of our common stock held by nonaffiliates as of March 10, 2020 .

Thus, our common stock will be less liquid than the stock of companies with broader public ownership, and as a result, the trading prices for our shares of common stock may be more volatile.

Among other things, trading of a relatively small volume of our common stock may have a greater impact on the trading price of our stock than would be the case if our public float were larger.

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