What changed in this filing

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Item 1A. Risk Factors

2022-03-01 compared with 2021-03-01 · 91 added, 83 removed, 321 unchanged (35% of the section changed)

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The COVID-19 pandemic has adversely affected, and is likely to continue to adversely affect, our customers and other businesses in our market area, as well as counterparties and third party vendors.

The resulting adverse impacts on our business, financial condition, liquidity and results of operations have been, and may continue to be significant.

The COVID-19 pandemic and the resulting containment measures have resulted in widespread economic and financial disruptions that have adversely affected, and are likely to continue to adversely effect, our customers and other businesses in our market area, as well as counterparties and third-party vendors.

We continue to see the impact of the pandemic on our business, which we expect may potentially worsen, particularly since there remains ongoing uncertainty as to how long the COVID-19 pandemic and related containment measures will continue, both in our market area and the rest of the country.

This impact has been, in certain areas, and could continue to be significant, adverse and potentially material.

The full extent of this impact, and the resulting impact on our business, financial condition, liquidity and results of operations, remains inestimable at this time, and will depend on a number of evolving factors and future developments beyond our control and that we are unable to predict, including the duration, spread and severity of the pandemic;

The resulting adverse impacts on our business, financial condition, liquidity and results of operations have been, and may continue to be, varied and significant.

The COVID-19 pandemic and the resulting containment measures have resulted in widespread economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, certain customer segments and other businesses in our market area, as well as counterparties and third-party vendors.

We continue to see the impact of the pandemic on our business, which could worsen, particularly since there remains ongoing uncertainty as to how long the COVID-19 pandemic and related containment measures will continue, both in our market area and the rest of the country.

This impact has been significant, in certain areas, and could continue to be significant, adverse and potentially material.

to predict, including the duration, spread and severity of the pandemic;

the nature, extent and effectiveness of containment measures;

the timing of development and widespread availability of medical treatments or vaccines;

the proportion of the population that is willing to be vaccinated;

the extent and duration of the effect on the economy, unemployment, consumer confidence and consumer and business spending;

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and how quickly and to what extent normal economic and operating conditions can resume.

An additional effect of COVID-19 is the adverse impact it has had, and will continue to have, on the workplace and employee retention and recruitment, as many industries shift to full or partial remote working environments.

It is also possible that any adverse impacts of the pandemic and containment measures may continue once the pandemic is controlled and the containment measures are lifted.

We expect the negative impacts of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations to continue, and be the most severe in the following areas:

We expect the potential negative impacts of the COVID-19 pandemic on certain aspects of our business, financial condition, and results of operations to continue, and be the most severe in the following areas:

• Loan Credit Quality .

The significant disruption resulting from the COVID-19 pandemic has been materially affecting the businesses of our customers and of their customers, which impacts their creditworthiness, their ability to pay amounts owed to us and our ability to collect those amounts.

The significant disruption resulting from the COVID-19 pandemic has been materially affecting the businesses of certain segments of our customer bases and of their customers, which impacts their creditworthiness, their ability to pay amounts owed to us and our ability to collect those amounts.

Among the industry’s most clearly impacted by the pandemic are the Accommodation and Food Service industry, exposure to which represents 8% of our loan portfolio as of December 31, 2021, and the Retail Trade industry, which represents 1% of our loan portfolio as of December 31, 2021.

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These areas may have a longer recovery period than other industries.

Despite high home sales volumes and our strong performance in gains from residential mortgage loans for the quarter and year ended December 31, 2020, such volumes and performance may not be stable.

Despite high home sales and mortgage refinance volumes and our strong performance in gains from residential mortgage loans for the quarter and year ended December 31, 2021, such volumes and performance may not be stable, especially if interest rates increase in 2022 as is widely expected.

Economic conditions may likely result in future material declines in real estate values and home sales volumes, and an increase in tenants failing to make or deferring rent payments.

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In the event of foreclosure, it is unlikely that we will be able to sell the foreclosed property at a price that will allow us to recoup a significant portion of the delinquent loan.

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• Allowance for Credit Losses .

We began using a new credit reserving methodology known as the CECL methodology effective January 1, 2020.

Our ability to accurately forecast future losses under that methodology may be impaired by the significant uncertainty surrounding the pandemic and containment measures and the lack of a comparable precedent.

For the twelve months ended December 31, 2020, after the initial adjustment to the ACL as of January 1, 2020, we further increased the ACL by $45.6 million of provisioning, respectively, inclusive of $167 thousand of ACL on AFS debt securities recorded in 2020.

We may need to record additional provisions for credit losses in future, as the COVID-19 pandemic continues to evolve, and our losses on our loans and other exposures could exceed our allowance.

• Increased Demands on Capital and Liquidity .

We have experienced increased volume of loan originations, particularly SBA loans pursuant to the PPP created by recent legislation.

Certain of these SBA loans have mandated interest rates that are lower than our usual rates and may not be purchased by the SBA or other third parties within expected timeframes.

In addition, borrowers may draw on existing lines of credit or seek additional loans to finance their businesses.

These factors may result in reduced levels of capital and liquidity being available to originate more profitable loans, which will negatively impact our ability to serve our existing customers and our ability to attract new customers.

We use a credit reserving methodology known as the Current Expected Credit Losses ("CECL") methodology (which the Bank adopted effective January 1, 2020).

Our ability to accurately forecast future losses under this methodology may be impaired by the significant uncertainty surrounding the pandemic and containment measures and the lack of a comparable precedent.

For the twelve months ended December 31, 2021, we reduced the ACL by $20.8 million, through reversals and charge-offs as the economy showed signs of recovery from the COVID-19 pandemic due to the wide availability of vaccines and other treatments.

As the COVID-19 pandemic continues to evolve, or as our loan balances increase, we may need to record provisions for credit losses in the future.

Our losses on our loans and other exposures could exceed our allowance.

• Deposit Business .

As a result of the COVID-19 pandemic, deposit customers are expected to retain higher levels of cash.

While increased low-interest deposits could have a positive impact in the short-term, we would not expect these funds to be replenished as customers use deposit funds for liquidity for their business and individual needs.

As a result of government stimulus programs associated with COVID-19 related economic issues, deposit customers have retained a higher level of cash in deposit accounts.

While increased low-interest deposits could have a positive impact in the short-term (if interest earned on the funds is in excess of the interest paid on deposits), we would not expect these funds to be replenished as stimulus programs are curtailed and customers use deposit funds for liquidity for their business and individual needs.

If deposit levels decline, our available liquidity would decline, and we could be forced to obtain liquidity on terms less favorable than current deposit terms, which would in turn compress margins and negatively impact our results of operations.

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In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25 percent.

A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies.

The federal funds rate remained in this range for all of 2021.

A prolonged period of extremely volatile and unstable market conditions could increase our funding costs and negatively affect market risk mitigation strategies.

Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in current fair market values of our assets.

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• Operational Risk .

Current and future restrictions on our workforce's access to our facilities could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations.

We rely on business processes and branch activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties.

In response to COVID-19, we have modified our business practices by directing a portion of our employees to work remotely from their homes to minimize interruptions to our operations.

These actions will likely result in increased spending on our business continuity efforts, such as technology and readiness procedures for returning to our offices.

We could also experience an increased strain on our risk management policies, including, but not limited to, the effectiveness and accuracy of our models, given the lack of data inputs and comparable precedent.

Further, technology in employees' homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices.

The continuation of these work-from-home measures also introduces additional operational risk, including related to the effectiveness of our anti-money laundering and other compliance programs, as well as increased cybersecurity risk.

These cyber risks include greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted customers.

Restrictions on our workforce's access to our facilities, due to concerns over COVID-19 contagion risk, could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations.

We rely on business processes and branch activity that largely depend on people and technology, including access to information

technology systems as well as information, applications, payment systems and other services provided by third parties.

In response to COVID-19, we modified our business practices by directing a portion of our employees to work remotely from their homes to minimize interruptions to our operations.

On November 1, 2021, the Bank adopted a hybrid work model in which certain employees split time between working at the office and working remotely.

In mid-December, as the Omicron variant of COVID-19 became prevalent and case rates increased again, the Company directed a portion of our employees to again work remotely, before moving back to the hybrid work model on February 1, 2022.

Similar future actions in response to COVID-19 developments, such as new and more virulent variants, could result in our moving away from the hybrid model again.

Transitioning back and forth between a hybrid work model and a work from home model may increase our operational risks and introduce additional operational risks, including (i) risks related to our work productivity;

(ii) increased spending on our business continuity efforts;

(iii) increased strain on certain risk management practices, including, but not limited to, the effectiveness and accuracy of our models, given the potential lack of data inputs and comparable precedent;

(iv) risks related to the effectiveness of our anti-money laundering and other compliance programs;

(v) increased cybersecurity risk, particularly as technology in employees' homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices.

Increased cyber risks in this context may include greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability, and could seriously disrupt our operations and the operations of any impacted customers.

The Company may also experience an increase in attempts at fraudulent activity, such as check fraud, as nefarious individuals try to exploit the dislocations caused by the pandemic.

• External Vendors and Service Providers .

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For example, loan origination could be delayed due to the limited availability of real estate appraisers for the collateral.

Loan closings could be delayed related to reductions in available staff in recording offices or the closing of courthouses, which slows the process for title work, mortgage and UCC filings.

Loan closings could be delayed related to reductions in available staff in recording offices or the closing of courthouses, which slows the process for title work and mortgage and UCC filings.

If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.

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• Strategic and Reputational Risk .

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We have grown in the past several years through organic growth.

We intend to seek further growth in the level of our assets and deposits and selectively in the number of our branches, within our existing footprint in the Washington, D.C.

We intend to seek further growth in the level of our assets and deposits within our existing footprint in the Washington, D.C.

metropolitan area, although no additional branches are currently anticipated in 2022.

We cannot provide any assurance that we will continue to be able to maintain our rate of growth at acceptable risk levels and upon acceptable terms, while managing the costs and implementation risks associated with our growth strategy.

We may be unable to continue to increase our volume of loans and deposits or to introduce new products and services at acceptable risk levels for a variety of reasons, including an inability to maintain capital and liquidity sufficient to support continued growth.

We cannot provide any assurance that we will continue to be able to maintain our rate of growth at acceptable risk levels and upon acceptable terms.

Due to the impact of COVID-19 and heightened competition in the Bank’s market area, it has been difficult to maintain loan growth in recent quarters, and this is expected to continue in 2022 and beyond.

In 2021, total net loans, the primary source of the Bank’s revenue, declined, although total assets increased over the same period.

Further, loan pricing pressures in the highly competitive market for high-quality commercial loans, and the costs and implementation risks associated with pursuing loan growth, has put pressure on loan portfolio yields and consequently the Bank’s net interest margin and net income.

Even as economic conditions may improve in future quarters, there can be no assurance that we will be able to increase our total net loans or re-achieve similar loan growth numbers as compared to periods prior to COVID-19 (or re-achieve meaningful increase in loan growth at all) in the short-term or long-term.

Additionally, although deposit growth has been strong in the last two years, we may be unable to continue to increase our volume of loans and deposits or to introduce new products and services at acceptable risk levels for a variety of reasons, including an inability to maintain capital and liquidity sufficient to support continued growth.

If we are successful in continuing our growth, we cannot assure you that further growth would offer the same levels of potential profitability, or that we would be successful in controlling costs and maintaining asset quality.

Accordingly, an inability to maintain growth, or an inability to effectively manage growth, could adversely affect our results of operations, financial condition and stock price.

Failure to maintain effective systems of internal and disclosure control could have a material adverse effect on our results of operation, financial condition and stock price.

Failure to maintain effective systems of internal and disclosure controls could have a material adverse effect on our results of operation, financial condition and stock price.

Effective internal and disclosure controls are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company.

If we cannot provide reliable financial reports or prevent fraud, our reputation, operating results or stock price could be adversely impacted.

As part of our ongoing monitoring of internal and disclosure controls, we occasionally discover material weaknesses or significant deficiencies in our internal and disclosure controls that require remediation;

as we did in our 2019 assessment of internal controls.

See “Item 9A.

Controls and Procedures.” A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Any failure to maintain effective controls or to timely implement any necessary improvement of our internal and disclosure controls, or to effect remediation of any material weakness or significant deficiency, could, among other things, result in losses from fraud or error, harm our reputation, or cause investors to lose confidence in our reported financial information, all of which could have a material adverse effect on our results of operation, financial condition or stock price.

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Growth and shareholder returns may be adversely affected if sources of capital are not available to help us meet them.

As we grow, we will have to maintain our regulatory capital levels at or above the required minimum levels.

As we grow, we need to maintain our regulatory capital levels at or above the required minimum levels.

If earnings do not meet our current estimates, if we incur unanticipated losses or expenses, or if we grow faster than expected, we may need to obtain additional capital sooner than expected or we may be required to reduce our level of assets or reduce our rate of growth in order to maintain regulatory compliance.

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The significant level of ADC loans in our portfolio, and new loans sought by customers, which may be required to be assigned a higher risk weight, could require us to maintain additional capital for these loans.

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Our results of operations, financial condition and the value of our shares may be adversely affected if we are not able to continue to grow our assets.

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If we are unable to increase customer deposits in an amount sufficient to fund loan growth, we may be required to rely on other, potentially more expensive, sources of liquidity, such as FHLB borrowings, brokered deposits and repurchase agreements, to fund loan growth, which could adversely affect our earnings, or reduce our rate of growth, which could adversely affect our earnings and stock price.

We also have a significant amount of deposits, which are in excess of the maximum FDIC insurance coverage limits.

We also have a significant amount of deposits that are in excess of the maximum FDIC insurance coverage limits.

At any time, customers who have uninsured deposits may decide to move their deposits to institutions which are perceived as safer, sounder, or “too big to fail” or could elect to use other non-deposit funding products, such as repurchase agreements, that may require the Bank to pay higher interest and to provide securities as collateral for the Bank’s repurchase obligation.

At December 31, 2021, the Bank had approximately $5.3 billion of uninsured deposits, or 53% of our total deposits.

While we believe that our strong earnings, capital position, relationship banking model and reputation as a safe and sound institution mitigate the risk of losing deposits, there can be no assurance that we will not have to replace a significant amount of deposits with alternative funding sources, such as repurchase agreements, federal funds lines, certificates of deposit, brokered deposits, other categories of interest bearing deposits and FHLB borrowings, all of which are more expensive than noninterest bearing deposits, and can be more expensive than other categories of deposits.

amount of deposits with alternative funding sources, such as repurchase agreements, federal funds lines, certificates of deposit, brokered deposits, other categories of interest bearing deposits and FHLB borrowings, all of which are more expensive than noninterest bearing deposits, and can be more expensive than other categories of deposits.

While we believe that we would be able to maintain adequate liquidity at reasonable cost, the loss of a significant amount of deposits, particularly noninterest bearing deposits, could have a material adverse effect on our earnings, net interest margin, rate of growth and stock price.

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Additionally, the value of an acquisition to the Company is dependent on our ability to successfully identify and estimate the magnitude of any asset quality issues of acquired companies.

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Our concentrations of loans may create a greater risk of loan defaults and losses.

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Our Residential Lending department may not continue to provide us with significant noninterest income.

In 2020, the Bank originated $1.3 billion and sold $1.2 billion of residential mortgage loans to investors, as compared to $666 million originated and $628 million sold to investors in 2019.

In 2021, the Bank originated $1.1 billion and sold $1.2 billion of residential mortgage loans to investors, as compared to $1.3 billion originated and $1.2 billion sold to investors in 2020.

The residential mortgage business is highly competitive, and highly susceptible to changes in market interest rates, consumer confidence levels, employment statistics, the capacity and willingness of secondary market purchasers to acquire and hold or securitize loans, and other factors beyond our control.

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While not a significant matter in the past, should repurchases become a material issue, our earnings and asset quality could be adversely impacted, which could adversely impact our share price.

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Our financial condition, earnings and asset quality could be adversely affected if our consumer facing operations do not operate in compliance with applicable regulations.

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While we expect that we would be able to replace the liquidity provided by these deposits, the replacement funds would likely be more costly, negatively impacting earnings.

Fluctuations in inflation rates may also have a number of adverse effects on the Bank and the Company.

For example, material increases in inflation rates would likely result in an increase in personnel and other operational costs and an increase in salary and wage expenses, which comprise the Bank’s most significant non-interest expense category.

Long periods of high inflation also result in higher interest rates, which will increase the Bank’s deposit costs and overall cost of funds.

Higher interest rates will also reduce the value of the Bank’s investment portfolio holdings, and if such reductions are significant, they may materially limit our ability to meet future liquidity shortfalls by selling investments without realizing substantial losses.

These and other indirect impacts of inflation on the Bank and the Company could significantly adversely affect the Bank's and the Company's earnings and capital in both the short term and long term.

Uncertainty relating to the discontinuation, reform or replacement of LIBOR may adversely affect our results of operations.

In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021.

The Alternative Reference Rates Committee, or ARRC, has proposed that the Secured Overnight Financing Rate, or SOFR, as the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR.

The Alternative Reference Rates Committee, or ARRC, has proposed that the Secured Overnight Financing Rate, or SOFR, be used as the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR.

ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR.

The Company has material contracts that are indexed to USD-LIBOR and is monitoring this activity and evaluating the related risks.

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The inability to obtain LIBOR rates, and the uncertainty as to the nature, comparability and utility of alternative reference rates which have been or may be established may adversely affect the value of LIBOR-based loans, investment securities and other financial instruments in our portfolio, and may impact the availability and cost of hedging instruments and borrowings.

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We compete for loans, deposits, and investment dollars with numerous regional and national banks, online divisions of out-of-market banks, and other community banking institutions, as well as other kinds of financial institutions and enterprises, such as securities firms, insurance companies, savings associations, credit unions, mortgage brokers, private lenders and nontraditional competitors such as fintech companies and internet-based lenders, depositories and payment systems.

Our profitability depends upon our continued ability to successfully compete with traditional and new financial services providers, some of which maintain a physical presence in our market areas and others of which maintain only a virtual presence.

Our profitability depends upon our continued ability to successfully compete with traditional and new financial services providers, some of which maintain a physical presence in our market areas

and others of which maintain only a virtual presence.

Many competitors have substantially greater resources than us, and some operate under less stringent regulatory environments.

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While the Company does not have a significant level of loans to federal government contractors or their subcontractors, the impact of a shutdown of federal government operations, a decline in federal government spending, a reallocation of government spending to different industries or different areas of the country, or a delay in payments to such contractors, could have a ripple effect.

Temporary layoffs, staffing freezes, salary reductions or furloughs of government employees or government contractors could have adverse impacts on other businesses in the Company’s market and the general economy of the greater Washington, D.C.

In particular, the federal government’s response to COVID-19 has been to provide stimulus to the economy through the PPP, direct payments to taxpayers, and other programs.

These programs were generally successful in stabilizing the economy throughout the pandemic.

However, as the impact of COVID-19 on the U.S economy recedes and America gets back to work, these stimulus programs are not expected to be continued.

The effect of the discontinuance of COVID-19-related stimulus on the local economy in 2022 and beyond is uncertain.

Temporary layoffs, staffing freezes, salary reductions or furloughs of government employees or government contractors, and other impacts from the cessation of stimulus or declining government spending, could have adverse impacts on other businesses in the Company’s market and the general economy of the greater Washington, D.C.

metropolitan area, and may indirectly lead to a loss of revenues by the Company’s customers, including vendors and lessors to the federal government and government contractors or to their employees, as well as a wide variety of commercial and retail businesses.

Accordingly, such potential federal government actions could lead to increases in past due loans, nonperforming loans, credit loss reserves, and charge-offs, and a decline in liquidity.

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We rely upon independent appraisals to determine the value of the real estate that secures a significant portion of our loans, and the values indicated by such appraisals may not be realizable if we are forced to foreclose upon such loans.

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Our operations are exposed to risk that a service provider may not perform in accordance with established performance standards required in our agreements for any number of reasons including equipment or network failure, a change in their senior management, their financial condition, their product line or mix and how they support existing customers, or a simple change in their strategic focus.

While we have comprehensive policies and procedures in place to mitigate risk at all phases of service provider management from selection, to performance monitoring and renewals, the failure of a service provider to perform in accordance with contractual agreements could be disruptive to our business, which could have a material adverse effect on our financial conditions and results of our operations.

While we have comprehensive policies and procedures

in place to mitigate risk at all phases of service provider management from selection, to performance monitoring and renewals, the failure of a service provider to perform in accordance with contractual agreements could be disruptive to our business, which could have a material adverse effect on our financial conditions and results of our operations.

RISKS RELATED TO INVESTING IN OUR STOCK

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Refer to “Regulation” under Item 1 and to “Market for Common Stock” under Item 5 for additional information.

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We may issue additional equity securities, or engage in other transactions, which could affect the priority of our common stock, which may adversely affect the market price of our common stock.

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RISKS RELATED TO OUR LEGAL AND REGULATORY ENVIRONMENT

Due to our increased asset size, the Company may be subject to additional regulation, increased supervision and increased costs in the future.

Because we have over $10 billion in total assets on our balance sheet, the Company is subject to additional regulation, increased supervision and increased costs in the future.

As of December 31, 2021, our total assets were $11.8 billion.

In addition to our current regulatory requirements, banks with $10 billion or more in total assets are examined directly by the CFPB with respect to various federal consumer protection laws, subject to enhanced prudential regulation, and subject to additional regulatory requirements.

In addition to our current regulatory requirements, banks with $10 billion or more in total assets are examined directly by the CFPB with respect to various federal consumer protection laws, and are subject to enhanced prudential regulation, continuous ongoing supervision by the Federal Reserve and the FDIC

and additional regulatory requirements.

The Company and the Bank expect to be subject to ongoing supervision by the Federal Reserve and FDIC (as opposed to discrete examinations as a community banking organization), targeted examinations, more frequent loan portfolio reviews, and other enhanced supervision.

The Bank will also need to provide information to the CFPB on a quarterly basis, and will be subject to periodic examinations focused on compliance with consumer laws and regulations, as a banking organization with over $10 billion in total assets.

Compliance with these additional ongoing requirements may necessitate additional personnel, the design and implementation of additional internal controls, or the incurrence of significant expenses, any of which could have a material adverse effect on our business, financial condition and results of operations.

In November 2020, the federal banking regulators issued an interim final rule that provides temporary relief for certain community banking organizations related to certain regulations and reporting requirements as a result, in large part, of their growth in size from participating in COVID-19 pandemic response programs, such as the PPP and other lending that supports the U.S.

Under the interim final rule, community banking organizations that have crossed a relevant threshold generally will have until 2022 to either reduce their size, or to prepare for new regulatory and reporting standards.

The rule applies to community banking organizations and financial institutions with less than $10 billion in total assets as of December 31, 2019, including the Company.

Our concentrations of loans may require us to maintain higher levels of capital.

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Although not currently anticipated, we may be required to maintain higher levels of capital than we would otherwise be expected to maintain as a result of our levels of construction, development and commercial real estate loans.

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Litigation and regulatory actions, possibly including enforcement actions, could subject us to significant fines, penalties, judgments or other requirements resulting in increased expenses or restrictions on our business activities.

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and the relationship of the Company and certain of its former officers and directors with a local public official, among other things.

The Company is currently defending against shareholder litigation.

Any such legal or regulatory actions may subject us to substantial compensatory or punitive damages, significant fines, penalties, obligations to change our business practices, required changes in our senior officers, or other requirements resulting in increased expenses, diminished income and damage to our business.

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This uncertainty makes it difficult to estimate probable losses, which, in turn, can lead to substantial disparities between the reserves we may establish for such proceedings and the eventual settlements, fines, or penalties.

While the Company and Bank carry insurance to protect us from material outlays (excluding regulatory fees and penalties), such insurance may not always fully or even substantially cover such outlays, and any adverse determinations in such actions could have a material adverse effect on our business, financial condition, results of operations and stock price.

While the Company and Bank carry insurance to protect us from material outlays (excluding regulatory fees and penalties), such insurance may not always fully or even substantially cover such outlays.

The Company maintains director and officer insurance policies (“D&O Insurance Policies”) that provide coverage for the legal defense costs related to certain of the above-referenced investigations and litigations.

Subject to any new developments to any new or existing investigations and litigations that may occur over the next few months, the Company currently believes there is a possibility that the applicable D&O Insurance Policies may be exhausted as early as the first quarter of 2022.

Once the D&O Insurance Policies are exhausted, the Company will be responsible for paying the defense costs associated with those investigations and litigations for itself and on behalf of any current and former officers and directors entitled to indemnification from the Company.

The Company cannot predict with any certainty the amount of defense costs that the Company may incur in the future in connection with currently ongoing and any potential future investigations and legal proceedings, as they are dependent on various factors, many of which are outside of the Company’s control.

In the event such costs are significant, they could have a material adverse effect on our business, financial condition, results of operations and stock price.

The banking industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, may have a materially adverse effect on our operations.

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Applicable federal and state laws, regulations, interpretations, enforcement policies and accounting principles have been subject to significant changes in recent years, and may be subject to significant future changes.

Future changes may have a

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material adverse effect on our business, financial condition and results of operations.

Future changes may have a material adverse effect on our business, financial condition and results of operations.

Federal regulatory agencies may adopt changes to their regulations or change the manner in which existing regulations are applied.

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Various federal and state banking regulators and states have also enacted data breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in the event of a security breach.

Ensuring that our collection, use, transfer and storage of PII complies with all applicable laws and regulations can increase our costs.

Ensuring that our collection, use, transfer, storage and disposal of PII complies with all applicable laws and regulations can increase our costs.

Furthermore, we may not be able to ensure that customers and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means.

If personal, confidential or proprietary information of customers or others were to be mishandled or misused (in situations where, for example, such information was erroneously provided to parties who are not permitted to have the information, or where such information was intercepted or otherwise compromised by third parties), we could be exposed to litigation or regulatory sanctions under privacy and data protection laws and regulations.

litigation or regulatory sanctions under privacy and data protection laws and regulations.

Concerns regarding the effectiveness of our measures to safeguard PII, or even the perception that such measures are inadequate, could cause us to lose customers or potential customers and thereby reduce our revenues.

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Changes in the local and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the fair value of publicly traded financial institutions and could result in an impairment charge at a future date.

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Changes in tax laws could have an adverse effect on us, the banking industry, our customers, the value of collateral securing our loans and demand for loans.

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In some instances, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.

Effective January 1, 2020, we implemented the CECL framework for our ACL.

Any such changes (while not anticipated) could adversely affect the Company’s and Bank’s capital, regulatory capital ratios, ability to make larger loans, earnings and performance metrics.

The Financial Accounting Standards Board, or FASB, issued a new credit impairment model, the Current Expected Credit Loss, or CECL model, which became applicable to us on January 1, 2020 as stated above.

CECL requires financial institutions to estimate and establish a provision for credit losses over the lifetime of the asset, at the origination or the date of acquisition of the asset, as opposed to reserving for incurred or probable losses through the balance sheet date.

The CECL model also applies to certain financial assets other than loans, including held-to-maturity debt securities of which the Bank has none..

Under the CECL model, expected credit deterioration would be reflected in the income statement in the period of origination or acquisition of an asset, with changes in expected credit losses due to further credit deterioration or improvement reflected in the periods in which the expectation changes.

The Financial Accounting Standards Board, or FASB, has issued the Current Expected Credit Loss (CECL) standard, which became applicable to us on January 1, 2020.

CECL requires financial institutions to estimate and establish a provision for credit losses over the lifetime of the asset, at the origination or acquisition of the asset, as opposed to reserving for probable incurred losses.

The CECL model also applies to certain financial assets other than loans, including debt securities.

Under the CECL standard, expected credit deterioration would be reflected in the income statement in the period of origination or acquisition of an asset, with changes in expected credit losses due to further credit deterioration or improvement reflected in the periods in which the expectation changes.

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

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If we need to make significant and unanticipated increases in our loss allowance in the future, our business, results of operations, capital and financial condition could be materially adversely affected at that time.

The adoption of the CECL model materially affected how we determine our ACL, and resulted in changes to our allowance.

Moreover, the CECL model has and may continue to create more volatility in our level of ACL.

We are always evaluating the impact the CECL accounting model will have on our accounting, as it had an initial $14.7 million one-time increase in our reserve, inclusive of the reserve for unfunded commitments, as of January 1, 2020 as a cumulative-effect adjustment to the ACL recognized through shareholder’s equity ($10.9 million).

Please refer to Note 1 to the Consolidated Financial Statements for a more detailed discussion of CECL.

The implementation of the CECL model involves the use of estimates and forecasts based on difficult, subjective, and complex judgments, including estimates as to the direction and effects of economic conditions and how these economic conditions might affect the ability of our borrowers to repay their loans or the value of assets.

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Additionally, to the extent that economic conditions and forecasts and prior loss experience have been favorable, rapid or unforeseen changes in economic conditions or performance of our loans and other financial assets could result in our ACL being inadequate, which could materially adversely affect our business, results of operations and financial condition.

There can be no assurance that our judgments about our historical loss experience, categorization of loans and other assets and forecasts of economic conditions and other facts that will impact the expected losses on an asset will be correct.

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There can be no assurance that our judgments about our historical loss experience, categorization of loans and other assets and forecasts of economic conditions and other factors that will impact the expected losses on an asset will be correct.

RISKS RELATED TO THE USE OF TECHNOLOGY

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Although we maintain insurance coverage that may, subject to policy terms and conditions including significant self-insured deductibles, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses.

The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, adversely affecting customer or investor confidence, result in a loss of customer business, subject us to additional regulatory scrutiny and possible regulatory penalties, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

On December 15, 2020, the federal banking agencies issued a notice of proposed rulemaking that would require a banking organization to notify its primary federal regulators within 36 hours of identifying a computer-security incident that meets certain criteria.

The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, adversely affect customer or investor confidence, result in a loss of customer business, subject us to additional regulatory scrutiny and possible regulatory penalties, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

In November 2021, three federal banking agencies (OCC, FRB, FDIC) approved a final rule that will require banking organizations to notify their primary federal regulator of any significant computer security event that has, or is reasonably likely to have, a material effect on the viability of the organization’s banking operations, its ability to deliver banking products and services, or the stability of the financial sector.

This rule also covers service providers when the provider determines that it has experienced such a computer-security incident.

This notification must be made no later than 36 hours after the banking organization determines that a cyber incident has occurred.

This new rule will become effective on April 1, 2022, with a compliance date of May 1, 2022.

The Company is currently establishing internal processes to ensure compliance with this rule.

certain criteria.

We are evaluating the potential impact of the proposal on our operations.

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As these technologies are improved in the future, we may be required to make significant capital expenditures in order to remain competitive, which may increase our overall expenses and have a material adverse effect on our business, financial condition and results of operations.

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We depend on the use of data and modeling in both management’s decision-making, generally, and in meeting regulatory expectations, in particular.

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• Actions of one or more investors in selling our common stock short;

• General market conditions and, in particular, developments related to market conditions for the financial services industry.

• General market conditions and, in particular, developments related to market conditions for the financial services industry (inclusive of the potential adverse impact by current or anticipated military conflict, including escalating military tension between Russia and Ukraine, terrorism or other geopolitical events).

In addition, the stock market in general has experienced price and volume fluctuations.

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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