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Item 1A. Risk Factors

2023-03-01 compared with 2022-03-01 · 179 added, 155 removed, 257 unchanged (57% of the section changed)

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RISKS RELATED TO OUR BUSINESS AND ECONOMIC CONDITIONS

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, 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.

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 nature, extent and effectiveness of containment measures;

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;

the impact and continued availability of monetary, fiscal and other economic policies and programs designed to provide economic assistance to individuals and small businesses;

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 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 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.

In addition, approximately 7% of our loan portfolio as of December 31, 2021 is secured by restaurants, hotels or retail properties.

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

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.

A large portion of our loan portfolio is related to real estate, with 78% consisting of commercial real estate and real estate construction loans, and 85% of our loans being secured by real estate.

As a result of actual or expected credit losses, we may downgrade loans, increase our allowance for loan losses, and write down or charge off credit relationships, any of which would negatively impact our results of operations.

In addition, market upheavals are likely to affect the value of real estate and commercial assets.

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.

• Allowance for Credit Losses .

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 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.

Our business and results of operations may be adversely affected by the financial markets, fiscal, monetary, and regulatory policies and economic conditions.

These factors could have a material adverse effect on our earnings, net interest margin, rate of growth, financial condition and stock price.

General economic, political, social and health conditions affect markets and our business.

In particular, markets, and therefore our business, may be affected by the level and volatility of interest rates, availability and market conditions of financing, unexpected changes in gross domestic product ("GDP"), economic growth or its sustainability, inflation, supply chain disruptions, consumer spending, employment levels, labor shortages, wage inflation, federal government shutdowns, developments related to the U.S.

federal debt ceiling, energy prices, home prices, commercial property values, bankruptcies, fluctuations or other significant changes in both debt and equity capital markets and currencies, liquidity of financial markets and the availability and cost of capital and credit.

Market fluctuations may impact our margin requirements and affect our business liquidity.

Also, any sudden or prolonged market downturn, as a result of the above factors or otherwise, could result in a decline in net interest income and noninterest income and adversely affect our results of operations and financial condition, including asset quality, capital and liquidity levels.

• Macroeconomic effects of COVID-19.

Although many health and safety restrictions have been lifted and vaccine distribution has increased, certain adverse consequences of the pandemic continue to impact the macroeconomic environment and may continue to persist.

The growth in economic activity and demand for goods and services, alongside labor shortages and supply chain complications and/or disruptions, has also contributed to rising inflationary pressures.

The final outcome and/or potential duration of the economic disruption that resulted from the onset and subsequent recovery from COVID-19 remains uncertain at this time as the financial markets continue to be impacted.

• Interest Rate Risk .

Our net interest income, lending activities, deposits and profitability have been and could continue to be negatively affected by volatility in interest rates caused by uncertainties stemming from the COVID-19 pandemic.

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

Our net interest income, lending activities, deposits and profitability have been, and could continue to be, negatively affected by volatility in interest rates caused by uncertainties stemming from global economic conditions, especially as certain adverse consequences of the pandemic continue to impact the macroeconomic environment.

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

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

After a period of low interest

rates, the federal funds rate was increased rapidly to 4.25%-4.50% at the end of 2022.

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

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Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results or financial condition.

• Loan Credit Quality .

Certain adverse consequences of the pandemic continue to materially affect 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.

Our exposure to the Accommodation and Food Service industry represented 6% of our loan portfolio as of December 31, 2022, and the Retail Trade industry represented 1% of our loan portfolio as of December 31, 2022.

Although the economy has shown signs of improvement in 2022, these industries may have a longer recovery period than others.

A decline in home sales and mortgage refinance volumes led to a lower level of gains from residential mortgage loans for the year ended December 31, 2022, and such volumes and performance may remain diminished, especially if interest rates continue to remain high or increase further in 2023.

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

A large portion of our loan portfolio is related to real estate, with 79% consisting of commercial real estate and real estate construction secured by commercial real estate.

As a result of actual or expected credit losses, we may downgrade loans, increase our allowance for loan losses and write down or charge off credit relationships, any of which would negatively impact our results of operations.

In addition, market upheavals are likely to affect the value of real estate and commercial assets.

As a result, 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.

• Allowance for Credit Losses .

We use a credit reserving methodology known as the Current Expected Credit Losses ("CECL") methodology.

Our ability to accurately forecast future losses under this methodology may be impaired by significant uncertainties surrounding the disruption resulting from the COVID-19 pandemic and the lack of a comparable precedent and, more specifically, the disruption of the financial markets as they continue to be affected by market risks such as the volatility in interest rates.

For the twelve months ended December 31, 2022, we decreased the ACL by $521 thousand, through adjustments net of 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 increases to the provision for credit losses in the future.

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

• Operational Risk .

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.

Restrictions on our workforce's access to our facilities, due to risks over a resurgence of the COVID-19 contagion, 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 2022, the Bank operated primarily under a hybrid work model in which certain employees split time between working at the office and working remotely.

In response to COVID-19 developments, we may have to alternate between a hybrid work model and a work from home model due to new and more virulent variants.

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;

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We rely on many outside service providers that support our day-to-day operations including data processing and electronic communications, real estate appraisal, loan servicers and local and federal government agencies, offices and courthouses.

In light of the containment measures responding to COVID-19, many of these entities may limit the availability and access of their services, which may impact our business.

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

In light of labor shortages and supply chain disruptions, many of these entities may limit the availability and access of their services, which may impact our business.

For example, a loan origination could be delayed due to the limited availability of real estate appraisers to evaluate 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 and mortgage and UCC filings.

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• Strategic and Reputational Risk .

The pandemic and containment measures have caused us to modify our strategic plans and business practices, and we may take further actions that we determine are in the best interests of our colleagues, customers and business partners.

If we do not respond appropriately to the pandemic, or if customers or other stakeholders do not perceive our response to be adequate, we could suffer damage to our reputation and our brand, which could materially adversely affect our business.

We also face an increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of the pandemic on market and economic conditions and actions governmental authorities take in response to those conditions, as detailed in the Note 1 to the Consolidated Financial Statements.

The final outcome and/or potential duration of the economic disruption which resulted from the onset and subsequent recovery from COVID-19 is uncertain at this time as the global economy continues to be impacted.

The lasting effects of the pandemic and the related ongoing containment measures have caused us to modify our business practices, and we may take further actions that we determine are in the best interests of our colleagues, customers and business partners.

If we do not respond appropriately to the current economic environment, or if customers or other stakeholders do not perceive our response to be adequate, we could suffer damage to our reputation and our brand, which could materially adversely affect our business.

We also face an increased risk of litigation and governmental and regulatory scrutiny as a result of the lasting effects of the pandemic on market and economic conditions.

We also face risks related to actions governmental authorities take in response to those conditions.

• Evolution of the COVID-19 pandemic.

The pandemic has adversely affected, and may 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, varied and significant.

Since 2020, the COVID-19 pandemic and the resulting containment measures have resulted in widespread economic and financial disruptions that have adversely affected, and may continue to adversely affect, certain customer segments and other businesses in our market area, as well as counterparties and third-party vendors.

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

In the past, this impact has been significant in certain areas, and could be significant, adverse and potentially material in the future.

We may not be able to manage future growth and competition.

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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.

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.

metropolitan area.

We cannot provide any assurance that we will be able to grow at acceptable risk levels and upon acceptable terms.

Due to the evolving economic effects of the COVID-19 pandemic, the increase in interest rates, and the 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 2023 and beyond.

Even as economic conditions may continue to 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, 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 our growth, we cannot provide assurance that future 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 controls 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 operations, 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.

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.

Any failure to maintain effective controls, to timely implement any necessary improvement to 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 operations, financial condition or stock price.

Management reviews and updates our systems of internal control and disclosure controls and procedures, as well as corporate governance policies and procedures, as appropriate.

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Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, financial condition and results of operations.

Our continued growth depends on our ability to meet minimum regulatory capital levels.

Growth depends on our ability to meet minimum regulatory capital levels.

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

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.

Growth requires that we 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, reduce or suspend stock repurchases or dividends or reduce our rate of growth in order to maintain regulatory compliance.

Under those circumstances net income and the rate of growth of net income may be adversely affected.

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.

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.

Since opening for business in 1998, our asset level, loans and net income available to common shareholders have increased significantly.

We may not be able to achieve continued growth in asset levels, loans, or earnings in future years.

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

We may not be able to achieve meaningful growth in asset levels, loans or earnings in future years.

Moreover, as our asset size, loan portfolio and earnings increase, it may become more difficult to achieve high rates of increase.

Additionally, it may become more difficult to achieve continued improvements in our expense levels and efficiency ratio.

Additionally, it may become more difficult to achieve improvements in our expense levels and efficiency ratio.

We may not be able to maintain the relatively low levels of nonperforming assets that we have experienced to date.

Declines in the rate of growth of income or assets or deposits, and increases in operating expenses or nonperforming assets may have an adverse impact on the value of the common stock.

The inability to achieve growth of income or assets or deposits and increases in operating expenses or nonperforming assets may have an adverse impact on the value of the common stock.

We are subject to liquidity risk in our operations.

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If a financial institution is unable to meet its payment obligations on a daily basis, it is subject to being placed into receivership, regardless of its capital levels.

• Liquidity risks related to customer and brokered deposits

Our largest source of liquidity is customer deposit accounts, including noninterest bearing demand deposit accounts, which constituted 36% of our total deposits at December 31, 2022.

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 rely on brokered deposits, which constituted 26% of our total deposits at December 31, 2022, as an additional source of liquidity to meet our obligations and fund loan and investment opportunities.

The market for customer and brokered deposits is highly competitive and the risk of disintermediation is high, particularly in a high interest rate environment.

Most of our noninterest bearing deposits are operating deposits or compensating balances that are held in connection with lending relationships, and are less likely to disintermediate.

For customers that do not have a lending relationship, however, the risk of deposit disintermediation is significantly higher, as the opportunity cost of interest forgone is greater.

The potential outflow of such deposits is a risk unless we pay a more competitive rate of interest on them, which could significantly and negatively impact the Bank’s interest expense and net interest margin.

In addition, if we are unable to increase customer deposits in an amount sufficient to fund loan growth, we may be required to rely more heavily on brokered deposits or on other, potentially more expensive, sources of liquidity, such as FHLB borrowings and repurchase agreements to fund loan growth, or, if such sources are unavailable, to resort to the sale of available for sale securities at a loss, the sale or participation of existing loans or other alternative sources of fundraising to meet our liquidity needs.

Generally, these alternative sources of liquidity may not be as stable as other types of deposits, or may be associated with higher levels of risk, and may require us to pay a higher cost of funds, to replace them with other sources of funds or to slow loan growth.

An inability to maintain or replace customer and brokered deposits as they mature could negatively affect our liquidity, which could significantly reduce our future growth or materially adversely affect our net interest margin, earnings and stock price.

• Liquidity risks related to deposits 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.

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.

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, 2022, the Bank had approximately $4.4 billion of uninsured deposits, which was 51% of our total deposits.

• Liquidity risks related to access to capital markets

We face significant capital and other regulatory requirements as a financial institution.

We may need to raise additional capital in the future to provide sufficient capital resources and liquidity to meet our commitments and business needs, which could include the possibility of financing acquisitions.

In addition, we must meet certain regulatory capital requirements and maintain sufficient liquidity.

Importantly, regulatory capital requirements could increase from current levels, which could require us to raise additional capital or reduce our operations.

Our liquidity could be adversely affected by any inability to access the capital markets, illiquidity or volatility in the capital markets, the decrease in value of eligible collateral or increased collateral requirements (including as a result of credit concerns for short-term borrowing), changes to our relationships with our funding providers based on real or perceived changes in our risk profile, prolonged federal government shutdowns or changes in regulations.

Additionally, our liquidity may be negatively impacted by the unwillingness or inability of the Federal Reserve to act as lender of last resort.

Our ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities and on our financial condition and performance.

Accordingly, we may be unable to raise additional capital if needed or on acceptable terms.

If we fail to maintain capital to meet regulatory requirements, our liquidity, business, financial condition and results of operations could be adversely affected.

• Liquidity risks related to securities' market values

The investment securities portfolio has risk factors beyond the Company’s control that may significantly influence its fair value.

Declines in the value of investment securities could result in losses that can reduce liquidity, capital and earnings.

These risk factors include, but are not limited to, market conditions, instability in the credit markets, rating agency downgrades of the securities, lack of market pricing of the securities, defaults of the issuers of the securities and issuer impairments.

The Company’s investment in equity securities and in securities with no market activity present heightened credit and price risks.

We believe that the Company's liquidity risks are mitigated through the use of various models and strategies combined with our strong earnings, capital position, relationship banking model and reputation as a safe and sound institution.

We also continually assess and strategize to control liquidity risk exposures from the potential loss of or competition for customer deposits and from the potential loss of securities' market values.

There is no assurance, however, 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, can be more expensive than other categories of deposits and may significantly increase our cost of funds.

There is also no assurance that we will be able to reduce our risk positions related to assets with significant declines in value or related to assets with no market activity.

In times of market stress or other unforeseen circumstances, market movements may limit the effectiveness of our strategies, reduce or eliminate our growth and cause us to incur material losses.

The Company believes that the loss of a significant amount of deposits, particularly noninterest bearing deposits and any material losses in our investment portfolio could have a material adverse effect on our earnings, net interest margin, rate of growth and stock price.

We may face risks with respect to future expansion or acquisition activity.

We are subject to comprehensive regulation under federal and state laws.

These laws and regulations significantly affect and have the potential to restrict the scope of our existing businesses and limit our ability to pursue certain business opportunities, including the products and services we offer.

We may seek to selectively expand our banking operations through limited de novo branching or opportunistic acquisition activities.

We cannot be certain that any expansion activity, through de novo branching, acquisition of branches of another financial institution or a whole institution, or the establishment or acquisition of nonbanking financial service companies, will prove profitable or will increase shareholder value.

We cannot be certain that any expansion activity, through de novo branching, acquisition of branches of another financial institution or a whole institution or the establishment or acquisition of nonbanking financial services companies, will prove profitable or will increase shareholder value.

The FRB's prior approval is required to acquire all or substantially all of the assets of any bank or savings association, to acquire direct or indirect ownership or control of more than 5% of any class of voting securities of any bank or savings association or to merge or consolidate with any other bank holding company or savings and loan holding company.

The BHC Act and other federal law enumerates the factors the FRB must consider when reviewing the merger of bank holding companies, the acquisition of banks or the acquisition of voting securities of a bank or bank holding company.

These factors include the competitive effects of the proposal in the relevant geographic markets;

the financial and managerial resources and

future prospects of the companies and banks involved in the transaction;

the effect of the transaction on the financial stability of the United States;

the organizations' compliance with anti-money laundering laws and regulations;

the convenience and needs of the communities to be served;

and the records of performance under the CRA of the insured depository institutions involved in the transaction.

Such regulatory approvals may not be granted on terms that are acceptable to us, or at all.

We may also be required to sell branches as a condition to receiving regulatory approval, a condition which may not be acceptable to us or, if acceptable to us, may reduce the benefit of any acquisition.

The success of any acquisition will depend, in part, on our ability to realize the estimated cost savings and revenue enhancements from combining the businesses of the Company and the target company.

Our ability to realize increases in revenue will depend, in part, on our ability to retain customers and employees and to capitalize on existing relationships for the provision of additional products and services.

If our estimates turn out to be incorrect or we are not able to successfully combine companies, the anticipated cost savings and increased revenues may not be realized fully or at all, or may take longer to realize than expected.

If our estimates for such activities turn out to be incorrect or we are not able to successfully combine companies, the anticipated cost savings and increased revenues may not be realized fully or at all or may take longer to realize than expected.

It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients and employees or to achieve the anticipated benefits of the merger.

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metropolitan area could increase the levels of nonperforming loans and charge-offs and reduce loan demand.

In that event, we would likely experience lower earnings or higher losses.

In that event, we would likely experience higher losses or lower earnings.

Additionally, if, for any reason, economic conditions in our market area deteriorate, or there is significant volatility or weakness in the economy or any significant sector of the area’s economy, our ability to develop our business relationships may be diminished, the quality and collectability of our loans may be adversely affected, the value of collateral may decline and loan demand may be reduced.

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a loss of earnings from these loans, an increase in the provision for loan losses, an increase in loan charge-offs, and/or an increase in operating expenses which could have an adverse impact on our results of operations and financial condition.

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

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.

Our Residential Lending department, which will cease originating mortgages for sale in the first quarter of 2023, will no longer provide us with significant noninterest income

We recently announced that we will cease originating residential mortgages for sale in the first quarter of 2023 (see Note 26 of the Consolidated Financial Statements for further details).

While we believe that this decision is appropriate given the challenged nature of the business, we cannot be certain that we will be able to maintain or increase the volume or percentage of revenue or net income previously produced by the residential mortgage business.

In 2022, the Bank originated $295.6 million and sold $338.9 million of residential mortgage loans to investors, as compared to $1.1 billion originated and $1.2 billion sold to investors in 2021.

Changes in tax laws could make home ownership less attractive, reducing the demand for residential mortgage loans.

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The loss of services of one or more loan officers could have the effect of reducing the level of our mortgage production or the rate of growth of production.

As a result of these factors we cannot be certain that we will be able to continue to maintain or increase the volume or percentage of revenue or net income produced by the residential mortgage business.

Our financial condition, earnings and asset quality could be adversely affected if we are required to repurchase loans originated for sale by our Residential Lending department.

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Similarly, when interest earning assets mature or re-price more quickly than interest bearing liabilities, falling interest rates could reduce net interest income.

These rates are highly sensitive to many factors beyond our control, including competition, general economic conditions and monetary and fiscal policies of various governmental and regulatory authorities, including the Federal Reserve Board.

We attempt to manage our risk from changes in market interest rates by adjusting the rates, maturity, re-pricing, and balances of the different types of interest earning assets and interest bearing liabilities, but interest rate risk management techniques are not exact.

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At December 31, 2022, our cumulative net asset sensitive twelve month gap position was +7.98% of total assets.

As such, we expect modest increases of approximately +4.7% and +8.1%, respectively, in projected net interest income and net income over a twelve month period resulting from a 100 basis point increase in rates.

In addition, our residential mortgage origination and sale volume could decline if interest rates increase.

As such, assuming a static balance sheet, we expect increases of approximately +9.9% and +16.4%, respectively, in projected net interest income and net income over a twelve month period resulting from an instantaneous 100 basis point increase in rates across the yield curve.

Conversely, assuming a static balance sheet, we expect decreases of approximately (4.7)% and (7.3)%, respectively, in projected net interest income and net income over a twelve month period resulting from an instantaneous 100 basis point decrease in rates across the yield curve.

In addition, if interest rates continue to rise or stay elevated, we will likely continue to experience an increase in deposit outflows.

Our residential mortgage origination and sales volume will also decrease, given our decision to cease originating residential mortgages for sale in the first quarter of 2023 (See Note 26 of the Consolidated Financial Statements for further details).

The results of our interest rate sensitivity simulation model depend upon a number of assumptions, which may not prove to be accurate.

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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, 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.

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.

If LIBOR rates are no longer available, and the Bank is required to implement substitute indices for the calculation of interest rates under its loan agreements, it may incur additional expenses in effecting the transition, and may be subject to disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute indices, which could have an adverse effect on its results of operations.

At this time, it is not possible to predict the effect that these developments, any discontinuance, modification or other reforms to LIBOR or any other reference rate, the establishment of alternative reference rates, or the impact of any such events on contractual mechanisms may have on the markets, us or our fixed-to-floating rate debt securities.

Uncertainty as to the nature of such potential discontinuance, modification, alternative reference rates or other reforms may negatively impact market liquidity, our access to funding required to operate our business and the trading market for our fixed-to-floating rate debt securities.

Furthermore, the use of alternative reference rates or other reforms could cause the interest payable on our outstanding fixed-to-floating rate debt securities to be materially different, and potentially higher, than expected.

We may not be able to successfully compete with others for business.

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metropolitan area in which we operate is considered highly attractive from an economic and demographic viewpoint and is a highly competitive banking market.

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.

We compete for loans and deposits' 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.

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

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metropolitan area is characterized by a significant number of businesses that are federal government contractors or subcontractors or which depend on such businesses for a significant portion of their revenues.

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.

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.

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.

As the economy began to improve from the COVID-19 pandemic, many of the federal government stimulus programs were discontinued.

The impact of the discontinuation of these programs on the local economy in 2023 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.

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These costs and claims could adversely affect our business.

Climate change or government action and societal responses to climate change could adversely affect our results of operations.

Climate change can increase the likelihood of the occurrence and severity of natural disasters and can also result in longer-term shifts in climate patterns such as extreme heat, sea level rise and more frequent and prolonged drought.

Such significant climate change effects may negatively impact the Company’s geographic markets, disrupting the operations of the Company, our customers or third parties on which we rely.

Damages to real estate underlying mortgage loans or real estate collateral and declines in economic conditions in geographic markets in which the Company’s customers operate may impact our customers’ ability to repay loans or maintain deposits due to climate change effects, which could increase our delinquency rates and average credit loss.

Moreover, as the effects of climate change continue to create a level of concern for the state of the global environment, companies are facing increasing scrutiny from customers, regulators, investors and other stakeholders related to their environmental, social and governance (“ESG”) practices and disclosure.

New government regulations could result in more stringent forms of ESG oversight and reporting and diligence and disclosure requirements.

Increased ESG related compliance costs, in turn, could result in increases to our overall operational costs.

Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards, including with respect to the Company’s involvement in certain industries or projects associated with causing or exacerbating climate change, may negatively affect the Company’s reputation and commercial relationships, which could adversely affect our business.

Our operations rely significantly on certain external vendors.

Our business is dependent on the use of outside service providers that support our day-to-day operations including data processing and electronic communications.

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.

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.

Difficulty recruiting or retaining successful bankers, as well as the loss of any of our executive officers or other key personnel, could negatively impact the implementation of our business strategy, impair relationships with our customers and adversely affect our financial condition and results of operations.

In light of macroeconomic factors, as well as work environment issues arising from the COVID-19 pandemic, human capital management risks are an increasing component of the Company’s assessment of risk and its enterprise risk management system.

Our ability to retain and grow loans, deposits and fee income depends upon the business generation capabilities, reputation and relationship management skills of our bankers.

If we were to experience difficulty recruiting successful bankers, or lose the services of any of our bankers to a new or existing competitor or otherwise, we may be unable to establish and retain valuable relationships and some of our customers or potential customers could choose to use the services of a competitor instead.

Moreover, the Company relies significantly on the expertise and experience of our executive officers and senior management, whose skills, years of industry experience and relationships with customers may be difficult for the Company to replace.

The loss of service of one or more of these key personnel could reduce the Company’s ability to successfully implement its long-term business strategy, our business could suffer and the value of the Company’s common stock could be materially adversely affected.

Leadership changes may occur from time to time and the Company cannot predict whether significant resignations will occur or whether the Company will be able to recruit additional qualified personnel.

There can be no assurance that the Company can adequately prepare for these risks prior to their occurrence or that they will not have a material impact on our financial condition and results of 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.

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.

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

In accordance with our Amended Articles of Incorporation, our Board of Directors may determine from time to time that we need to raise additional capital by issuing additional shares of our common stock or other securities.

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New investors, and particularly investors in any preferred stock the Company may issue from time to time, will therefore have rights, preferences and privileges that are senior to, and that adversely affect, our then current common shareholders.

Additionally, if we raise additional capital by making additional offerings of debt or preferred equity securities, upon liquidation of the Company, holders of our debt securities and shares of preferred stock, and lenders with respect to other borrowings, will receive distributions of our available assets prior to the holders of our common stock.

Additional equity offerings may dilute the holdings of our existing shareholders or reduce the market price of our common stock, or both.

Additionally, if we raise additional capital by making additional offerings of debt or preferred equity securities, upon liquidation of the Company, holders of our debt securities and

shares of preferred stock and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our common stock.

Also, additional equity offerings may dilute the holdings of our existing shareholders or reduce the market price of our common stock, or both.

Holders of our common stock are not entitled to preemptive rights or other protections against dilution.

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RISKS RELATED TO OUR LEGAL AND REGULATORY ENVIRONMENT

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, 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.

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

Under guidance adopted by the federal banking agencies, banks which have concentrations in construction, land development or commercial real estate loans (other than loans for majority owner occupied properties) would be expected to maintain higher levels of risk management and, potentially, higher levels of capital.

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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Additionally, we also from time to time receive demand letters from shareholders, and such letters may lead to these shareholders filing claims or derivative suits against us if our engagement with such shareholders ends in a failure to successfully negotiate a settlement.

The Company has received various document requests and subpoenas from securities and banking regulators and U.S.

Attorney’s offices in connection with investigations, which the Company believes relate to the Company's identification, classification and disclosure of related party transactions;

the retirement of certain former officers and directors;

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

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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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.

The Company maintains director and officer insurance policies (“D&O Insurance Policies”) that provide coverage for the legal defense costs.

Once the D&O Insurance Policies are exhausted (as is the case for our 2016/2017 D&O Policy), the Company will be responsible for paying the defense costs associated with those investigations and litigations (to include unpaid receivables from the insurance carriers) for itself and on behalf of any current and former officers and directors entitled to indemnification from the Company.

The Company may incur in the future in connection with current 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.

The banking industry is highly regulated and supervised under federal and state laws and regulations that are intended primarily for the protection of depositors, customers, the public, the banking system as a whole or the FDIC Deposit Insurance Fund, not for the protection of our shareholders and creditors.

The Company and Bank are subject to regulation and supervision by the Federal Reserve, the FDIC, as well as our state regulator.

The banking industry is highly regulated and supervised under federal and state laws and regulations that are intended primarily for the protection of depositors, customers, the public, the banking system as a whole or the FDIC DIF and not for the protection of our shareholders and creditors.

The Company and Bank are subject to regulation and supervision by the Federal Reserve and the FDIC, as well as our state regulator.

Compliance with these laws and regulations can be difficult and costly, and changes to laws and regulations can impose additional compliance costs.

The laws and regulations applicable to the Company and Bank govern a variety of matters, including permissible types, amounts and terms of loans and investments they may make, the maximum interest rate that may be charged, the amount of reserves that must hold against deposits, the types of deposits that may be accepted and the rates that may be paid on such deposits, maintenance of adequate capital and liquidity, changes in control of the Company and Bank, transactions between the Bank and its affiliates, handling of nonpublic information, restrictions on distributions to shareholders through dividends or share repurchases, dividends and establishment of new offices.

The laws and regulations applicable to the Company and Bank govern a variety of matters, including permissible types, amounts and terms of loans and investments they may make, the maximum interest rate that may be charged, the amount of reserves that must be held against deposits, the types of deposits that may be accepted and the rates that may be paid on such deposits, maintenance of adequate capital and liquidity, changes in control of the Company and Bank, transactions between the Bank and its affiliates, handling of nonpublic information, restrictions on distributions to shareholders through dividends or share repurchases, dividends and establishment of new offices.

We must obtain approval from our regulators before engaging in certain activities, and there is risk that such approvals may not be granted, either in a timely manner or at all.

These requirements may constrain our operations, and the adoption of new laws and changes to or repeal of existing laws may have a further impact on our business, financial condition and results of operations.

Also, the burden imposed by those laws and regulations may place banks in general, including the Bank in particular, at a competitive disadvantage compared to its non-bank competitors.

Also, the burden imposed by those laws and regulations may place banks in general, including the Bank in particular, at a competitive disadvantage compared to our non-bank competitors.

Our failure to comply with any applicable laws or regulations or regulatory policies and interpretations of such laws and regulations could result in sanctions by regulatory agencies, civil money penalties or damage to our reputation, all of which could have a material adverse effect on our business, financial condition and results of operations.

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We cannot predict the substance or effect of future legislation or regulation or the application of laws and regulations to us.

Compliance with current and potential regulation, as well as regulatory scrutiny, may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase regulatory capital, and limit our ability to pursue business opportunities in an efficient manner by requiring it to expend significant time, effort and resources to ensure compliance and respond to any regulatory inquiries or investigations.

Compliance with current and potential regulation, as well as regulatory scrutiny, may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase regulatory capital and limit our ability to pursue business opportunities in an efficient manner by requiring us to expend significant time, effort and resources to ensure compliance and respond to any regulatory inquiries or investigations.

In addition, regulators may elect to alter standards or the interpretation of the standards used to measure regulatory compliance or to determine the adequacy of liquidity, risk management or other operational practices for financial service companies in a manner that impacts our ability to implement our strategy and could affect us in substantial and unpredictable ways and could have a material adverse effect on our business, financial condition and results of operations.

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We are subject to laws regarding the privacy, information security and protection of personal information, and any violation of these laws or another incident involving personal, confidential or proprietary information of individuals could damage our reputation and otherwise adversely affect our business.

Our business requires the collection and retention of large volumes of customer data, including personally identifiable information, or PII, in various information systems that we maintain and in those maintained by third party service providers.

Our business requires the collection and retention of large volumes of customer data, including personally identifiable information ("PII") in various information systems that we maintain and in those maintained by third party service providers.

We also maintain important internal company data such as PII about our employees and information relating to our operations.

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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.

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.

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 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.

We are subject to the effect of changes in tax laws which could increase the effective tax rate payable by us to federal and state governments, reduce the value of our beneficial tax attributes or otherwise adversely affect our business, results of operations or financial condition.

We are subject to the effect of changes in tax laws which could increase the effective tax rate payable by us to federal, state and municipal governments, reduce the value of our beneficial tax attributes or otherwise adversely affect our business, results of operations or financial condition.

Additionally, changes in tax laws could have a negative impact on the banking industry, borrowers, the market for single family residential or commercial real estate or business borrowing.

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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, 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.

Accordingly, the CECL model could require financial institutions, like the Bank, to increase their allowances for credit losses.

We elected the Federal Reserve and FDIC’s rule providing for an optional three-year phase-in period for the day-one adverse regulatory capital effects upon adopting the standard.

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 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.

To the extent that our analysis of our prior loss experience, current and forecast economic conditions, and other factors included in our estimates of expected loss are incorrect, our ACL may be inadequate.

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 factors that will impact the expected losses on an asset will be correct.

RISKS RELATED TO THE USE OF TECHNOLOGY

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We have observed an increased level of attention in the industry focused on cyber-attacks that include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data or causing operational disruption.

To combat against these attacks, policies and procedures are in place to identify, protect, detect, respond, and recover from the possible security breach of its information systems and cyber-fraud.

While 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.

To combat against these attacks, policies and procedures are in place to identify, protect, detect, respond and recover from the possible security breach of our information systems and cyber-fraud.

While 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.

While we have not incurred any material losses related to cyber-attacks, we may incur substantial costs and suffer other negative consequences if we fall victim to successful cyber-attacks.

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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.

As of May 1, 2022, the Company is required to notify its 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, pursuant to a rule approved by the Office of the Comptroller of the Currency ("OCC"), FRB and FDIC.

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.

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

The Company has implemented internal processes to ensure compliance with this rule.

Failure to keep up with the rapid technological changes in the financial services industry could have a material adverse effect on our competitive position and profitability.

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While these quantitative techniques and approaches improve our decision-making, they also create the possibility that faulty data, flawed quantitative approaches or poorly designed or implemented models could yield adverse or faulty outcomes and decisions, and could result in regulatory scrutiny.

Secondarily, because of the complexity inherent in these approaches, misunderstanding or misuse of their outputs could similarly result in suboptimal decision-making, which could have a material adverse effect on our business, financial condition, results of operations and share price.

Secondarily, because of the complexity inherent in these approaches, misunderstanding or misuse of their outputs could similarly result in

suboptimal decision-making, which could have a material adverse effect on our business, financial condition, results of operations and share price.

GENERAL RISKS

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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 (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).

• General market conditions and, in particular, developments related to market conditions for the financial services industry, inclusive of the potential adverse impact from:

◦ Terrorism, and current or anticipated military conflicts, including escalating military tensions between Russia and Ukraine and other geopolitical events;

◦ Catastrophic events, including natural disasters, and public health crises.

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