Item 1A. Risk Factors
Item 1A. Risk Factors
In addition to the risk factors previously disclosed in Item 1A. to Part I of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022, the Corporation also identified the following risk factors:
Recent volatility in the banking sector may result in new legislation, regulations or policy changes that could subject the Corporation and the Bank to increased government regulation and supervision.
The recent failures of Silicon Valley Bank and Signature Bank prompted responses by the FDIC, the Federal Reserve and the U.S. Treasury Secretary to protect the depositors of these institutions. Congress and the federal banking agencies have begun to evaluate the events leading to the failures and have posited varying theories, such as inadequate regulation and supervision, and a failure by the institutions to effectively manage interest rate and liquidity risks. Continued evaluation of these recent developments may lead to governmental initiatives intended to prevent future bank failures under similar circumstances, including modifications to the risk-based capital regulations. The federal banking agencies may also re-evaluate applicable liquidity risk management standards. Although we cannot predict with certainty which initiatives may be pursued by legislators and regulatory agencies, or the terms and scope of any such initiatives, any of the potential changes referenced above could, among other things, subject us to additional costs, limit the types of financial services and products that the Bank may offer, and limit the future growth of the Corporation and the Bank, any of which could materially and adversely affect the business, results of operations or financial condition of the Corporation.
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The proportion of the Corporation’s deposit account balances that exceed FDIC insurance limits may expose the Bank to enhanced liquidity risk.
There is growing consensus that the proportion of the deposits that exceeded FDIC insurance limits at Silicon Valley Bank and Signature Bank was a significant factor in the recent failure of these institutions. In response to these, many large depositors across the industry withdrew deposits in excess of applicable deposit insurance limits and deposited these funds in other financial institutions and low-risk securities accounts in an effort to mitigate the risk of potential further bank failures. While the Bank has not experienced significant withdrawal activity in connection with the recent bank failures, if a significant portion of the Bank’s deposits were to be withdrawn within a short period of time in connection with a similar future crisis, additional sources of funding may be required to meet withdrawal demands. The Corporation may be unable to obtain sufficient funding on favorable terms, which may have an adverse effect on the Corporation’s net interest margin. In addition, funding deposit obligations may be more difficult in a high interest rate environment. Because the Corporation’s available-for-sale investment securities may lose value when interest rates rise, proceeds from the sale of such assets may be diminished during periods of elevated interest rates. Under such circumstances, the Corporation may be required to access funding from sources such as the Federal Reserve Discount Window, the recently established Bank Term Funding Program or other alternative liquidity sources in order to manage our liquidity risk.
The Corporation may be subject to increases in FDIC insurance assessments as a result of the recent bank failures.
The significant losses incurred by the FDIC’s Deposit Insurance Fund in connection with the resolution of the recent bank failures are required by law to be recovered through one or more special assessments on depository institutions and, potentially, their holding companies. The FDIC is required to consider a variety of factors in determining the terms and applicability of any such special assessment, including, without limitation, the types of entities that benefit from the action taken by the agencies, economic conditions, and anticipated industry impacts. The FDIC has announced that it intends to publish a notice of proposed rulemaking for a special assessment in May 2023. It is also possible that the FDIC will alter the assessment rate schedule or calculation methodology relating to regular deposit insurance assessments in response to the recent bank failures. Although the Corporation cannot predict the specific timing and terms of any special assessment relating to the recent bank failures, or any other potential increase in deposit insurance assessment rates, any significant increase in the Bank’s assessment fees could have a materially adverse effect on the Corporation’s results of operations and financial condition.
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