Item 1A. Risk Factors
Item 1A. Risk Factors
The following paragraphs describe changes in the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2019.
An outbreak of COVID-19 has adversely affected BancShares' business, financial condition and results of operations.
A novel strain of coronavirus (“COVID-19”) has spread across most of the world, including the United States beginning in the first quarter of 2020. It has caused severe disruptions to the US economy, regional quarantines, business shutdowns, high unemployment, disruptions to supply chains, and overall economic instability that has adversely impacted the operations, activities and business of BancShares and its customers. Effects have generally been felt across all industries; however, the industries that have been the most negatively impacted to date include hospitality, travel and tourism, retail, medical and dental, and financial services.
In response to the national public health crisis, Federal, State and Local governments continue to impose an array of restrictions on the way all businesses conduct their operations and on our customers, business partners, vendors and employees. These restrictions, along with other economic factors including inflation risks, oil price volatility, and changes in interest rates have and may continue to destabilize financial markets and negatively impact our customers’ business activities and operations, making it difficult for them to satisfy existing debt obligations. They also have led to elevated unemployment and slower consumer spending which in turn will increase our collection risk as deteriorating economic conditions correlate with lower credit quality metrics and higher customer defaults on loans. Economic pressures and uncertainty has and may continue to change consumer and business behaviors, which, in the short and long term, could affect borrowers’ creditworthiness and the demand for loans and other products and services we offer. BancShares is actively monitoring the loan portfolio to identify changes in credit risk within a specific geography, loan class, or within a particular industry concentration. Therefore, provision expense could increase as we incorporate these changes into our estimate on the allowance for credit losses.
Additionally, our operations have experienced disruptions as we operate in a remote working environment for most corporate employees and we have adjusted branch operations and corporate processes. With continued uncertainty around outbreak severity within impacted areas, there may be increased absenteeism, and lost productivity as a result of the remote workforce. We may see an increased incidence of cybersecurity threats or fraud as cyber-criminals look to profit from the disruption and potential strain on information technology and the fear of the general public. There may be disruption in critical third party services as they adjust to the new operating environment. BancShares has a comprehensive business continuity and data security plan in place but may not be able to mitigate all of the issues identified above.
Market volatility and general uncertainty in the capital markets may also impact our business. Our access to capital and liquidity could be limited by market disruptions which could be exacerbated by delays in customer payments or significant withdrawals from customer deposit accounts. In addition, the fair value of our assets and liabilities will be impacted by the changing market environment. This could also increase liquidity and capital adequacy risks, as well as long-lived asset impairment risk.
As the government and its regulatory bodies respond to the crisis, it increases the burden on our associates to quickly respond to changing regulatory guidance. This could increase the risk of noncompliance.
The impacts laid out above and others will be felt across all of the following categories of risk identified by BancShares in our Annual Report on Form 10-K:
• Operational Risk
• Credit Risk
• Market Risk
• Liquidity Risk
• Capital Adequacy Risk
• Compliance Risk
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• Strategic Risk
• Financial Reporting Risk
The effects of the COVID-19 pandemic will heighten specific risk factors and could impact substantially all risk factors described in our Annual Report on Form 10-K under the risk categories listed above. Those effects will adversely affect our business operations and results at least until the outbreak has subsided, and the negative effects on the economy, our customers and our business and results likely will continue to be felt for some time afterwards. The full extent of the impact will depend on future developments that are highly uncertain including the duration and spread of the outbreak, its severity, governmental actions to contain the virus, and the long term economic impact, both globally, as well as in our banking markets, which includes a potential recession. As a result, we currently cannot fully assess the risk and adverse impact of the COVID-19 pandemic, but the effects may have a material impact on our business and financial results and heighten many of the individual risk factors identified in our Annual Report on Form 10-K for the year ended December 31, 2019.
Transaction with CIT
As a result of us entering into the Merger Agreement, certain new risk factors have been identified. These risks and the other risks associated with the Transaction will be more fully discussed in the joint proxy statement/prospectus that will be included in the registration statement on Form S-4 that we will file with the Securities and Exchange Commission in connection with the Transaction.
Merger-Related Risk
The consummation of the Transaction is contingent upon the satisfaction of a number of conditions, including shareholder and regulatory approvals, that may be outside of our or CIT's control and that we and CIT may be unable to satisfy or obtain or which may delay the consummation of the Transaction or result in the imposition of conditions that could reduce the anticipated benefits from the Transaction or cause the parties to abandon the Transaction.
Consummation of the Transaction is contingent upon the satisfaction of a number of conditions, some of which are beyond our and CIT's control, including, among others:
• approval of the Merger Agreement by CIT’s shareholders and the approval by our shareholders of the issuance of the shares of our common stock to be issued in First-Step Merger;
• authorization for listing on Nasdaq of the shares of our capital stock to be issued in the First-Step Merger, subject to official notice of issuance;
• the receipt of required domestic and foreign regulatory approvals, including, among others, the approval of the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the North Carolina Commissioner of Banks;
• effectiveness of the registration statement on Form S-4 for our common stock to be issued in the First-Step Merger; and
• the absence of any order, injunction, decree or other legal restraint preventing the completion of the Mergers or making the completion of the Transaction illegal.
Each party's obligation to complete the Transaction is also subject to certain additional customary conditions, including, among others:
• subject to certain exceptions, the accuracy of the representations and warranties of the other party;
• performance in all material respects by the other party of its obligations under the Merger Agreement; and
• receipt by each party of an opinion from its counsel to the effect that the Mergers will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code.
These conditions to the closing of the Transaction may not be fulfilled in a timely manner or at all, and, accordingly, the Transaction may be delayed substantially or may not be completed. In addition, the parties can mutually decide to terminate the Merger Agreement at any time, before or after receipt of the requisite approvals by our or CIT's shareholders, or we or CIT may elect to terminate the Merger Agreement in certain other circumstances.
As a condition to granting required regulatory approvals, governmental entities may impose conditions, limitations or costs, require divestitures or place restrictions on our conduct after the closing of the Transaction. Such conditions or changes and the process of obtaining regulatory approvals could, among other things, have the effect of delaying completion of the Transaction or of imposing additional costs or limitations on us following the Transaction, any of which may have an adverse effect on us following the Transaction.
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We and CIT may also be subject to lawsuits challenging the Transaction, and adverse rulings in these lawsuits may delay or prevent the Transaction from being completed or require us or CIT to incur significant costs to defend or settle these lawsuits. Any delay in completing the Transaction could cause us not to realize, or to be delayed in realizing, some or all of the benefits that we expect to achieve if the Transaction is successfully completed within its expected time frame.
We may fail to realize all of the anticipated benefits of the Transaction, or those benefits may take longer to realize than expected. We may also encounter significant difficulties in integrating with CIT.
We and CIT have operated and, until the completion of the Transaction, will continue to operate, independently. The success of the Transaction, including anticipated benefits and cost savings, will depend, in part, on our ability to successfully integrate CIT’s operations in a manner that results in various benefits and that does not materially disrupt existing customer relationships or result in decreased revenues due to loss of customers. The process of integrating operations could result in a loss of key personnel or cause an interruption of, or loss of momentum in, the activities of one or more of the combined company's businesses. Inconsistencies in standards, controls, procedures and policies could adversely affect the combined company. The diversion of management's attention and any delays or difficulties encountered in connection with the Transaction and the integration of CIT's operations could have an adverse effect on the business, financial condition, operating results and prospects of the combined company.
If we experience difficulties in the integration process, including those listed above, we may fail to realize the anticipated benefits of the Transaction in a timely manner or at all.
While the Transaction is pending, we will be subject to business uncertainties and contractual restrictions that could adversely affect our business and operations.
Uncertainty about the effect of the Transaction on employees, customers and other persons with whom we or CIT have a business relationship may have an adverse effect on our business, operations and stock price. Our existing customers or existing customers of CIT could decide to no longer do business with us, CIT or the combined company, reducing the anticipated benefits of the Transaction. We and CIT are also subject to certain restrictions on the conduct of our respective businesses while the Transaction is pending. As a result, certain other projects may be delayed or abandoned, and business decisions could be deferred. Employee retention at BancShares and CIT may be challenging before or after completion of the Transaction, as certain employees may experience uncertainty about their future roles with the combined company, and these retention challenges may require us to incur additional expenses in order to retain key employees. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with us, CIT or the combined company, the benefits of the Transaction could be materially diminished.
We expect to incur substantial expenses related to the Transaction and the integration with CIT.
We and CIT will incur substantial expenses in connection with the Transaction and integration. There are a large number of processes, policies, procedures, operations, technologies and systems that must be integrated. While we have assumed that a certain level of expenses would be incurred, there are many factors beyond our control that could affect the total amount or the timing of the integration expenses. Moreover, many of the expenses that will be incurred are, by their nature, difficult to estimate accurately. These expenses could, particularly in the near term, exceed the savings that we expect to achieve from the elimination of duplicative expenses and the realization of economies of scale. The amount and timing of any charges to earnings as a result of Transaction or integration expenses are uncertain at present.
Our future results will suffer if we do not effectively manage our expanded operations following the Transaction .
Following the Transaction, the size and geographic and operational scope of our business will increase significantly beyond its current size and scope. Our future success depends, in part, upon the ability to manage this expanded business, which will pose substantial challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. There can be no assurances that we will be successful in this regard or that we will realize the expected operating efficiencies, cost savings and other benefits currently anticipated from the Transaction.
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