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Item 1A. Risk Factors

2024-02-22 compared with 2023-02-24 · 131 added, 131 removed, 224 unchanged (54% of the section changed)

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Conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy and other factors beyond First Financial’s control may affect its deposit levels and composition, demand for loans, the ability of borrowers to repay their loans and the value of the collateral securing the loans it makes.

Economic turmoil in different regions of the world affect the economy and stock prices in the United States, which can affect First Financial’s earnings and capital and the ability of its customers to repay loans.

For example, on February 24, 2022, Russian military forces invaded Ukraine, and sustained conflict and disruption in the region have occurred and remain likely.

Although the length, impact, and outcome of the ongoing war in Ukraine is highly unpredictable, this conflict has resulted, and could continue to result, in market and other disruptions, including significant volatility in commodity prices and supply of energy resources, instability in financial markets, supply chain interruptions, political and social instability, changes in consumer or purchaser preferences, as well as increases in cyberattacks and espionage.

The extent and duration of the military action, sanctions and resulting market disruptions could be significant and could potentially have substantial impact on the global economy and our business for an unknown period of time.

Due to First Financial's volume of real estate loans, declining real estate values, especially in light of rising interest rates, could affect the value of property used as collateral as well as First Financial’s ability to sell the collateral upon foreclosure.

Economic turmoil in different regions of the world, as well as military conflicts such as those currently ongoing in Ukraine and the Middle East, affect the economy and stock prices in the United States, which can affect First Financial’s earnings and capital and the ability of its customers to repay loans.

If the strength of the United States economy in general and the strength of the local economies in which we conduct operations decline, this could result in, among other things, a deterioration of credit quality or a reduced demand for credit, including a resultant effect on our loan portfolio and allowance for credit losses.

These factors could also result in higher delinquencies and greater charge-offs in future periods, which could materially affect our financial condition and results of operations.

While the Federal Reserve slowed the pace of interest rate hikes earlier in 2023, it may remain open to increasing rates further should inflation dynamics remain unfavorable.

This scenario of higher short-term interest rates for a longer period than currently anticipated by market participants (“higher for longer”), along with other factors, could also result in higher delinquencies and greater charge-offs in future periods, which could materially affect our financial condition and results of operations.

There is no assurance that our non-impaired loans will not become impaired or that our impaired loans will not suffer further deterioration in value.

A slowing labor market, declining savings, higher interest rates, and sticky inflation could cause financial stress to consumers and slacken consumption.

The fluctuations in national, regional and local economic conditions, including those related to local residential, commercial real estate and construction markets, may result in increased charge-offs and, consequently, reduce our net income.

These fluctuations are not predictable, cannot be controlled and may have a material impact on our operations and financial condition even if other favorable events occur.

Weakness in the real estate market, including the secondary market for residential mortgage loans, could affect us.

Disruptions in the secondary market for residential mortgage loans limit the market for and liquidity of many mortgage loans.

The effects of mortgage market challenges, combined with reductions in residential real estate market prices and reduced levels of home sales, could affect the value of collateral securing mortgage loans that we hold, mortgage loan originations and profits on sales of mortgage loans.

Such conditions could result in higher losses or charge-offs in our mortgage loan portfolio and other lines of business.

Declines in real estate values, home sale volumes, financial stress on borrowers as a result of job losses, interest rate resets on adjustable rate mortgage loans or other factors could have further effects on borrowers that could result in higher delinquencies and greater charge-offs in future periods, which would affect our financial condition or results of operations.

Additionally, declines in real estate values might affect the creditworthiness of state and local governments, resulting in decreased profitability or credit losses from loans made to such governments.

A decline in home values or overall economic weakness could also have an impact upon the value of real estate or other assets which we own upon foreclosing a loan and our ability to realize value on such assets.

Changes in market interest rates or capital markets could affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital or liquidity.

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Earnings and capital levels could also be affected if the interest we receive on loans and other investments falls more quickly than the interest we pay on deposits and other borrowings.

In addition to the general impact of the economy, changes in interest rates or in valuations in the debt or equity markets could directly impact us in one or more of the following ways:

In addition to the general impact of the economy, changes in interest rates or in valuations in the debt, equity, or currency markets could directly impact us in one or more of the following ways:

• the yield on earning assets and rates paid on interest bearing liabilities may change in disproportionate ways;

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• the value of assets for which we provide processing services could decline;

• the bank's profitability may decline due to negative impacts of increased market volatility;

• insured and/or uninsured depositors may seek alternative investments, making the bank more reliant on alternative, more expensive funding sources;

• the demand for loans and refinancings may decline, which could negatively impact income related to loan originations;

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Although we have implemented procedures we believe will reduce the potential effects of changes in interest rates on our results of operations, these procedures may not always be successful.

In addition, any substantial or prolonged change in market interest rates could affect our financial condition, results of operations and liquidity.

In addition, any substantial or prolonged change in

market interest rates could affect our financial condition, results of operations and liquidity.

During 2023, the target fed funds rate increased by 100 basis points.

Because the First Financial balance sheet is asset sensitive, these interest rate increases resulted in $108.6 million of incremental net income in 2023.

Additional increases are projected for 2023, although it is not clear how much longer, or by how much, rates will rise.

We may be impacted by the transition from LIBOR as a reference rate.

The London Interbank Offered Rate (LIBOR) has been used extensively in the United States and globally as a benchmark for various commercial and financial contracts, including adjustable rate mortgages, corporate debt, interest rate swaps and other derivative financial instruments.

LIBOR is set based on interest rate information reported by certain banks, which are set to stop reporting such information after June 30, 2023.

In the United States, the Alternative Reference Rate Committee (ARRC) has endorsed the use of a Secured Overnight Funding Rate (SOFR) as the set of alternative United States dollar reference interest rates.

SOFR is different from LIBOR in that it is a backward looking secured rate rather than a forward looking unsecured rate.

These differences could lead to a greater disconnect between our costs to raise funds for SOFR as compared to LIBOR.

For cash products and loans, ARRC has also recognized Term SOFR, which is a forward looking SOFR based on SOFR futures and may in part reduce differences between SOFR and LIBOR.

There are operational issues which may create a delay in the transition to SOFR or other substitute indices, leading to uncertainty across the industry.

First Financial has established a working group to manage the LIBOR transition process.

The working group has identified all LIBOR-related contracts and determined which will require amended language to incorporate a substitute reference rate.

The working group has also developed and implemented flexible language regarding reference rates for all new loan products and agreements.

First Financial ceased originating any loans that reference LIBOR at the beginning of 2022 and is in the process of amending all existing loan documents that reference LIBOR as the index rate to allow for the substitution of Term SOFR or another reference rate and does not anticipate any material issues with transitioning away from LIBOR by June 30, 2023.

Declining values of real estate, increases in unemployment, insurance market disruptions and the related effects on local economies may increase our credit losses, which could negatively affect our financial results.

Our loan portfolio consists of a significant number of loans secured by real estate and other assets, the value of which can be affected by market conditions.

We offer a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer and other loans.

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We cannot fully eliminate credit risk, and as a result, credit losses may increase in the future.

Weakness in the secondary market for residential mortgage loans could affect us.

Disruptions in the secondary market for residential mortgage loans limit the market for and liquidity of many mortgage loans.

Such conditions could result in higher losses or charge-offs in our mortgage loan portfolio and other lines of business.

Our financial instruments carried at fair value expose us to certain market risks.

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We may classify additional financial assets or financial liabilities at fair value in the future.

The economic impact of COVID-19 or any other pandemic could adversely affect our business, financial condition, liquidity, and results of operations .

COVID-19 has negatively impacted global, national and local economies, disrupted global supply chains, created significant volatility and disruption in financial markets.

The extent to which COVID-19 will continue to impact our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted.

As of December 31, 2022, we hold and service PPP loans.

In the event there was a deficiency in the manner in which we originated, funded or serviced PPP loans, the SBA may deny its liability under the guaranty for the PPP Loans, reduce the amount of the guaranty, or, if the SBA has already paid under the guaranty, seek recovery of any loss related to the deficiency.

Risks Related to Our Business

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We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors.

Nonetheless, in the near-term, high interest rates along with rising costs, particularly robust wage growth, are expected to weigh on firms’ profit margins.

Likewise, the resumption of federal student loan payments in October 2023 and the discontinuation of other government support programs pose uncertainty regarding the potential impacts on some borrowers’ ability to pay.

Although we regularly review our credit exposure to specific clients and counterparties and to specific industries that we believe may present credit concerns, default risk may arise from events or circumstances that are difficult to detect, such as fraud.

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In addition, bank regulators periodically review our allowance for credit losses and may require us to increase our provision for credit losses or recognize further loan charge-offs.

Moreover, the Financial Accounting Standards Board (FASB) has changed its requirements for establishing the allowance for credit losses.

The new accounting guidance requires banks to record, at the time of origination, credit losses expected throughout the life of the asset on loans, leases and held-to-maturity debt securities, as opposed to the previous practice of recording losses when it was probable that a loss event had occurred.

The accounting guidance requires banks to record, at the time of origination, credit losses expected throughout the life of the asset on loans, leases and held-to-maturity debt securities, as opposed to the previous practice of recording losses when it was probable that a loss event had occurred.

Under the CECL model, we are required to use historical information, current conditions and reasonable and supportable forecasts to estimate the expected credit losses.

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We adopted the CECL accounting guidance in 2020 and recognized a one-time cumulative effect adjustment to our allowance for credit losses and retained earnings as of January 1, 2020.

Concurrent with the enactment of the CARES Act, federal bank regulatory agencies issued an interim final rule that delays the estimated impact on regulatory capital resulting from the adoption of CECL.

Concurrent with the enactment of the CARES Act, federal bank regulatory agencies issued an interim final rule that delayed the estimated impact on regulatory capital resulting from the adoption of CECL.

The interim final rule provided banking organizations that implemented CECL prior to the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay.

We adopted CECL in the first quarter of 2020, including the regulatory phase-in.

CECL implementation poses operational risk, including the failure to properly transition internal processes or systems, which could lead to errors, financial misstatements or operational losses.

As a result of CECL, our financial results may be negatively affected as soon as weak or deteriorating economic conditions are forecasted and alter our expectations for credit losses.

In 2021, we were able to reverse previous provision expense of $19.0 million as the credit conditions related to COVID-19 were not as significant as originally anticipated.

In 2021, we were able to recapture previous provision expense of $19.0 million as the credit conditions related to COVID-19 were not as significant as originally anticipated.

In 2022, we recorded $6.7 million of provision expense as our loan portfolio grew and the overall duration of the portfolio extended due to rising interest rates.

Depending upon future COVID-19 variants and circumstances, as well as broader macroeconomic shifts, we may incur significant provision expense for credit losses in future periods.

Projections for new business initiatives and strategies may prove inaccurate.

The introduction, implementation, withdrawal, success and timing of business initiatives and strategies, including, but not limited to, the opening of new banking centers or entering into new product lines, may be less successful or may be different than anticipated, which could affect our business.

The Bank makes certain projections and develops plans and strategies for its banking and financial products.

If we do not accurately determine demand for our banking and financial products, it could result in us incurring significant expenses without the anticipated increases in revenue, which could result in a material effect on the Bank’s business and/or capital.

We may be required to repurchase mortgage loans or indemnify mortgage loan purchasers as a result of breaches of representations and warranties, borrower fraud, or certain borrower defaults, which could harm our liquidity, results of operations and financial condition.

When we sell mortgage loans, whether as whole loans or pursuant to a securitization, we are required to make customary representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated.

Our whole loan sale agreements require us to repurchase or substitute mortgage loans in the event we breach any of these representations or warranties.

In addition, we may be required to repurchase mortgage loans as a result of borrower fraud.

While we have taken steps to enhance our underwriting policies and procedures, there can be no assurance that these steps will be effective or reduce risk associated with loans sold in the past.

If the level of repurchase and indemnity activity becomes material, our liquidity, results of operations and financial condition may be affected.

Competition in the financial services industry is intense and could result in our losing business and/or key personnel or experiencing reduced margins.

We operate in a highly competitive industry that could become even more competitive as a result of legislative, regulatory and technological changes, and continued consolidation.

We face aggressive competition from other domestic and foreign lending institutions as well as from numerous other providers of financial services.

The ability of non-banking financial institutions to provide services previously limited to commercial banks has intensified competition.

Because non-banking financial institutions are not subject to the same regulatory restrictions as banks and bank holding companies, they can often operate with greater flexibility and lower cost structures.

Securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions.

These developments may significantly change the competitive environment in which we conduct business.

Some of our competitors have greater financial resources and/or face fewer regulatory constraints, such as Financial Technology Companies, or FinTechs.

Credit unions that compete with us have regulatory and other advantages that allow them to price products and services more competitively.

As a result of these various sources of competition, we could lose loan, deposit, or other types of business to competitors or be forced to price products and services on less advantageous terms to retain or attract clients, either of which could affect our profitability.

The principal bases for competition are pricing (including the interest rates charged on loans or paid on interest bearing deposits), product structure, the range of products and services offered, and the quality of customer service (including convenience and responsiveness to customer needs and concerns).

The ability to access and use technology is an increasingly important competitive factor in the financial services industry, and it is a critically important component to customer satisfaction as it affects our ability to deliver the right products and services.

For example, digital or cryptocurrencies, blockchain, and other FinTech technologies that are designed to enhance transactional security have the potential to disrupt the financial industry, change the way banks do business, and reduce the need for banks as financial deposit-keepers and intermediaries.

Another increasingly competitive factor in the financial services industry is the competition to attract and retain talented employees across many of our business and support areas, many of whom are key to executing our strategic plan and to maintaining relationships with the customers and communities they serve.

This competition could lead to adverse effects on our business, financial condition, or operating results and could also cause us to not pursue certain business opportunities.

Failure to adequately address the competitive pressures we face could make it harder for us to attract and retain customers across our businesses.

Similarly, meeting these competitive pressures could require us to incur significant additional expense, to reevaluate the number of branches through which we serve our customers, or to accept risk beyond what we would otherwise view as desirable under the circumstances.

In addition, in our interest rate sensitive business, pressure to increase rates on deposits or decrease rates on loans could reduce our net interest margin with a resulting negative impact on our net interest income.

Clients could pursue alternatives to bank deposits, causing us to lose a relatively inexpensive source of funding.

Checking and savings account balances and other forms of client deposits could decrease if clients perceive alternative investments as providing superior expected returns.

Consumers may move money out of bank deposits in favor of other investments, including digital or cryptocurrency.

When clients move money out of bank deposits in favor of alternative investments, we can lose a relatively inexpensive source of funds, increasing our funding costs.

Consumers may decide not to use banks to complete their financial transactions, or deposit funds electronically with banks having no branches within our market area, which could affect net income.

Technology and other changes allow parties to complete financial transactions without banks.

For example, consumers can pay bills and transfer funds directly without banks.

Consumers can also shop for higher deposit interest rates at banks across the country, which may offer higher rates because they have few or no physical branches and open deposit accounts electronically.

This process could result in the loss of fee income and client deposits and could increase our funding costs.

Our wealth management business subjects us to a variety of investment and market risks.

At December 31, 2022, we had $3.2 billion in assets under management.

A sharp decline or heightened volatility in the stock market could negatively impact the value of investments held by the bank's wealth management clients, which in turn impacts the amount of assets under management and subjects our earnings to additional risks and uncertainties.

As our wealth management business grows, we may also face operational risk resulting from inadequate or failed internal processes, systems or errors, and regulatory risk, which could result in penalties or restrictions due to non-compliance with laws and regulations.

Our foreign exchange business is largely dependent upon a small number of large clients and market volatility.

In August 2019, First Financial acquired Bannockburn, which is engaged in various foreign exchange market activities.

Bannockburn’s business model relies, to some extent, upon a small number of large clients engaged in foreign currency transactions.

In 2023, we recorded $43.1 million of provision expense as our loan portfolio grew, net charge-offs increased and the overall duration of the portfolio extended due to rising interest rates and slower loan prepayments.

Depending upon future circumstances, as well as broader macroeconomic shifts, we may incur significant provision expense for credit losses in future periods.

Our foreign exchange business plays a crucial role in facilitating various financial transactions, including foreign exchange, interest rate, and soon commodity hedging for our commercial clients and is largely dependent upon a small number of large clients and market volatility that could adversely affect our financial condition, results of operations, and reputation.

In August 2019, First Financial acquired Bannockburn, which engages in various capital markets activities as part of its matched book business encompassing foreign exchange, interest rate, and, coming in 2024, commodity hedging transactions.

• Concentration risk:

Bannockburn’s business model relies, to some extent, upon a small number of large clients.

The loss of one or more of these large clients would adversely affect the revenue derived from Bannockburn.

Additionally, foreign currency transactions historically increase as market volatility increases.

Sustained periods of stability in global financial markets could adversely affect Bannockburn’s revenue.

Other risks and uncertainties related to our foreign exchange business include the risk that foreign exchange rates may move in an unfavorable direction, leading to losses for the bank;

the risk that a client may default on its payment obligations, resulting in losses for the bank;

the risk that our systems for managing foreign exchange market activities could be inadequate or fail as a result of processes, systems or human error;

and the risk of regulatory penalties or restrictions due to non-compliance with laws and regulations related to foreign exchange transactions.

• Market risk:

Foreign currency transactions expose us to market risk, including fluctuations in foreign exchange rates, interest rates, and commodity prices.

These fluctuations could result in financial losses or decreased revenues if we fail to accurately predict or manage these risks.

Foreign currency transactions historically increase as market volatility increases.

Sustained periods of stability in global financial markets could also adversely affect Bannockburn’s revenue.

• Credit risk:

We are exposed to credit risk through our dealings with counterparties in derivative transactions.

While we have risk management policies and procedures in place to mitigate credit risk, the failure of counterparties to fulfill their obligations could lead to financial losses or damage to our reputation.

• Liquidity risk:

The nature of our capital markets operations requires us to maintain sufficient liquidity to meet our obligations, including margin calls and settlement requirements.

A sudden or unexpected increase in liquidity needs could strain our resources and negatively impact our financial position.

• Regulatory risk:

Our capital markets activities are subject to extensive regulatory oversight and compliance requirements.

Changes in regulations or regulatory enforcement actions could increase our compliance costs, restrict our ability to operate certain businesses, or result in fines or penalties.

• Operational Risk:

We face operational risks, including systems failures, errors, or disruptions, that could disrupt our capital markets activities and result in financial losses or harm to our reputation.

• Legal risk:

Our capital markets operations are subject to legal risks, including litigation, regulatory investigations, and disputes with clients or counterparties.

Adverse legal outcomes could result in financial losses, reputational damage, or regulatory sanctions.

• Political risk:

Our foreign exchange business is also susceptible to the risk that political events or changes in government policies could negatively impact the bank's matched book business.

Negative public opinion could damage our reputation and impact business operations and revenues.

As a financial institution, our earnings and capital are subject to risks associated with negative public opinion.

Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending practices, the failure of any of our products or services to meet our clients’ expectations or applicable regulatory requirements, corporate governance and acquisitions, social media and other marketing activities, and the implementation of environmental, social and governance practices or actions taken by government regulators and community organizations in response to any of the foregoing.

Negative public opinion could affect our ability to attract and/or retain clients, could expose us to litigation and regulatory action, and could have a material adverse effect on our stock price or result in heightened volatility.

Negative public opinion could also affect our ability to borrow funds in the unsecured wholesale debt markets.

We rely on other companies to provide key components of our business infrastructure, creating risks of failures by such companies and cybersecurity incidents involving our customers’ information.

Digitalization and technological innovation continue to advance the trend of banks outsourcing technology operations and banks entering partnerships or other arrangements with third parties.

Third parties provide key components of our business infrastructure, such as processing and Internet connections and network access.

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Any disruption in such services provided by these third parties or any failure of these third parties to handle current or higher volumes could affect our ability to deliver products and services to clients and to efficiently and effectively conduct our business.

Technological or financial difficulties of a third-party

service provider could affect our business to the extent such difficulties result in the interruption or discontinuation of services provided by that party.

Technological or financial difficulties of a third-party service provider could affect our business to the extent such difficulties result in the interruption or discontinuation of services provided by that party.

A cybersecurity breach of a vendor's system may result in theft of our data or disruption of business processes.

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Failures in our business infrastructure could interrupt the operations or increase the costs of doing business.

Unauthorized use or disclosure of sensitive or confidential client or customer information, whether through a breach of our computer systems or otherwise, or other breaches in the security of our systems could harm our business.

As part of our business, we collect, process, and retain sensitive and confidential client and customer information on behalf of our subsidiaries and other third parties.

Despite the security measures we have in place, our facilities and systems, and those of our third-party service providers, may be vulnerable to security breaches, acts of fraud, acts of vandalism, computer viruses, malware, ransomware, theft of information, misplaced or lost data, programming and/or human errors, or other similar events.

Ransomware actors continue to affect the sector by targeting banks and their third parties.

These attacks have the potential to affect banks and market operations by rendering critical data inaccessible as well as by threatening the confidentiality of customer data through data leaks.

If information security is breached, information can be lost or misappropriated, resulting in financial loss or costs to us or damages to others.

Our systems can be rendered inoperable, resulting in our inability to provide service to our customers.

Any security breach involving the misappropriation, loss, destruction or unauthorized disclosure of confidential customer information, whether by us or by our vendors, could severely damage our reputation, expose us to the risk of litigation and liability, disrupt our operations and have a material effect on our business.

Cybersecurity risk management programs are expensive to maintain and will not protect us from all risks associated with maintaining the security of customer data and our proprietary data from external and internal intrusions, disaster recovery and failures in the controls used by our vendors.

Employee error or misconduct may result in failure to implement policies and procedures designed to avoid risks.

Moreover, as technology and cyberattacks change over time, we must continually monitor and change systems to guard against new threats.

We may not know of and be able to guard against a new threat until after an attack has occurred.

Congress and the legislatures of states in which we operate regularly consider legislation that would impose more stringent data privacy requirements.

Any of these occurrences could result in our diminished ability to operate one or more of our businesses, potential liability to clients, reputational damage and regulatory intervention in the form of requirements, restrictions and penalties, which could affect us our business and results of operations.

We rely on our systems, employees and certain counterparties, and certain failures could affect our operations.

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Employee errors or misconduct could subject us to civil claims for negligence or regulatory enforcement actions, including fines and restrictions on our business.

In addition, there have been instances where financial institutions have been victims of fraudulent activity in which criminals pose as customers to initiate wire and automated clearinghouse transactions out of customer accounts.

In addition, continuing cyberattacks and current geopolitical tensions highlight the importance of heightened threat monitoring and safeguarding against disruptive attacks targeting the financial sector.

There have been instances where financial institutions have been victims of fraudulent activity in which criminals pose as customers to initiate wire and automated clearinghouse transactions out of customer accounts.

Although we have policies and procedures in place to verify the authenticity of our customers, we cannot assure that such policies and procedures will prevent all fraudulent transfers.

Such activity can result in financial liability and harm to our reputation.

Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of our computer systems or otherwise, or other breaches in the security of our systems could harm our business.

As part of our business, we collect, process, and retain sensitive and confidential client and customer information on behalf of our subsidiaries and other third parties.

Despite the security measures we have in place, our facilities and systems, and those of our third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, malware, ransomware, theft of information, misplaced or lost data, programming and/or human errors, or other similar events.

If information security is breached, information can be lost or misappropriated, resulting in financial loss or costs to us or damages to others.

Our systems can be rendered inoperable, resulting in our inability to provide service to our customers.

Employee error or misconduct may result in failure to implement policies and procedures designed to avoid risks.

Moreover, as technology and cyberattacks change over time, we must continually monitor and change systems to guard against new threats.

We may not know of and be able to guard against a new threat until after an attack has occurred.

Congress and the legislatures of states in which we operate regularly consider legislation that would impose more stringent data privacy requirements.

We may not pay dividends on our common shares.

Holders of our common shares are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments.

Although we have historically declared cash dividends on our common shares, we are not required to do so and may reduce or eliminate our common share dividend in the future.

Additionally, our funds to pay dividends on common shares are dependent upon dividends paid to us by the Bank, which are subject to regulatory restrictions.

A reduction in our dividend rate could affect the market price of our common shares.

Our liquidity is dependent upon our ability to receive dividends from our subsidiaries, which accounts for most of our revenue and could affect our ability to pay dividends, and we may be unable to provide liquidity from other sources.

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As of December 31, 2023, we had indebtedness of $1.3 billion.

Clients could pursue alternatives to bank deposits, causing us to lose a relatively inexpensive source of funding.

Checking and savings account balances and other forms of client deposits, including uninsured deposits, could decrease if clients perceive alternative investments as providing superior expected returns.

We regularly perform liquidity tress testing and sensitivity analyses of deposit assumptions.

Both remain critical given recent trends in deposit balance and interest rate movements, as well as uncertainty regarding depositor behavior moving forward.

Consumers may move money out of bank deposits in favor of other investments, including digital or cryptocurrency.

When clients move money out of bank deposits in favor of alternative investments, we can lose a relatively inexpensive source of funds, increasing our funding costs.

Sound liquidity risk management, including processes that ensure sufficient committed capacity to meet contingent liquidity needs, remains critical.

Our financial condition, results of operations, and stock price may be negatively impacted by unrelated bank failures and negative depositor confidence in depository institutions.

The recent bank failures of Silicon Valley Bank in California, Signature Bank in New York, and First Republic Bank in California, and the decision of Silvergate Bank in California to voluntarily liquidate its assets and wind down operations, each of which occurred during the first and second quarters of 2023, have caused uncertainty in the investor community and negative confidence among bank customers generally.

While we do not believe that the circumstances of these banks' failures and liquidations are indicators of broader issues with the banking system, the failures may reduce customer confidence, affect sources of funding and liquidity, increase regulatory requirements and costs, adverselyaffect financial markets and/or have a negative reputational ramification for the financial services industry, including us.

These bank failures led to volatility and declines in the market for bank stocks and questions about depositor confidence in depository institutions, which in turn led to a greater focus by institutions, investors, and regulators on the on-balance sheet liquidity of and funding sources for financial institutions and the composition of its deposits.

Notwithstanding, our efforts to promote deposit insurance coverage with our customers and otherwise effectively manage our liquidity, deposit portfolio retention, and other related matters, our financial condition, results of operation, and stock price may be adversely affected by future negative events within the banking sector and adverse customer or investor responses to such events.

Disruptions in our ability to access capital markets on desirable terms may affect our capital resources, liquidity and business.

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We continue to evaluate these risks on an ongoing basis.