What changed in this filing

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Item 1A. Risk Factors

2022-03-01 compared with 2021-02-26 · 65 added, 46 removed, 194 unchanged (36% of the section changed)

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The following describes some of the principal risks and uncertainties to which our industry in general, and our securities, assets and businesses specifically, are subject;

other risks are briefly identified in our cautionary statement that is included under the heading “Forward-Looking Statements and Associated Risks” in Part I, Item 1, “Business.” Although we seek ways to manage these risks and uncertainties and to develop programs to control those that we can, we ultimately cannot predict the future.

to manage these risks and uncertainties and to develop programs to control those that we can, we ultimately cannot predict the future.

Future results may differ materially from past results, and from our expectations and plans.

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The ongoing COVID-19 pandemic and measures intended to prevent its spread have adversely impacted the Company’s business and financial results, and the continued impact will depend on future developments, which are highly uncertain and cannot be predicted, including the severity and duration of the pandemic and further actions taken by governmental authorities and other third parties to contain and treat the virus.

COVID-19, which has been identified as a pandemic by the World Health Organization and declared a national emergency in the United States, continues to significantly impact the global economy (including the states and local economies in which we operate) and create significant volatility and disruption in financial markets.

The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns.

Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending.

As a result, the demand for the Company’s products and services has been, and will continue to be, significantly impacted.

Furthermore, the pandemic has caused, and could continue to influence, the recognition of credit losses in the Company’s loan portfolios and increases in the Company’s allowance for credit losses as our customers are negatively impacted by the economic downturn.

In addition, governmental actions have resulted in decreased interest rates and yields, which may lead to decreases in the Company’s net interest income and noninterest income.

As our banking regulators have encouraged us to work prudently with borrowers who are unable to meet their contractual payment obligations due to the effects of COVID-19, the Bank has provided certain hardship relief primarily in the form of payment deferrals.

COVID-19, which has been identified as a pandemic by the World Health Organization and declared a national emergency in the United States, continues to cause disruptions in the global economy (including the states and local economies in which we operate) and instability in financial markets.

The outbreak resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns.

Such measures, which could be implemented again in the future, significantly contributed to rising unemployment and negatively impacted consumer and business spending.

As a result, the demand for the Company’s products and services has been, and may continue to be, adversely impacted.

Furthermore, the pandemic has caused, and could continue to influence, the recognition of credit losses in the Company’s loan portfolio as customers are negatively impacted by economic conditions.

The Company’s allowance for credit losses is also subject to further change as customers are impacted by economic fluctuations resulting from the pandemic.

In addition, governmental actions taken in response to COVID-19 have resulted in decreased interest rates and yields, which have adversely impacted the Company's interest margins and which may lead to decreases in the Company’s net interest income.

As our banking regulators encouraged us to work prudently with borrowers who are unable to meet their contractual payment obligations due to the effects of COVID-19, the Bank provided certain hardship relief primarily in the form of payment deferrals.

As a result, the Bank has made short-term loan modifications for borrowers who are current and otherwise not past due.

As provided under the CARES Act and extended by the 2021 Consolidated Appropriations Act, these qualified loan modifications are currently exempt by law from classification as troubled debt restructures as defined by GAAP.

As provided under the CARES Act and extended by the 2021 Consolidated Appropriations Act, these qualified loan modifications were exempt by law from classification as troubled debt restructures, as defined by GAAP, through January 1, 2022.

The potential adverse impact resulting from the inability of these borrowers to repay loans on a timely basis cannot be determined at this time.

However, the extent of such impact, as reflected in the Company’s financial statements, may be muted by these loan modifications, which could have the effect of delaying loss recognition until after any applicable deferral period.

The spread of COVID-19 has caused the Company to modify is business practices (including developing work from home and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and business partners.

However, the extent of such impact, as reflected in the Company’s financial statements, may have been muted by these loan modifications, which could have the effect of having delayed loss recognition until after the deferral period.

The spread of COVID-19 caused the Company to modify its business practices (including developing work from home and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and business partners.

There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities.

Furthermore, the Company’s business operations have been, and may again in the future be, disrupted due to vendors and third-party service providers being unable to work or provide services effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic.

COVID-19 has not yet been contained and the extent to which it continues to impact the Company’s business, results of operations and financial condition, as well as its regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and severity of the outbreak, the potential for a seasonal or other resurgence, actions taken by governmental authorities and other third parties to contain and treat the virus, and how quickly and to what extent normal economic and operating conditions can resume.

The extent to which COVID-19 continues to impact the Company’s business, results of operations and financial condition, as well as its regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and severity of the pandemic, the potential for seasonal or other resurgences, actions taken by governmental authorities and other third parties to contain and treat the virus, and how quickly and to what extent normal economic and operating conditions can resume.

Moreover, the effects of the COVID-19 pandemic may heighten many of the other risks described in this “Risk Factors” section.

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As a participating lender in the SBA Paycheck Protection Program (“PPP”), the Company and the Bank are subject to additional risks of litigation from the Bank’s clients or other parties in connection with the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties .

On March 27, 2020, the CARES Act was enacted, which included a $349 billion loan program administered through the SBA referred to as the PPP.

Under the PPP, small businesses, eligible nonprofits and certain others can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria.

Under the terms of the PPP, loans are to be fully guaranteed by the SBA.

Congress has approved additional funding for the program since it began, most recently on December 27, 2020 as part of the 2021 Consolidated Appropriations ACT, whereby authority to make loans under the program was extended through March 31, 2021.

The Bank has participated and is participating as a lender in the PPP.

On March 27, 2020, the CARES Act established the PPP, which is administered by the SBA, to fund payroll and operational costs of eligible businesses, organizations and self-employed persons during the pandemic.

The Bank actively participated in assisting its customers with PPP funding during all phases of the program.

Because of the short timeframe between the passing of the CARES Act and the April 3, 2020 opening of the PPP, there was some ambiguity in the laws, rules and guidance regarding the operation of the program, which exposes the Company to risks relating to noncompliance with the PPP.

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In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Bank.

The ongoing COVID-19 pandemic is increasing cyber-security risks.

The ongoing COVID-19 pandemic is introducing additional risk to our information systems and security procedures, controls and policies as a result of employees, contractors and other corporate partners working remotely.

As a result of the increased remote workforce, we must increasingly rely on information technology systems that are outside our direct control, and these systems are also vulnerable to cyber-based attacks and security breaches.

The ongoing COVID-19 pandemic has increased cyber-security risks.

The ongoing COVID-19 pandemic has introduced additional risk to our information systems and security procedures, controls and policies as a result of employees, contractors and other corporate partners working remotely.

As a result of an increased remote workforce, we have increasingly relied on information technology systems that are outside our direct control, and these systems are also vulnerable to cyber-based attacks and security breaches.

In addition, since the beginning of pandemic, there has been an increase attacks by cyber criminals on businesses and individuals, utilizing interest in pandemic-related information and the fear and uncertainty caused by the pandemic to increase phishing, malware, and other cybersecurity attacks designed to trick victims into transferring sensitive data or funds, steal credentials or deploy malware that compromises information systems.

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From time to time, banking regulators change these capital adequacy guidelines.

For example, as a result of the Basel III Rules required by the Dodd-Frank Act, we are now required to satisfy additional, more stringent, capital adequacy standards than we had in the past.

For example, as a result of the Basel III Rules required by

the Dodd-Frank Act, we are now required to satisfy additional, more stringent, capital adequacy standards than we had in the past.

See “Business - Regulation and Supervision, Capital Requirements” of Item 1 above for additional information.

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Economic weakness in our geographic markets could negatively affect us.

We conduct business from offices that are located in 20 contiguous southern Indiana counties and four counties in Kentucky, from which substantially all of our customer base is drawn.

We conduct business from offices that are located in 19 contiguous southern Indiana counties and 14 counties in Kentucky, from which substantially all of our customer base is drawn.

Because of the geographic concentration of our operations and customer base, our results depend largely upon economic conditions in this area.

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Such deterioration could negatively impact customers’ ability to obtain new loans or to repay existing loans, diminish the values of any collateral securing such loans and could cause increases in the number of the Company’s customers experiencing financial distress and in the levels of the Company’s delinquencies, non-performing loans and other problem assets, charge-offs and provision for credit losses, all of which could materially adversely affect our financial condition and results of operations.

The underwriting and credit monitoring policies and procedures that we have adopted cannot eliminate the risk that we might incur losses on account of

factors relating to the economy like those identified above, and those losses could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The underwriting and credit monitoring policies and procedures that we have adopted cannot eliminate the risk that we might incur losses on account of factors relating to the economy like those identified above, and those losses could have a material adverse effect on our business, financial condition, results of operations and cash flows.

If our actual loan losses exceed our estimates, our earnings and financial condition will be impacted.

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We have also included assumptions about the severity and duration of the effects of the COVID-19 pandemic on our borrowers, their industry, and on economic conditions in general, all of which are highly uncertain and for which we have no historical experience to draw upon.

If our assumptions and judgments used to determine the allowance for credit losses prove to be incorrect or if the value of the collateral securing the loans decreases substantially, the allowance may not be adequate.

If our assumptions and judgments used to determine the allowance for credit losses prove to be incorrect, the allowance may not be adequate.

We could sustain actual loan losses that are significantly higher than the amount of our allowance for credit losses.

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In addition, we also have interest rate derivatives that reference LIBOR.

In July 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021.

In the United States, efforts to identify a set of alternative U.S.

dollar reference interest rates are ongoing, and the Alternative Reference Rate Committee has recommended the use of a Secured Overnight Funding Rate (“SOFR”).

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 the Bank’s costs to raise funds for SOFR as compared to LIBOR.

In November 2020, the LIBOR administrator published a consultation regarding its intention to delay the date on which it will cease publication of U.S.

dollar LIBOR from December 31, 2021 to June 30, 2023 for the most common tenors of U.S.

dollar LIBOR, but indicated no new contracts using U.S.

dollar LIBOR should be entered into after December 31, 2021.

Also, in November 2020, the Federal Reserve Board issued a statement supporting the release of a proposal and supervisory statements designed to provide a clear end date for U.S.

dollar LIBOR, and federal banking regulators issued a release encouraging banks to stop entering into U.S.

dollar LIBOR contracts by the end of 2021, noting that most legacy contracts will mature prior to the date LIBOR ceases to be issued.

It is uncertain at this time the extent to which those entering into financial contracts will transition to any other particular benchmark.

In any event, the implementation of a substitute index or indices for the calculation of interest rates under our loan agreements with our borrowers may cause significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept the substitute index or indices, and may result in disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute index or indices, which could have an adverse effect on our results of operations.

The consequences of a market-wide transition from LIBOR cannot be predicted.

However, they could have an adverse impact on the value of LIBOR-linked loans and other financial obligations, or extensions of credit held by or due to us.

After first announcing its intention to do so in July 2017, the United Kingdom’s Financial Conduct Authority, the authority regulating LIBOR, announced in March 2021 that, among other things:

(i) a majority of the current LIBOR rate settings would cease to exist immediately after December 31, 2021 (including the 1-week and 2-month U.S.

dollar LIBOR settings);

and (ii) the 1-month, 3-month, 6-month and 12-month U.S.

dollar LIBOR settings would cease to exist after June 30, 2023.

To identify a successor rate for U.S.

dollar LIBOR, the Alternative Reference Rates Committee (the “ARRC”), a U.S.-based group convened by the Federal Reserve Board and the Federal Reserve Bank of New York, was formed.

On July 29, 2021, the ARRC formally identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for LIBOR.

SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S.

Treasury securities, and is based on directly observable U.S.

Treasury-backed repurchase transactions.

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

At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or other reforms to LIBOR that may be enacted in the United States, the United Kingdom or elsewhere or, whether the COVID-19 outbreak will have further effect on LIBOR transition plans.

Any replacement interest rate(s) may perform differently and we may incur significant costs to transition both our borrowing arrangements and the loan agreements with our customers from LIBOR, which may have an adverse effect on our results of operations.

In addition, amending certain contracts indexed to LIBOR may require consent from impacted counterparties which could be difficult to obtain.

The financial and operational impact of the transition is unknown at this time.

As federal banking regulators required banks to stop originating new products using LIBOR by December 31, 2021, the Bank began using alternative indices, including SOFR, in originating new loans or other products following such date.

The banking and financial services business in our markets is highly competitive.

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In addition, banking and other financial services competitors (including newly organized companies) that are not currently represented by physical locations within our geographic markets could establish office facilities within our markets, including through their acquisition of existing competitors.

Financial technology, or “FinTech,” companies are also emerging in key areas of banking.

Financial technology, or

“FinTech,” companies continue to emerge in key areas of banking.

Our competitors may have substantially greater resources and lending limits than we have and may offer services that we do not or cannot provide.

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An inability to raise funds through deposits, borrowings, the sale of securities or loans and other sources could have a substantial negative effect on our liquidity.

Our access to funding sources in amounts adequate to finance our activities or the terms of which are acceptable to us could be impaired by factors that affect us specifically or the

financial services industry or economy in general.

Our access to funding sources in amounts adequate to finance our activities or the terms of which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general.

Although we have historically been able to replace maturing deposits and borrowings as necessary, we might not be able to replace such funds in the future if, among other things, our results of operations or financial condition or the results of operations or financial condition of our lenders or market conditions were to change .

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Competition for qualified employees and personnel in the financial services industry (including banking personnel, trust and investments personnel, and insurance personnel) is intense and there are a limited number of qualified persons with knowledge of and experience in our local markets.

Our success depends to a significant degree upon our ability to attract and retain qualified loan origination executives, sales executives for our trust and investment products and services, and sales executives for our insurance products and services.

Our success depends to a significant degree upon our ability to attract and retain

qualified loan origination executives, sales executives for our trust and investment products and services, and sales executives for our insurance products and services.

We also depend upon the continued contributions of our management personnel, and in particular upon the abilities of our senior executive management, and the loss of the services of one or more of them could harm our business .

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In the course of our business, we may own or foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties (including liabilities for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination), or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property.

Climate change and related legislative and regulatory initiatives may materially affect the Company’s business and results of operations.

The global business community has increased its political and social awareness surrounding the state of the global environment and the issue climate change.

Further, the U.S.

Congress, state legislatures and federal and state regulatory agencies continue to propose numerous initiatives related to climate change.

Similar and even more expansive initiatives are expected under the current administration, including potentially increasing supervisory expectations with respect to banks’ risk management practices, accounting for the effects of climate change in stress testing scenarios and systemic risk assessments, revising expectations for credit portfolio concentrations based on climate-related factors and encouraging investment by banks in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change.

The lack of empirical data surrounding the credit and other financial risks posed by climate change make it impossible to predict how specifically climate change may impact our financial condition and results of operations.

To the extent our customers experience unpredictable and more frequent weather disasters attributable to climate change, the value of real property securing the loans in our portfolios may be negatively impacted.

Additionally, if insurance obtained by our borrowers is insufficient to cover any disaster-related losses sustained to the collateral, or if insurance coverage is otherwise unavailable to our borrowers, the collateral securing our loans may be negatively impacted, which could impact our financial condition and results of operations.

Further, the effects of weather disasters attributed to climate change may negatively impact regional and local economic activity, which could lead to an adverse effect on our customers and impact the communities in which we operate.

Overall, climate change, its effects and the resulting, unknown impact could have a material adverse effect on our financial condition and results of operations.

Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to the Company’s environmental, social and governance practices may impose additional costs on the Company or expose it to new or additional risks.

Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social and governance (“ESG”) practices and disclosure.

Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions and human rights.

Increased ESG-related compliance costs for the Company as well as among our suppliers, vendors and various other parties within our supply chain 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 could

negatively impact our reputation, ability to do business with certain partners, access to capital, and our stock price.

New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure.

Risks Related to Our Operations

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While we have policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breach of our information systems, we cannot completely ensure that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed.

The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, 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.

The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in

a loss of customer business, subject us to additional regulatory scrutiny, 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.

We are dependent upon third parties for certain information system, data management and processing services and to provide key components of our business infrastructure.

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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