What changed in this filing

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Item 1A. Risk Factors

2024-03-05 compared with 2023-03-03 · 65 added, 44 removed, 261 unchanged (29% of the section changed)

4 unchanged sentences

Economic and Market Risks

We may be adversely affected by economic conditions in the local economies in which we conduct our operations, and in the United States in general, including global economic, geopolitical instability, inflationary risks and ongoing impact of the COVID-19 pandemic.

Recent Events Impacting the Financial Services Industry May Negatively Affect our Financial Condition and Results of Operation

Recent events impacting the financial services industry, including the failure of Silicon Valley Bank, Signature Bank, and First Republic Bank have resulted in decreased confidence in banks among consumer and commercial depositors, other counterparties and investors, as well as significant disruption, volatility and reduced valuations of equity and other securities of banks in the capital markets.

These events occurred during a period of rapidly rising interest rates which, among other things, has resulted in unrealized losses in longer duration securities and loans held by banks, more competition for bank deposits and may increase the risk of a potential recession.

These recent events could adversely impact the market price and volatility of the Company’s common stock.

These recent events may also result in potentially adverse changes to laws or regulations governing banks and bank holding companies or result in the impositions of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on our business.

Inability to access short-term funding or the loss of client deposits could increase our cost of funding, limit access to capital markets or negatively impact our overall liquidity or capitalization.

Moreover, we may be impacted by concerns regarding the soundness or creditworthiness of other financial institutions, which can cause substantial and cascading disruption within the financial markets and increased expenses.

In addition, the cost of resolving the recent bank failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments.

Inflationary pressures in the global economy continue to persist.

With the increases in food, energy and other commodity prices, core inflation has risen sharply over the prior two year period and has become increasingly persistent.

While inflationary pressures related to the cost of goods and services, including labor, generally have minimal direct impact on the Bank's financial condition or results of operation, such pressures do directly impact the ability of both our commercial and consumer borrowers to meet their own financial obligations as they come due, including their loan payments to the Company.

In addition, while the Federal Reserve’s moves over the 2022 and 2023 fiscal years to raise interest rates in order to quell inflation appear to be working, such rapid increases in interest rates can have the impact of reducing demand for both the Company’s consumer and commercial products, as well as impact the ability of both our commercial and consumer borrowers to meet their own financial obligations as they come due, including their loan payments to the Company.

We could experience an unexpected inability to obtain needed liquidity which could adversely affect our business, profitability, and viability as a going concern.

Liquidity measures the ability to meet current and future cash flow needs as they become due.

The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits, and to take advantage of interest rate market opportunities.

The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets, and its access to alternative sources of funds.

The bank failures in 2023 exemplify the potentially catastrophic results of the unexpected inability of insured depository institutions to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in an institution’s ability to satisfy its obligations to depositors.

We continually strive to ensure our funding needs are met by maintaining a level of liquidity through asset and liability management.

If we become unable to obtain funds when needed, it could have a material adverse effect on our business, financial condition, and results of operations.

Rising interest rates have decreased the value of the Company’s securities portfolio, and the Company would realize losses if it were required to sell such securities to meet liquidity needs.

As a result of inflationary pressures and the resulting rapid increases in interest rates over the prior two fiscal years, the trading value of previously issued government and other fixed income securities has declined significantly.

These securities make up a majority of the securities portfolio of most banks in the U.S., including the Company’s, resulting in unrealized losses embedded

in the held-to-maturity portion of U.S.

banks’ securities portfolios.

While the Company does not currently intend to sell its securities, and none of the Company's securities are classified as held-to-maturity, if the Company were required to sell securities to meet liquidity needs, it may incur losses, which could negatively impact its profitability.

Such a sale of securities, even if losses were incurred, would not further impair the Company's capital position.

While the Company has taken actions to maximize its funding sources, there is no guarantee that such actions will be successful or sufficient in the event of sudden liquidity needs.

Furthermore, while the Federal Reserve Board has announced a Bank Term Funding Program available to eligible depository institutions secured by U.S.

treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral at par, to mitigate the risk of potential losses on the sale of such instruments, there is no guarantee that such programs will be effective in addressing liquidity needs as they arise.

The proportion of our deposit account balances that exceed FDIC insurance limits may expose the Bank to enhanced liquidity risk in times of financial distress.

As of December 31, 2023, approximately 21.14% of our total deposits were not insured by the FDIC.

Uninsured deposits historically have been viewed by the FDIC as less stable than insured deposits.

According to statements made by the FDIC staff and the leadership of the federal banking agencies, customers with larger uninsured deposit account balances often are small- and mid-sized businesses that rely upon deposit funds for payment of operational expenses and, as a result, are more likely to closely monitor the financial condition and performance of their depository institutions.

As a result, in the event of financial distress, uninsured depositors historically have been more likely to withdraw their deposits.

If a significant portion of our deposits were to be withdrawn within a short period of time such that additional sources of funding would be required to meet withdrawal demands, we may be unable to obtain funding at favorable terms, which may have an adverse effect on our net interest margin.

Obtaining adequate funding to meet our deposit obligations may be more challenging during periods of elevated prevailing interest rates, such as the present, and our ability to attract depositors during a time of actual or perceived distress or instability in the marketplace may be limited.

Further, interest rates paid for non-deposit borrowings generally exceed the interest rates paid on deposits, and this spread may be exacerbated by higher prevailing interest rates.

We are constantly at risk of increased losses from fraud.

Criminals are committing fraud at an increasing rate and are using more sophisticated techniques.

In some cases, these individuals are part of larger criminal rings, which allow them to be more effective.

Such fraudulent activity has taken many forms, ranging from debit card fraud, check fraud, mechanical devices attached to ATM machines, social engineering and phishing attacks to obtain personal information, or impersonation of clients through the use of falsified or stolen credentials.

Additionally, an individual or business entity may properly identify itself, yet seek to establish a business relationship for the purpose of perpetrating fraud.

An emerging type of fraud even involves the creation of synthetic identification in which fraudsters “create” individuals for the purpose of perpetrating fraud.

Further, in addition to fraud committed directly against us, the Company may suffer losses as a result of fraudulent activity committed against third parties.

Increased deployment of technologies, such as chip card technology and multi-factor authentication, defray and reduce certain aspects of fraud;

however, criminals are turning to other sources to steal personally identifiable information, such as unaffiliated healthcare providers and government entities, in order to impersonate the consumer and thereby commit fraud.

Our primary market includes the Iowa counties of Johnson, Linn and Washington.

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The macroeconomic environment in the United States is susceptible to global events and volatility in financial markets.

For example, global demand for products continues to exceed supply during the economic recovery from the COVID-19 pandemic, creating significant inflationary pressures which, in turn, may adversely impact regional and global economic conditions, as well as the Company’s financial condition and results of operations.

As a participating lender in the Paycheck Protection Program (PPP), the Company and the Bank are subject to additional risks of litigation from the Bank’s customers or other parties regarding the Bank’s processing of loans for the PPP and risks that the Small Business Administration (SBA) may not fund some or all PPP loan guarantees.

Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP and claims related to agent fees.

The Company and the Bank may be exposed to the risk of similar litigation from both customers and non-customers that approached the Bank regarding PPP loans.

If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation.

In addition, litigation can be costly, regardless of outcome.

Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

Changing interest rates may adversely affect our profits.

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Further increases to prevailing interest rates could influence the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings.

additional and aggressive increases to the target range for the federal funds rate, combined with ongoing geopolitical instability, raise the risk of economic recession.

Moreover, additional and aggressive increases to the target range for the federal funds rate, combined with ongoing geopolitical instability, raise the risk of economic recession.

Any such downturn, especially in the regions in which we operate, may adversely affect our asset quality, deposit levels, loan demand and results of operations.

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For AFS debt securities, a decline in fair value due to credit loss results in recording an allowance for credit losses to the extent the fair value is less than the amortized cost basis.

In assessing whether the impairment of investment securities is due to credit losses, we consider the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability to retain our investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.

In assessing whether the impairment of investment securities is due to credit losses, we consider if a credit loss exists by monitoring to ensure it has adequate credit

support considering the nature of the investment, collectability or delinquency issues, the underlying financial statements of the issuers, credit ratings and subsequent changes thereto, other available relevant information, and the intent and ability to retain our investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.

Growth levels in local and national real estate markets may impact our operations and/or financial condition.

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No assurance can be given that these conditions will not directly or indirectly affect our operations.

The stock market can be volatile, and fluctuations in our operating results and other factors could cause our stock price to decline.

The stock market has experienced, and may continue to experience, fluctuations that significantly impact the market prices of securities issued by many companies.

Market fluctuations could adversely affect our stock price.

These fluctuations have often been unrelated or disproportionate to the operating performance of particular companies.

These broad market fluctuations, as well as general economic, systemic, political and market conditions, such as recessions, loss of investor confidence, or interest rate changes, may negatively affect the market price of our common stock.

Moreover, our operating results may fluctuate and vary from period to period due to the risk factors set forth herein.

As a result, period-to-period comparisons should not be relied upon as an indication of future performance.

Our stock price could fluctuate significantly in response to the impact these risk factors have on our operating results or financial position.

Regulatory and Legal Risks

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As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments.

These sources include brokered money markets and certificates of deposit, federal funds purchased, lines of credit and Federal Home Loan Bank advances.

Negative operating results or changes in industry conditions could lead to an inability to replace these additional funding sources at maturity.

These sources include brokered money markets and certificates of deposit, federal funds purchased, lines of credit, the Bank Term Funding Program through the Federal Reserve, and Federal Home Loan Bank advances.

Negative operating results or changes in industry conditions could lead to an inability to replace these additional

funding sources at maturity.

Our financial flexibility could be constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates.

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As with most financial institutions, we maintain allowances for credit losses for loans and debt securities to provide for defaults and nonperformance, which represent an estimate of expected losses over the remaining contractual lives of the loan and debt security portfolios.

This estimate is the result of our continuing evaluation of specific credit risks and loss experience, current loan and debt security portfolio quality, present economic, political and regulatory conditions, including, but not limited to, the ongoing economic impact of the COVID-19 pandemic and the related uncertainties created thereby, industry concentrations, reasonable and supportable forecasts for future conditions and other factors that may indicate losses.

This estimate is the result of our continuing evaluation of specific credit risks and loss experience, current loan and debt security portfolio quality, present economic, political and regulatory conditions, industry concentrations, reasonable and supportable forecasts for future conditions and other factors that may indicate losses.

The determination of the appropriate levels of the allowances for loan and debt security credit losses inherently involves a high degree of subjectivity and judgment and requires us to make estimates of current credit risks and future trends, all of which may undergo material changes.

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Our ability to retain the current management team is key to the successful implementation of our growth strategy.

It is equally important that we are

able to continue to attract and retain quality and community-focused managers and officers.

It is equally important that we are able to continue to attract and retain quality and community-focused managers and officers.

The unexpected loss of one of our key managers and/or officers or the inability to attract qualified personnel could have an adverse effect on our operations, financial condition and reputation.

The Company's Treasurer and Principal Financial Officer resigned in September 2022.

The Company retained an outside consultant to assist the President and CEO of the Bank in managing the responsibilities of the Principal Financial Officer position in the period before the Company's current Treasurer and Principal Financial Officer, Anthony Roetlin, was appointed in December 2022.

Labor shortages and a failure to attract and retain qualified employees could negatively impact our business, results of operations and financial condition.

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Although we have not experienced any material labor shortage to date, we have recently observed an overall tightening and increasingly competitive local labor market.

A sustained labor shortage or increased turnover rates within our employee base and also within our third-party vendors could lead to increased costs, such as increased compensation expense to attract and retain employees.

A sustained labor shortage or increased turnover rates within our employee base and also within our third-party vendors

could lead to increased costs, such as increased compensation expense to attract and retain employees.

In addition, if we are unable to hire and retain employees capable of performing at a high-level, or if mitigation measures we take to respond to a decrease in labor availability have unintended negative effects, our business could be adversely affected.

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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 operation.

The replacement of LIBOR could adversely affect the Company’s revenue or expenses and the value of those assets or obligations.

LIBOR and certain other “benchmarks” are the subject of recent national, international and other regulatory guidance and proposals for reform.

These reforms may cause such benchmarks to perform differently than in the past or have other consequences which cannot be predicted.

LIBOR is set based on interest information reported by certain banks, which may stop reporting such information in 2023.

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

While there is no consensus on what rate or rates may become accepted alternatives to LIBOR, a group of large banks, the Alternative Reference Rate Committee or ARRC, selected by the Federal Reserve Bank of New York, started in May 2018 to publish the Secured Overnight Finance Rate or SOFR as an alternative to LIBOR.

SOFR is a broad measure of the cost of

borrowing cash overnight collateralized by Treasury securities, given the depth and robustness of the U.S.

Treasury repurchase market.

At this time, it is impossible to predict whether SOFR will become an accepted alternative to LIBOR.

The manner and impact of this transition, as well as the effect of these developments on the Bank’s funding costs, loan and investment and trading securities portfolios, asset-liability management, and business, is uncertain.

We are subject to risks associated with technological changes and the resources needed to implement the changes.

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Although we employ detection and response mechanisms designed to contain and mitigate security incidents, early detection may be thwarted by persistent sophisticated attacks and malware designed to avoid detection.

While we have not been materially impacted by cyber incidents, we have been subject to other intentional cyber incidents from third parties over the last several years, including denial of service attacks which attempt to interrupt service to customers and malicious software attacks on computer systems which attempt to allow unauthorized entrance.

We also face risks related to cyber attacks and other security breaches in connection with card transactions that typically involve the transmission of sensitive information regarding our customers through various third parties.

Some of these parties have in the past been the target of security breaches and cyber attacks, and because the transactions involve third parties and environments that we do not control or secure, future security breaches or cyber attacks affecting any of these third parties could impact us through no fault of our own, and in some cases we may have exposure and suffer losses for breaches or attacks relating to them.

We also rely on numerous other third party service providers to conduct other aspects of our business operations and face similar risks relating to them.

While we conduct security assessments on our higher risk third party service providers, we cannot be sure that their information security protocols are sufficient to withstand a cyber attack or other security breach.

There can be no assurance that cyber incidents will not occur and they could occur more frequently and on a more significant scale.

We devote significant resources to implement, maintain, monitor and regularly upgrade our systems and networks with measures such as intrusion detection and prevention and firewalls to safeguard critical business applications.

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Risks Related to the Company's Common Stock

The stock market can be volatile, and fluctuations in our operating results and other factors could cause our stock price to decline.

The stock market has experienced, and may continue to experience, fluctuations that significantly impact the market prices of securities issued by many companies.

Market fluctuations could adversely affect our stock price.

These fluctuations have often been unrelated or disproportionate to the operating performance of particular companies.

Moreover, our operating results may fluctuate and vary from period to period due to the risk factors set forth herein.

As a result, period-to-period comparisons should not be relied upon as an indication of future performance.

Our stock price could fluctuate significantly in response to the impact these risk factors have on our operating results or financial position.

Our stock is thinly traded.

9 unchanged sentences

The Bank’s ability to pay dividends to the Company is subject to, among other things, its earnings, financial condition and applicable regulations, which in some instances limit the amount that may be paid as dividends.

Unresolved Staff Comments

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