What changed in this filing

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Item 1A. Risk Factors

2024-03-15 compared with 2023-03-15 · 89 added, 82 removed, 497 unchanged (26% of the section changed)

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Risks Related to Our Business

– Geographic concentration in Colorado, Arizona, Wyoming, California, and Montana.

– Geographic concentration in Colorado, Arizona, Wyoming, Montana, and California.

– The soundness of other financial institutions could adversely affect us.

– Negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses.

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– The trust wealth management fees we receive may decrease as a result of poor investment performance, in either relative or absolute terms, which could decrease our revenues and net earnings.

– We may be adversely impacted by the transition from LIBOR as a reference rate and the uncertainty related to one or more alternative reference rates intended to replace LIBOR.

– Our allowance for loan losses may not be adequate to cover actual losses.

– Our allowance for credit losses may not be adequate to cover actual losses.

– Increased credit risk, including as a result of deterioration in economic conditions, could require us to increase our allowance for credit losses and could have a material adverse effect on our results of operations and financial condition.

– Our business and operations may be adversely affected in numerous and complex ways by external business disruptors in the financial services industry

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– We are required to make significant estimates and assumptions in the preparation of our financial statements and our estimates and assumptions may not be accurate.

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– Fraud, breaches of our information security, and cybersecurity attacks could adversely affect us.

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– We rely on customer and counterparty information, which subjects us to risks if that information is not accurate or is incomplete.

– A future pandemic could adversely impact our business and financial results.

– A future pandemic, epidemic, or highly contagious disease could adversely impact our business and financial results.

– Economic and trade sanctions against targeted foreign countries and regimes could adversely affect us.

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This summary of risk factors should be read in conjunction with the more detailed risk factors below.

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Risks Related to Our Business

Our banking, trust and wealth advisory operations are geographically concentrated in Colorado, Arizona, Wyoming California, and Montana, leading to significant exposure to those markets.

Our business activities and credit exposure, including real estate collateral for many of our loans, are concentrated in Colorado, Arizona, Wyoming, California, and Montana.

Our banking, trust and wealth advisory operations are geographically concentrated in Colorado, Arizona, Wyoming Montana, and California, leading to significant exposure to those markets.

Our business act ivities and credit exposure, including real estate collateral for many of our loans, are concentrated in Colorado, Arizona, Wyoming, Montana, and California.

As of December 31, 2023, 83.2% of the loans in our loan portfolio were made to borrowers who live in or conduct business in those states.

This geographic concentration imposes risks from lack of geographic diversification.

Difficult economic conditions, including state and local government deficits, in Colorado, Arizona, Wyoming, California, and Montana may affect our business, financial condition, results of operations and future prospects, where adverse economic developments, among other things, could affect the volume of loan originations, increase the level of nonperforming assets, increase the rate of foreclosure losses on loans and reduce the value of our loans and loan servicing portfolio.

Any regional or local economic downturn that affects Colorado, Arizona, Wyoming, California, and Montana or existing or prospective borrowers or property values in such areas may affect us and our profitability more significantly and more adversely than our competitors whose operations are less geographically concentrated.

Difficult economic conditions, including state and local government deficits, in Colorado, Arizona, Wyoming, Montana, California may affect our business, financial condition, results of operations and future prospects, where adverse economic developments, among other things, could affect the volume of loan originations, increase the level of nonperforming assets, increase the rate of foreclosure losses on loans and reduce the value of our loans and loan servicing portfolio.

Any regional or local economic downturn that affects Colorado, Arizona, Wyoming, Montana, and California or existing or prospective borrowers or property values in such areas may affect us and our profitability more significantly and more adversely than our competitors whose operations are less geographically concentrated.

This includes a sustained downturn in the oil and gas market, which is important for the general economic health of Colorado in particular.

A prolonged period of low oil prices could have a material adverse effect on our results of operations and financial condition.

The soundness of other financial institutions could adversely affect us.

The lack of soundness of other financial institutions or financial market utilities may adversely affect the Company.

The Company’s ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions.

Financial institutions are interdependent because of trading, clearing, counterparty or other relationships.

Defaults by, or rumors or questions about, one or more financial institutions or financial market utilities, or the financial services industry generally, may lead to market-wide liquidity problems and losses of client, creditor and counterparty confidence and could lead to losses or defaults by other financial institutions, or the Company.

Recent events relating to the failures of certain banking entities in March and April of 2023 have caused general uncertainty regarding the adequacy of liquidity of banks, in particular regional banks which in turn has generated significant market volatility among publicly traded bank holding companies.

Although we are not directly impacted by these recent bank failures, the resulting speed and with which news, including social media outlets, led depositors to withdraw or attempt to withdraw funds from these and other financial institutions, as well as the volatile impact to stock prices, could have a material effect on the Company’s operations.

Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses.

As of December 31, 2022 , approxi mately $1.91 billion, or 77.9%, of our t otal loans were loans with real estate as a primary or secondary component of collateral.

As of December 31, 2023, approximately $1.92 billion, or 76.1%, of our total loans were loans with real estate as a primary or secondary component of collateral.

The repayment of such loans is highly dependent on the ability of the borrowers to meet their loan repayment obligations to us, which can be adversely affected by economic downturns that can lead to (i) declines in the rents and, therefore, in the cash flows generated by those real properties on which the borrowers depend to fund their loan payments to us, (ii) decreases in the values of those real properties, which make it more difficult for the borrowers to sell those real properties for amounts sufficient to repay their loans in full, and (iii) job losses of residential home buyers, which makes it more difficult for these borrowers to fund their loan payments.

As a result, our operating results are more vulnerable to adverse changes in the real estate market than other financial institutions with more diversified loan portfolios, and we could incur losses in the event of changes in economic conditions that disproportionately affect the real estate markets.

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Real estate values in many of our markets have generally experienced periods of fluctuation over the last five years.

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Such declines and losses would have a material adverse effect on our business, financial condition and results of operations.

If real estate values decline, it is also more likely that we would be required to increase our allowance for loan losses, which would adversely affect our business, financial condition and results of operations.

If real estate values decline, it is also more likely that we would be required to increase our allowance for credit losses, which would adversely affect our business, financial condition and results of operations.

In addition, adverse weather events, including wildfires, flooding, and mudslides, can cause damages to the property pledged as collateral on loans, which could result in additional losses upon a foreclosure.

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On the other hand, increasing interest rates generally lead to increases in net interest income;

however, such increases also may result in a reduction in loan originations, declines in loan prepayment rates and reductions in the ability of borrowers to repay their current loan obligations, which could result in increased loan defaults and charge-offs and could require increases to our allowance for loan losses, thereby offsetting either partially or totally the increases in net interest income resulting from the increase in interest rates.

however, such increases also may result in a reduction in loan originations, declines in loan prepayment rates and reductions in the ability of borrowers to repay their current loan obligations, which could result in increased loan defaults and charge-offs and could require increases to our allowance for credit losses, thereby offsetting either partially or totally the increases in net interest income resulting from the increase in interest rates.

Additionally, we could be prevented from increasing the interest rates we charge on loans or from reducing the interest rates we offer on deposits due to "price" competition from other banks and financial institutions with which we compete.

Conversely, in a declining interest rate environment, our earnings could be adversely affected if the interest rates we are able to charge on loans or other investments decline more quickly than those we pay on deposits and borrowings.

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If we are unable to continue to originate residential real estate loans and sell them into the secondary market for a profit, our earnings could decrease.

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Also, when credit markets tighten due to adverse developments in specific markets or the general economy, opportunities for refinancing may become more expensive or unavailable, resulting in loan defaults.

In some cases, collateral consists of personal guarantees.

We could see increased losses as a result of insolvency of the guarantor particularly if the guarantor's financial condition is closely related to the general economic conditions of the industry of the guaranteed loan.

If our primary market areas experience an economic slowdown, these loans represent higher risk and could result in material increase in our provision for loans charged off and could require us to significantly increase our allowance for credit losses, which could have a material adverse impact on our business, financial condition, results of operations, and cash flows.

We may be subject to claims and litigation pertaining to our fiduciary responsibilities.

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Either of these results may adversely impact demand for our products and services or otherwise have a material adverse effect on our business, financial condition or results of operations.

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We may be adversely affected by the soundness of certain securities brokerage firms.

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For the year ended December 31, 2023, non-interest income represented approximately 26.5% of our total income before non-interest expense.

respect to assets under custody) and the volume of portfolio transactions, and the types of products and services used by our clients.

The level of these fees is influenced by several factors, including the mix and volume of our assets under custody and administration and our assets under management, the value and type of secu rities positions held (with respect to assets under custody) and the volume of portfolio transactions, and the types of products and services used by our clients.

In addition, our clients include institutional investors, such as mutual funds, collective investment funds, hedge funds and other investment pools, corporate and public retirement plans, insurance companies, foundations, endowments and investment managers.

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These clients also, by their nature, are often able to exert considerable market influence, and this, combined with strong competitive forces in the markets for our services, has resulted in, and may continue to result in, significant pressure to reduce the fees we charge for our services in both our asset servicing and asset management business lines.

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The trust wealth management fees we receive may decrease as a result of poor investment performance, in either relative or absolute terms, which could decrease our revenues and net earnings.

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As such, fluctuations in the equity and debt markets can have a direct impact upon our net earnings.

We may be adversely impacted by the transition from LIBOR as a reference rate and the uncertainty related to one or more alternative reference rates intended to replace LIBOR.

In 2017, the United Kingdom’s Financial Conduct Authority announced that the publication of 1-week and 2-month US dollar London Interbank Offered Rate ("LIBOR") will cease after December 31, 2021, and the publication of all other US dollar LIBOR settings will cease or be deemed unrepresentative after June 30, 2023.

This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after June 2023.

The Secured Overnight Financing Rate ("SOFR") has been identified by the Alternative Reference Rates Committee ("ARRC" a group of private-market participants convened by the Federal Reserve Board and the Federal Reserve Bank of New York) as the rate that represents best practice for use in certain new USD derivatives and other financial contracts.

To support the transition to SOFR, the ARRC developed the Paced Transition Plan, with specific steps and timelines designed to encourage adoption of SOFR.

In order to develop sufficient liquidity, the ARRC is focused on supporting the launch and usage of SOFR-based financial products in the market and creating a forward-looking term rate based on SOFR.

The language in our contracts and financial instruments that define and use LIBOR have developed over time and have various events that trigger when a successor rate to the designated rate would be selected.

If a trigger is satisfied, contracts and financial instruments often give the calculation agent (which may be us) discretion over the successor rate or benchmark to be selected.

As a result, there is considerable uncertainty as to how the financial services industry will address the discontinuance of designated rates in contracts and financial instruments or such designated rates ceasing to be acceptable reference rates.

This uncertainty could ultimately result in client disputes and litigation surrounding the proper interpretation of our LIBOR-based contracts and financial instruments.

We have a significant number of loans and borrowings with attributes that are either directly or indirectly dependent on LIBOR.

The transition from LIBOR could create considerable costs and additional risk.

Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR.

The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies.

Furthermore, failure to adequately manage this transition process with our clients could adversely impact our reputation.

Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.

Our allowance for loan losses may not be adequate to cover actual losses and t he implementation of the Current Expected Credit Loss accounting standard could require the Company to increase its allowance for credit losses and may have a material adverse effect on its financial condition and results of operations .

In accordance with regulatory requirements and GAAP, we maintain an allowance for loan losses to provide for incurred loan and lease losses and a reserve for unfunded loan commitments.

Our allowance for loan losses may not be adequate to absorb actual loan losses, and future provisions for loan losses could materially and adversely affect our operating results.

Our allowance for loan losses is based on prior experience and an evaluation of the risks inherent in our then-current portfolio.

Our allowance for credit losses may not be adequate to cover actual losses.

In accordance with regulatory requirements and GAAP, we maintain an allowance for credit losses to provide for incurred loan and lease losses and a reserve for unfunded loan commitments.

Our allowance for credit losses may not be adequate to absorb actual credit losses, and future provisions for credit losses could materially and adversely affect our operating results.

Our allowance for credit losses is based on prior experience and an evaluation of the risks inherent in our then-current portfolio.

The amount of future losses may also vary depending on changes in economic, operating and other conditions, including changes in interest rates that may be beyond our control, and these losses may exceed current estimates.

Federal and state regulators, as an integral part of their examination process, review our loans and leases and allowance for loan losses.

While we believe our allowance for loan losses is appropriate for the risk identified in our loan and lease portfolio, we may need to increase the allowance for loan losses, such increases may not be sufficient to address losses, and regulators may require us to increase this allowance even further.

Federal and state regulators, as an integral part of their examination process, review our loans and leases and allowance for credit losses.

While we believe our allowance for credit losses is appropriate for the risk identified in our loan and lease portfolio, we may need to increase the allowance for credit losses, such increases may not be sufficient to address losses, and regulators may require us to increase this allowance even further.

Any of these occurrences could have a material adverse effect on our business, financial condition, results of operations and prospects.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.

ASU 2016-13 replaces the incurred loss model with an expected loss model, which is referred to as the current expected credit loss model, or CECL.

On July 17, 2019, the FASB voted to delay CECL implementation for certain companies including smaller reporting companies ("SRCs") as defined by the SEC.

The Company is designated as a SRC with the SEC.

The proposed delay by FASB was subject to a comment period.

At the October 16, 2019 FASB meeting, the FASB voted unanimously to delay the effective date of CECL adoption for SRCs to January 1, 2023.

CECL requires a change in the model to recognize a valuation allowance based on estimated expected credit losses over the life of the portfolio, compared to the probable incurred loss model.

The change to the CECL framework will require the Company to greatly increase the data the Company must collect and review to determine the appropriate level of the allowance for credit losses.

The adoption of CECL may result in greater volatility in the level of the allowance for credit losses, depending on various factors and assumptions applied in the model, such as the forecasted

economic conditions in the foreseeable future and loan payment behaviors.

Any increase in the allowance for credit losses, or expenses incurred to determine the appropriate level of the allowance for credit losses, may have an adverse effect on the Company’s financial condition and results of operations.

Based on preliminary results, the Company expects its allowance for credit losses ("ACL") coverage ratio to be within a range of approximately 75-90 bps of total loans and 30-45 bps coverage on off-balance sheet commitments.

The Company will implement the new standard beginning January 1, 2023.

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Increased credit risk, including as a result of deterioration in economic conditions, could require us to increase our allowance for credit losses and could have a material adverse effect on our results of operations and financial condition.

The credit performance of our loan portfolios significantly affects our financial results and condition.

If the current economic environment were to deteriorate, more of our customers may have difficulty in repaying their loans or other obligations which could result in a higher level of credit losses and provision for credit losses.

We reserve for credit losses by establishing an allowance through a charge to earnings.

The amount of this allowance is based on our assessment of lifetime expected credit losses inherent in our various loan and other portfolios carried at amortized cost as well as off-balance sheet credit exposures such as undrawn commitments to lend.

The process for determining the amount of the allowance is critical to our financial results and condition.

It requires difficult, subjective and complex judgments about the future, including forecasts of economic or market conditions that might impair the ability of our borrowers to repay their loans.

We might increase the allowance because of changing economic conditions, including falling home prices and higher unemployment, lower U.S.

Gross Domestic Product ("GDP") estimates, or other factors.

For example, changes in borrower behavior or the regulatory environment also could influence recognition of credit losses in the portfolio and our allowance for credit losses.

While we believe that our allowance for credit losses was appropriate at December 31, 2023, there is no assurance that it will be sufficient to cover future credit losses.

In the event of a deterioration in economic conditions, we may be required to increase our allowance in future periods, which would reduce our earnings.

Our business and operations may be adversely affected in numerous and complex ways by external business disruptors in the financial services industry.

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New entrants may use new technologies, advanced data and analytic tools, lower cost to serve, reduced regulatory burden or faster processes to challenge traditional banks.

For example, new business models have been observed in retail payments, consumer and commercial lending, foreign exchange and low-cost investment advisory services.

While we closely monitor business disruptors and seek to adapt to changing technologies, matching the pace of innovation exhibited by new and differently situated competitors may require us and policy-makers to adapt at a greater pace.

We may experience operational challenges in connection with the adoption of or failure to adopt, new technology, such as artificial intelligence, which could result in unintended consequences or expenses as a result of the technology's limitations, our failure to use new technology effectively or at all, not fully realizing the anticipated benefits from such new technology, or the cost to implement or remedy any challenges associated with the adoption of new technology in a timely manner.

Liquidity risk could adversely affect our ability to fund operations and hurt our financial condition.

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If our ability to obtain funds from these sources becomes limited or the costs of those funds increase, whether due to factors that affect us specifically, including our financial performance, or due to factors that affect the financial services industry in general, including weakening economic conditions or negative views and expectations about the prospects, safety, soundness or security of the financial services industry as a whole, then our ability to fund our operations, maintain our financial condition and grow our banking and investment advisory and trust businesses would be harmed, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

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We may not be able to maintain a strong core deposit base or other low-cost funding sources.

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In addition, account and deposit balances may decrease when clients perceive alternative investments, such as the stock market or real estate, as providing a better risk/return tradeoff.

Furthermore, the portion of our deposit portfolio that is comprised of large uninsured deposits may be more likely to be withdrawn rapidly under adverse economic conditions.

Furthermore, the portion of our deposit portfolio that is comprised of large uninsured deposits may be more li kely to be withdrawn rapidly under adverse economic conditions.

If our clients, including our trust clients, move money out of bank deposits, into investments or to other financial institutions, we could lose a relatively low cost source of funds, increasing our funding costs and reducing our net interest income and net income.

We also have increased risks from losses of bank deposit clients due to the large deposits we hold from certain clients.

For example, as of December 31, 2022, 26.0% o f our total deposits consisted of o ur 10 lar gest depositors.

For example, as of December 31, 2023, 23.9% of our total deposits consisted of our 10 largest depositors.

Loss of any one of these deposit clients would have an outsized impact on our results of operations.

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Many of our deposit clients and clients of our private trust bank offices are individuals involved in professional vocations, such as lawyers, accountants, and doctors.

These clients are a significant source of referrals for new clients in

both the deposit and wealth management areas.

These clients are a significant source of referrals for new clients in both the deposit and wealth management areas.

If we fail to adequately serve these professional clients with our deposit services, lending, and wealth management products, this source of referrals may diminish, which could have a negative impact on our results.

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The success of our business depends on achieving our strategic objectives, including through acquisitions which may not increase our profitability and may adversely affect our future operating results.

Since we commenced our banking business in 2004, we have grown our banking franchise and now hav e nineteen locations in Colorado, Arizona, Wyoming, California and Montana including a centralized operations center in downtown Denver.

Since we commence d our banking business in 2004, we have grown our banking franchise and now have eighteen locations in Colorado, Arizona, Wyoming, Montana, and California including a centralized operations center in downtown Denver.

We plan to continue to grow our banking business both organically and through acquisitions of other banks and financial service providers, which may include entry into new markets.

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• Acquisitions we might consummate in the future may prove not to be accretive to or may reduce our earnings if we do not realize anticipated cost savings, or if we incur unanticipated costs in integrating the acquired businesses into our operations or if a substantial number of the clients of any of the acquired businesses move their business to our competitors;

• Such expansion efforts will divert management time and effort from our existing banking operations, which could adversely affect our future financial performance;

• Such expansion efforts will divert management time and effort from our existing banking operations, which could adversely affect ou r future financial performance;

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• Additional capital which we may need to support our growth or the issuance of shares in any acquisitions will be dilutive of the investments that our existing shareholders have in the shares of our common stock that they own and in their respective percentage ownership interests they have in the Company.

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In addition, our ability to successfully attract and retain investment advisory and wealth management clients is dependent on our ability to compete with competitors’ investment products, level of investment performance, client services and marketing and distribution capabilities.

If we are not successful in retaining existing and attracting new

investment management clients, our business, financial condition, results of operations and prospects may be materially and adversely affected.

If we are not successful in retaining existing and attracting new investment management clients, our business, financial condition, results of operations and prospects may be materially and adversely affected.

We may not be successful in implementing our internal growth strategy or be able to manage the risks associated with our anticipated growth through opening new boutique private trust bank offices, which could have a material adverse effect on our business, financial condition and results of operations.

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Failure to adequately manage the risks associated with our anticipated growth, including growth through creating new boutique private trust bank offices, could have a material adverse effect on our business and results of operations.

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We may be required to recognize a significant charge to earnings if our goodwill or other intangible assets become impaired, which could have a material adverse effect on our financial condition and results of operations.

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The assessment of each reporting unit compares the aggregate fair value to its carrying value, along with several valuation assumptions and methods in order to determine if any impairment was triggered as of the measurement date.

If the qualitative assessment indicates that it is more likely than not that our goodwill is impaired, the Company performs a quantitative assessment to determine whether and what amount of goodwill is impaired.

The quantitative assessment requires comparison of the fair value of the individual reporting unit to its carrying value, including goodwill.

If the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not impaired and no further analysis is necessary.

If the carrying value of the reporting unit exceeds the fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

Notwithstanding the foregoing, the results of impairment testing on our intangible assets will have no impact on our tangible book value or regulatory capital levels.

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The preparation of our consolidated financial statements in conformity with GAAP requires our management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of income and expense during the reporting periods.

Critical estimates are made by management in determining, among other things, the allowance for loan losses, amounts of impairment of assets, fair values, intangibles, and valuation of income taxes.

Critical estimates are made by management in determining, among other things, the allowance for credit losses, amounts of impairment of assets, fair values, intangibles, and valuation of income taxes.

If our underlying estimates and assumptions prove to be incorrect, our financial condition and results of operations may be materially adversely affected.

Additionally, the adoption of CECL methodology for determining our allowance for credit losses in 2023 is expected to increase the complexity, and associated risk, of the analysis and processes relying on management judgment.

Additionally, the adoption of CECL methodology for determining our allowance for credit losses in 2023 has increased the complexity, and associated risk, of the analysis and processes relying on management judgment.

The occurrence of fraudulent activity, breaches of our information security, and cybersecurity attacks could adversely affect our ability to conduct our business, manage our exposure to risk or expand our businesses, result in the disclosure or misuse of confidential or proprietary information, increase our costs to maintain and update our operational and security systems and infrastructure, and adversely impact our results of operations, liquidity and financial condition, as well as cause legal or reputational harm.

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Our industry has seen increases in electronic fraudulent activity, hacking, security breaches, sophisticated social engineering and cyber-attacks within the financial services industry, including in the commercial banking sector, as cyber-criminals have been targeting commercial bank and brokerage accounts on an increasing basis.

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Our business is highly dependent on the security and efficacy of our infrastructure, computer and data management systems, as well as those of third parties with whom we interact or on whom we rely.

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Additionally, interruptions in service and security breaches could damage our reputation, lead existing clients to terminate their business relationships with us, make it more difficult for us to attract new clients and subject us to additional regulatory scrutiny and possibly financial liability, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects.

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Our ability to attract and retain clients and key associates could be adversely affected if our reputation is harmed.

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Our financial results could be adversely affected if the financial statements, collateral value or other financial information provided by clients or counterparties are incorrect.

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The risk of another pandemic could adversely impact our business and financial results.

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For example, loan origination could be delayed due to the limited availability of real estate appraisers for the collateral.

closings could be delayed related to reductions in available staff in recording offices or the closing of courthouses in certain counties, which slows the process for title work, mortgage and UCC filings in those counties.

Loan closings could be delayed related to reductions in available staff in recording offices or the closing of courthouses in certain counties, which slows the process for title work, mortgage and UCC filings in those counties.

If the third party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.

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• Interest Rate Risk .

Our net interest income, lending activities, deposits, hedging activities, and profitability could be negatively affected by volatility in interest rates caused by inflation, recession and other economic impacts stemming from a pandemic.

Throughout 2022, the Federal Reserve increased the federal funds rate seven times by a total of 425 bps from the beginning of the year rate of 0.25% to the ending rate of 4.50% at December 31, 2022.

Throughout 2023, the Federal Reserve increased the federal funds rate four times by a total of 100 basis points from the beginning of the year rate of 4.50% to the ending rate of 5.50% at December 31, 2023.

The large and frequent rate increases have increased our funding costs and negatively affected market risk mitigation strategies.

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The financial services industry is highly regulated, and legislative or regulatory actions taken now or in the future may have a significant adverse effect on our operations.

The financial services industry is extensively regulated and supervised under both federal and state laws and regulations that are intended primarily to protect clients, depositors, the FDIC deposit insurance fund, and the banking system as a whole, not our shareholders.

We are subject to the regulation and supervision of the Federal Reserve, the FDIC and the CDB.

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Failure to comply with any such laws, regulations or regulatory policies could result in sanctions by regulatory agencies, restrictions on our business activities, civil money penalties or damage to our reputation, all of which could adversely affect our business, results of operations, financial condition or prospects.

We expect that the Biden Administration will seek to implement a regulatory reform agenda that is significantly different than that of the Trump Administration.

This reform agenda could include a heightened focus on fair lending, the regulation of loan portfolios and credit concentrations to borrowers impacted by climate change, heightened scrutiny on Bank Secrecy Act and AML requirements, topics related to social equity, executive compensation, and increased capital and liquidity, as well as limits on share buybacks and dividends.

In addition, mergers and acquisitions could be dampened by increased antitrust scrutiny.

We also expect reform proposals for the short-term wholesale markets.

It is too early for us to assess which, if any of these policies, would be implemented and what their impact on our business would be.

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Federal and state banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any supervisory actions which we are, or may become, subject to as a result of such examinations may adversely affect us.

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The level of our commercial real estate loan portfolio may subject us to heightened regulatory scrutiny.

The FDIC and the Federal Reserve have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending.

The FDIC and the Federal Reserve have promulgated joint guidance on sound risk management practices for fi nancial institutions with concentrations in commercial real estate lending.

Under the guidance, a financial institution that is actively involved in commercial real estate lending should perform a risk assessment to identify potential concentrations in commercial real estate lending.

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In such an instance, management should employ heightened risk management practices, including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing.

As of December 31, 2022, o ur CRE 1 Concentration level was 114.3% and our CRE 2 Concentration level was 196.8%.

W e may, at some point, be considered to have a concentration in the future, or our risk management practices may be found to be deficient, which could result in increased reserves and capital costs as well as potential regulatory enforcement action.

As of December 31, 2023, our CRE 1 Concentration level was 127.5% and our CRE 2 Concentration level was 206.1% We may, at some point, be considered to have a concentration in the future, or our risk management practices may be found to be deficient, which could result in increased reserves and capital costs as well as potential regulatory enforcement action.

We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.

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The Department of Justice, the CFPB and other federal agencies are responsible for enforcing these laws and regulations.

A successful regulatory

challenge to an institution’s performance under the Community Reinvestment Act or fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines.

A successful regulatory challenge to an institution’s performance under the Community Reinvestment Act or fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines.

Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation.

Any such actions could have a material adverse effect on our business, financial condition, results of operations and prospects.

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We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

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Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory or governmental investigations or actions, litigation, fines, sanctions and damage to our reputation, which could have a material adverse effect on our business, financial condition or results of operations.

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We can be subject to legal and regulatory proceedings, investigations and inquiries related to conduct risk.

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For example, the U.S.

Department of Justice, or the DOJ, conditions the granting of cooperation credit in civil and criminal investigations of corporate wrongdoing on the company involved having provided to investigators all relevant facts relating to the individuals responsible for the alleged misconduct.

Department of Justice ("DOJ"), conditions the granting of cooperation credit in civil and criminal investigations of corporate wrongdoing on the company involved having provided to investigators all relevant facts relating to the individuals responsible for the alleged misconduct.

The complexity of the federal and state regulatory and enforcement regimes in the U.S., means that a single event or issue may give rise to a large number of overlapping investigations and regulatory proceedings, either by multiple federal and state agencies in the U.S.

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Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause the price of our common stock to decline.

The obligations associated with being a public company require significant resources and management attention, which will increase our costs of operations and may divert focus from our business operations.

The obligations associated with being a public company require significant resources and management attention, which increases our costs of operations and may divert focus from our business operations.

As a public company, we face increased legal, accounting, administrative and other costs and expenses that we did not incur as a private company, particularly after we no longer qualify as an emerging growth company.

We expect to incur substantial costs related to operating as a public company, and these costs may be higher when we no longer qualify as an emerging growth company.

We expect to incur substantial costs related to operating as a public company, and these costs may be higher now that we no longer qualify as an emerging growth company.

We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which requires that we file annual, quarterly and current reports with respect to our business and financial condition and proxy and other information statements, and the rules and regulations implemented by the SEC, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Act, the PCAOB and the Nasdaq Global Select Market, each of which imposes additional reporting and other obligations on public companies.

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We anticipate that these costs will materially increase our general and administrative expenses and such increases will reduce our profitability.

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If we fail to maintain effective internal control over financial reporting, we may not be able to report our financial results accurately and timely.

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As a public company, we are required to make annual assessments of the effectiveness of our internal control over financial reporting.

In addition, when we cease to be an emerging growth company under the JOBS Act, our independent registered public accounting firm will be required to report on the effectiveness of our internal control over financial reporting.

In addition, we ceased to be an emerging growth company under the JOBS Act in 2023.

Beginning in 2023, our independent registered public accounting firm was required to report on the effectiveness of our internal control over financial reporting.

A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the Company’s financial reporting.

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Our management and board of directors have significant control over our business.

As of December 31, 2022, our directors and executive officers beneficially owned an aggrega te of 1,671,775 shares, or approxim ately 17.4% of our shares of common stock.

As of December 31, 2023, our directors and executive officers beneficially owned an aggregate of 1,713,839 shares, or approximately 17.8% of our shares of common stock.

Consequently, our management and board of directors may be able to significantly affect our affairs and policies, including the outcome of the election of directors and the potential outcome of other matters submitted to a vote of our shareholders, such as mergers, the sale of substantially all of our assets and other extraordinary corporate matters.

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We may issue new debt securities, which would be senior to our common stock and may cause the market price of our common stock to decline.

We have issued $18.0 million aggregate principal amount of subordinated notes due 2030, $15.0 million due 2031 a nd $20.0 milli on due 2032.

We have issued $18.0 million aggregate principal amount of subordinated notes due 2030, $15.0 million due 2031 and $20.0 million due 2032.

In the future, we may increase our capital resources by making offerings of debt or equity securities, which may include senior or additional subordinated notes, series of preferred shares or common shares.

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Preferred shares and debt, if issued, have a preference on liquidating distributions or a preference on dividend or interest payments that could limit our ability to make a distribution to the holders of our common stock.

Future issuances and sales of parity preferred stock, or the perception that such issuances and sales could occur, may also cause prevailing market prices for the series of preferred stock and our common stock to decline and may adversely affect our ability to raise additional capital in the financial markets at times and prices favorable to us.

Future issuances and sales of parity preferred stock, or the perception that such issuances and sales could occur, may also cause prevailing market prices for the series of preferred stock and our common stock to decline an d may adversely affect our ability to raise additional capital in the financial markets at times and prices favorable to us.

Further issuances of our common stock could be dilutive to holders of our common stock.

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Our common stock is subordinate to our existing and future indebtedness, and is effectively subordinated to all the indebtedness and other non-common equity claims against our subsidiaries.

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If required payments on our subordinated debentures are not made or are deferred, or dividends on any preferred stock we may issue are not paid, we will be prohibited from paying dividends on our common stock.

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Our corporate organizational documents and provisions of federal and state law to which we are subject contain certain provisions that could have an anti-takeover effect and may delay, make more difficult or prevent an attempted acquisition that you may favor or an attempted replacement of our board of directors or management.

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The issuance of any shares of our common stock in the future

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also would, and equity-related securities could, dilute the percentage ownership interest held by shareholders prior to such issuance.

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Increased market volatility may materially and adversely affect the market price of our common stock, which could make it difficult to sell your shares at the volume, prices and times desired.

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