What changed in this filing

/stocks — the workspaceLOADING

Item 1A. Risk Factors

2023-03-10 compared with 2022-03-11 · 54 added, 82 removed, 171 unchanged (44% of the section changed)

10 unchanged sentences

The allowance for loan losses requires management to make significant estimates that affect the consolidated financial statements.

Due to the inherent nature of this estimate, management cannot provide assurance that it will not significantly increase the allowance for loan losses, which could materially and adversely affect earnings.

Due to the inherent nature of these estimates, management cannot provide assurance that it will not significantly increase the allowance for loan losses, which could materially and adversely affect earnings.

A decline in the condition of the local real estate market could negatively affect our business.

6 unchanged sentences

The Bank has a moderate concentration of credit exposure in commercial real estate, and loans with this type of collateral are viewed as having more risk of default.

As of December 31, 2021, the Bank had approximately $405,722 in loans secured by commercial real estate, representing approximately 51.5% of total loans outstanding at that date.

As of December 31, 2022, the Bank had approximately $437,888 in loans secured by commercial real estate, representing approximately 51.3% of total loans outstanding at that date.

The real estate consists primarily of multi-family housing, non-owner-operated properties and other commercial properties.

These types of loans are generally viewed as having more risk of default than residential real estate loans.

They are also typically larger than residential real estate loans and consumer loans and depend on cash flows from the owner’s business or the property to service the debt.

It may be more difficult for commercial real estate borrowers to repay their loans in a timely manner, as commercial real estate borrowers’

abilities to repay their loans frequently depends on the successful rental of their properties.

They are also typically larger than residential real estate loans and consumer loans and depend on cash flows from the owner’s business or the rental of the property to service the debt.

Cash flows may be affected significantly by general economic conditions, and a downturn in the local economy or in occupancy rates in the local economy where the property is located could increase the likelihood of default.

3 unchanged sentences

s results of operations and financial condition.

The Company’s nonperforming assets adversely affect its net income in various ways.

The Company expects to continue to incur additional losses relating to volatility in nonperforming loans. The Company does not record interest income on nonaccrual loans, which adversely affects its income and increases credit administration costs. When the Company receives collateral through foreclosures and similar proceedings, it is required to mark the related asset to the then fair market value of the collateral less estimated selling costs, which may, and often does, result in a loss.

The Company’s nonperforming assets adversely affect its net income in various ways. The Company does not record interest income on nonaccrual loans, which adversely affects its income and increases credit administration costs. When the Company receives collateral through foreclosures and similar proceedings, it is required to mark the related asset to the then fair market value of the collateral less estimated selling costs, which may, and often does, result in a loss.

An increase in the level of nonperforming assets also increases the Company’s risk profile and may impact the capital levels regulators believe are appropriate in light of such risks. The Company utilizes various techniques such as workouts and restructurings to manage problem assets. Increases in or negative adjustments in the value of these problem assets, the underlying collateral, or in the borrowers’

performance or financial condition, could adversely affect the Company’s business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and staff, which can be detrimental to the performance of their other responsibilities, including generation of new loans. There can be no assurance that the Company will avoid further increases in nonperforming loans in the future.

The Company relies upon independent appraisals to determine the value of the real estate which secures a significant portion of its loans, and the values indicated by such appraisals may not be realizable if the Company is forced to foreclose upon such loans.

5 unchanged sentences

If a default occurs on a loan secured by real estate that is less valuable than originally estimated, the Company may not be able to recover the outstanding balance of the loan and will suffer a loss.

Our loan portfolio ’

s credit risk and the risk of loan losses may increase if economic conditions worsen due to the ongoing COVID-19 pandemic.

If the COVID-19 pandemic depresses business activity, it is likely to result in a higher rate of business closures and increased job losses in the region in which we do business.

If, in response to the COVID-19 pandemic, public colleges and universities in our market area experience reduced enrollment or in-person learning, or reduced attendance at sporting events, employment levels in our area may also be adversely affected.

These factors would increase the likelihood that more of our customers would become delinquent or default on their loans.

A higher level of loan defaults could result in higher loan losses, which could adversely affect our result of operations and financial condition.

The risk of loss in our investment portfolio may increase if economic conditions worsen due to the ongoing COVID-19 pandemic or if interest rates change rapidly.

The Company holds both corporate and municipal bonds in its investment portfolio.

An economic downturn due to the COVID-19 pandemic could increase the actual or perceived risk of default by both corporate and government issuers and, in either case, could adversely affect the value of these investments.

In addition, the value of these investments could be adversely affected by a change in interest rates and related factors, including the pricing of securities.

The ongoing COVID-19 pandemic may adversely affect the Company ’

s current or future impaired loans.

The impact of the COVID-19 pandemic continues to present uncertainty and may lead to additional loans designated as impaired in future quarters. 

Cash flow assumptions associated with impaired loans measured under the cash flow method may be impacted if borrowers are further distressed by the economic impacts of the COVID-19 pandemic, resulting in lower measurements and higher funding requirements for the allowance for loan losses. 

Real estate activity in the Company’s market over the most recent 12 months has been robust. 

However, if the COVID-19 pandemic begins to negatively impact the real estate markets in which the Company’s collateral resides, the fair value of impaired loans measured using the collateral method could decline and may result in charge-offs.

The expiration of federal government aid related to the COVID-19 pandemic to assist borrowers may increase credit risk .

Federal aid from the CARES Act, the CAA and other regulations assisted borrowers during 2020 and 2021 for COVID-19 pandemic-related hardship. 

With the expiration of the aid, borrowers may face increased difficulty in servicing debt, which could result in loan losses and adversely affect the Company’s financial condition and results of operation.

If competition increases, our business could suffer, which could result in loan losses and adversely affect the Company ’

9 unchanged sentences

The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on the Company’s financial condition and results of operations.

The expected replacement or discontinuation of the London Interbank Offered Rate ( “

LIBOR ”

) as a benchmark interest rate and a transition to an alternative reference interest rate could present operational problems and result in market disruption.

The administrator of LIBOR has announced its intention to extend the publication of most tenors of LIBOR for U.S.

dollars through June 30, 2023 and ceased publishing other LIBOR tenors on December 31, 2021. 

Management cannot predict whether or when LIBOR will actually cease to be available, whether the Secured Overnight Funding Rate (“SOFR”), will become the market benchmark in its place or what impact such a transition may have on the Company’s business, financial condition and results of operations. 

The Federal Reserve, based on the recommendations of the Federal Reserve Bank of New York’s Alternative Reference Rate Committee, has begun publishing SOFR, which is intended to replace LIBOR, and has encouraged banks to transition away from LIBOR as soon as practicable.

Although SOFR appears to be the preferred replacement rate for LIBOR, it is unclear if other benchmarks may emerge or if other rates will be adopted outside of the United States.

The replacement of LIBOR also may result in economic mismatches between different categories of instruments that now consistently rely on the LIBOR benchmark.

Markets are slowly developing in response to these new rates, and questions around liquidity in these rates and how to appropriately adjust these rates to eliminate any economic value transfer at the time of transition remain a significant concern.

Transition away from the London Interbank Offered Rate ("LIBOR") to another benchmark rate could adversely affect operations.

The administrator of LIBOR announced that the most commonly used U.S.

dollar LIBOR settings would cease to be published or cease to be representative after June 30, 2023.

Management cannot predict whether or when LIBOR will actually cease to be available or what impact such a transition may have on the Company’s business, financial condition and results of operations.

The Adjustable Interest Rate (LIBOR) Act, enacted in March 2022, provides a statutory framework to replace LIBOR with a benchmark rate based on the Secured Overnight Funding Rate (“SOFR”) for contracts governed by U.S.

law that have no or ineffective fallbacks.

Although governmental authorities have endeavored to facilitate an orderly discontinuation of LIBOR, no assurance can be provided that this aim will be achieved or that the use, level, and volatility of LIBOR or other interest rates, or the value of LIBOR-based securities will not be adversely affected.

There continues to be substantial uncertainty as to the ultimate effects of the LIBOR transition, including with respect to the acceptance and use of SOFR and other benchmark rates.

The Company has a small number of loans, purchased through participation with larger banks, with attributes that are either directly or indirectly dependent on LIBOR.

19 unchanged sentences

Our information systems may experience an interruption or security breach.

We rely heavily on communications and information systems to conduct our business.

We rely heavily on communications and information systems to conduct our business.

Any failure, interruption or breach in security of these systems could result in failures or disruptions of our internet banking, deposit, loan and other systems.

3 unchanged sentences

The Company has invested in industry-accepted technologies, and annually reviews its processes and practices that are designed to protect its networks, computers and data from damage or unauthorized access.

Despite these security measures, the Company’s computer systems experienced two cyber-intrusions, one in May 2016 and one in January 2017 in which certain customer information was compromised, but which did not cause interruption to the Company’s normal operations. 

Despite these security measures, the Company’s computer systems experienced two cyber-intrusions, one in May 2016 and one in January 2017, in which certain customer information was compromised, but which did not cause interruption to the Company’s normal operations.

No losses were incurred by customers.

The Company has implemented additional security measures since the breaches.

The Company’s computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions.

A breach of any kind could compromise systems and the information stored there could be accessed, damaged or disclosed.

3 unchanged sentences

The Company experienced two cyber-intrusions, one in May 2016 and one in January 2017, in which certain customer information was compromised.

The Company has strengthened its multi-faceted approach to reduce the exposure of our systems to cyber-intrusions, strengthen our defenses against hackers and protect customer accounts and information relevant to customer accounts from unauthorized access. 

The Company has strengthened its multi-faceted approach to reduce the exposure of our systems to cyber-intrusions, enhance our defenses against hackers and protect customer accounts and information relevant to customer accounts from unauthorized access.

These tools include digital technology safeguards, internal policies and procedures, and employee training.

The Company believes its cybersecurity risk management program reasonably addresses the risk from cybersecurity attacks. 

However, it is not possible to fully eliminate exposure.

We may experience human error or have unknown susceptibilities that allow our systems to become victim to a highly-sophisticated cyber-attack. 

If hackers gain entry to our systems, they may disable other safeguards that limit loss, including limits on the number, amount and frequency of ATM withdrawals, as well as other loss-prevention or detection measures.

3 unchanged sentences

Although we assess the security of our higher risk vendors and service providers, we cannot be sure that the information security protocols of all companies we do business with are sufficient to withstand cyber-attacks or other security breaches.

Cybersecurity attacks are probable and may result in additional costs.

The Company has experienced many attempted cybersecurity attacks, of which two resulted in a breach. 

The Company estimates that the probability of future attempted cyber-attacks is high. 

To reduce the risk of loss from cyber-attacks, the Company has incurred costs related to advisory expenses, insurance premiums, system monitoring and testing, and installing new technological infrastructure and defenses. 

If the Company experiences a cyber-breach, these costs will increase and the Company will also likely incur additional litigation, reputational harm and regulatory costs.

Insurance may not cover losses from cybersecurity attacks.

The Company has invested in insurance related to cybersecurity. 

Insurance policies are necessary to protect the Company from major losses but may be written in such a way as to limit the protection from certain risks, including cyber risks. 

If the insurance carrier denies coverage of losses, the Company may litigate. 

Because of policy technicalities, litigation may not result in a favorable outcome for the Company. 

The Company has invested in insurance related to cybersecurity.

Insurance policies are necessary to protect the Company from major losses but may be written in such a way as to limit the protection from certain risks, including cyber risks.

If the insurance carrier denies coverage of losses, the Company may litigate.

Because of policy technicalities, litigation may not result in a favorable outcome for the Company.

Litigation will result in additional legal expense.

23 unchanged sentences

Regulatory capital standards may have an adverse effect on the Company ’

s profitability, lending, and ability to pay dividends on the Company ’

s securities.

s profitability, lending, and ability to pay dividends.

The Company is subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital that the Company and the Bank must maintain.

11 unchanged sentences

Such changes could also require the Company to incur additional personnel or technology costs.

Notably, guidance issued in June 2016 requires a change in the calculation of credit reserves from using an incurred loss model to using the current expected credit losses model (“CECL”).

During 2019, the standard’s effective date was delayed for the Company and other qualifying institutions until January 1, 2023.

The Company formed a management committee to prepare for the new standard.

The committee implemented data collection measures, researched forecasting resources, studied applicable loss calculations and has begun running preliminary CECL models concurrent with the incurred loss model.

To implement the standard, the Company will incur costs related to documentation, technology, training and increased audit expenses to validate the model.

Implementation could significantly impact our required credit reserves.

Other impacts to capital levels, profit and loss and various financial metrics will also result.

Notably, guidance issued in June 2016 requires a change in the calculation of credit reserves from using an incurred loss model to using the current expected credit losses model (“CECL”), effective January 1, 2023.

To implement the standard, the Company incurred costs related to documentation, technology, training and increased audit expenses to validate the model.

Adoption increased our credit reserves and reduced capital. 

Post adoption, other impacts to profit and loss and various financial metrics will also result.

The Company ’

11 unchanged sentences

In December 2021, the OCC published proposed principles for climate risk management by banking organizations with more than $100 billion in assets.

The OCC also has appointed its first ever Climate Change Risk Officer and established an internal climate risk implementation committee in order to assist with these initiatives and to support the agency’s efforts to enhance its supervision of climate change risk management. 

Similar and even more expansive initiatives are expected, including potentially increasing supervisory expectations with respect to banks’

5 unchanged sentences

Any financial liability or reputation damage could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.

We are subject to risks associated with proxy contests and other actions of activist shareholders.

In connection with the Company’s 2023 annual meeting of shareholders, Driver Management Company LLC (“Driver”) has nominated two candidates for election to the Company’s Board of Directors in opposition to two of the four nominees recommended by the Board of Directors.

Driver filed preliminary proxy materials in support of its nominees on February 3, 2023.

The Company’s aggregate expenses related to this proxy contest in excess of those normally spent for an annual meeting, and excluding salaries and wages of its regular employees and officers that have devoted time working on the proxy contest, are expected to be approximately $560.

In addition, Driver has indicated that, if it is successful in its proxy solicitation, Driver intends to seek reimbursement from the Company for the expenses Driver incurs.

The proxy contest, or related activities on the part of Driver or another shareholder, may adversely affect our business for a number of reasons, including, without limitation, the following:

Responding to proxy contests and other actions by activist shareholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees;

Perceived uncertainties as to our future direction may result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel, business partners, customers and others important to our success, any of which could negatively affect our business and our results of operations and financial condition;

If nominees advanced by activist shareholders are elected or appointed to our Board of Directors with a specific agenda, it may adversely affect our ability to effectively and timely implement our strategic plans or to realize long-term value from our assets, and this could in turn have an adverse effect on our business and on our results of operations and financial condition.

Changes in funding for local universities could materially affect our business.

19 unchanged sentences

Although the Company has business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.

In the event of a natural disaster, acts of war or terrorism, the impact of public health issues or other adverse external events, our business, services, asset quality, financial condition and results of operations could be adversely affected.

In the event of a natural disaster, acts of war or terrorism, public health issues or other adverse external events, our business, services, asset quality, financial condition and results of operations could be adversely affected.

The effects of widespread public health emergencies may negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations.

2 unchanged sentences

Any one or more of these developments could have a material adverse effect on our business, financial condition and results of operations.

The ongoing COVID-19 pandemic may adversely affect the Company ’

s business, financial condition and operations;

the extent of such impacts are highly uncertain and difficult to predict.

Global health and economic concerns relating to the COVID-19 pandemic has had a material adverse impact on the macroeconomic environment and significantly increased economic uncertainty.

The COVID-19 outbreak has adversely impacted and is likely to continue to adversely impact the Company’s workforce and operations and the operations of the Company’s customers and business partners.

In particular, the Company may experience adverse effects due to operational factors impacting the Company or its customers or business partners, including but not limited to:

decreased demand for the Company’s products and services due to economic uncertainty, volatile market conditions and temporary business closures;

credit losses resulting from financial stress experienced by the Company’s borrowers, especially those operating in industries most hard hit by government measures to contain the spread of the virus;

The economic impact of the COVID-19 pandemic and measures intended to reduce the spread of the virus could adversely affect our business, financial condition, and operations.

Global health and economic concerns relating to the COVID-19 pandemic and government actions taken to reduce the spread of the virus have significantly disrupted the macroeconomic environment in the United States.

Although the domestic and global economies have begun to recover from the COVID-19 pandemic as many health and safety restrictions have been lifted and vaccine distribution has increased, certain adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time, including labor shortages and disruptions of global supply chains. 

The growth in economic activity and in the demand for goods and services, coupled with labor shortages and supply chain disruptions, has also contributed to rising inflationary pressures and the risk of recession. 

Further, the COVID-19 pandemic could have long-lasting impacts on consumer behavior and business practices, including on remote work and business travel. 

The COVID-19 pandemic and related adverse economic consequences could cause adverse effects on the Company due to a number of operational factors impacting it or its customers or business partners, including but not limited to:

loan losses resulting from financial stress experienced by our customers;

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

the allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods or after the cessation of government aid, which will adversely affect the Company’s net income;

operational failures, disruptions or inefficiencies due to changes in the Company’s normal business practices necessitated by its internal measures to protect the Company’s employees and government-mandated measures intended to slow the spread of the virus;

possible business disruptions experienced by vendors and business partners in carrying out work that supports the Company’s operations;

a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of the cash dividend paid to the Company’s shareholders;

any financial liability, credit losses, litigation costs or reputational damage resulting from the Company’s origination of loans under the SBA’s PPP;

heightened levels of cyber and payment fraud, as cyber criminals try to take advantage of the disruption and increased online activity brought about by the COVID-19 pandemic.

The extent to which the COVID-19 pandemic impacts the Company’s business, liquidity, financial condition and operations will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, its duration and severity, the actions to contain it or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.

In addition, the rapidly changing and unprecedented nature of COVID-19 heightens the inherent uncertainty of forecasting future economic conditions and their impact on the Company’s loan portfolio, thereby increasing the risk that the assumptions, judgments and estimates used to determine the allowance for loan losses and other estimates are incorrect.

Further, the Company’s program providing loan payment extensions and interest only periods could delay or make it difficult to identify the extent of asset quality deterioration during the period of relief.

As a result of these and other conditions, the ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change, and the Company cannot predict the full extent of the impacts on its business or operations, or the local and national economy as a whole.

To the extent any of the foregoing risks or other factors that develop as a result of COVID-19 materialize, it could exacerbate the risk factors above, or otherwise materially and adversely affect the Company’s business, liquidity, financial condition and results of operations.

operational failures, disruptions, or inefficiencies due to changes in our normal business practices;

business disruptions experienced by our vendors and business partners in carrying out critical services that support our operations;

decreased demand for our products and services;

potential financial liability, loan losses, litigation costs, or reputational damage resulting from our origination of loans as a participating lender in the PPP;

heightened levels of cybersecurity risks and payment fraud due to disruption brought about by the pandemic, remote work and increased online activity.

The extent to which the COVID-19 pandemic and related economic consequences impact our business, liquidity, financial condition, and operations will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, if and when the virus can be fully controlled and abated and the extent of its lasting impacts on economic and operating conditions.

The impact of the removal of most pandemic related economic stimulus programs is also unknown. 

To the extent any of the foregoing risks or other factors that develop as a result of COVID-19 and related economic consequences materialize, it could exacerbate the other risk factors discussed in this section, or otherwise materially and adversely affect our business, liquidity, financial condition, and results of operations.

Unresolved Staff Comments

1 unchanged sentence

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