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RISK FACTORS RELATED TO OUR BUSINESS
−Removed: The lingering economic impact of the COVID-19 pandemic combined with the current inflationary pressures could adversely affect our financial condition and results of operations.
−Removed: The COVID-19 pandemic caused significant economic disruption throughout the United States.
−Removed: Although the economic activity has improved and there is growth in demand for goods and services, the lingering impact the COVID-19 pandemic has created certain adverse and persistent macroeconomic consequences, including labor shortages and disruptions of global supply chain, which may continue for some time and which have contributed to rising inflationary pressures and the risk of recession.
−Removed: As a result of the lingering impact of the COVID-19 pandemic and the related adverse economic consequences, we could be subject to the following risks, among others, any of which individually or in combination with others could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:
−Removed: Demand for our products and services may decline, making it difficult to grow assets and income;
−Removed: If we have high levels of unemployment for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
−Removed: Collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
−Removed: Limitations may be placed on our ability to foreclose on properties we hold as collateral;
−Removed: Our allowance for credit losses may have to be increased if borrowers experience financial difficulties which will adversely affect our net income;
−Removed: The net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
−Removed: Our cybersecurity risks are increased if employees work remotely;
−Removed: We rely on third-party vendors for certain services and the unavailability of a critical service could have an adverse effect on us;
−Removed: FDIC premiums may increase if the FDIC experiences additional resolution costs.
Unfavorable economic conditions could adversely affect our business.
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Our market is primarily based in the Catawba Valley region of North Carolina and surrounding communities.
−Removed: Worsening economic conditions within our markets could have a material adverse effect on our financial condition, results of operations and cash flows.
+Added: Adverse economic conditions within our markets could have a material adverse effect on our financial condition, results of operations and cash flows.
Accordingly, we expect to continue to be dependent upon local business conditions as well as conditions in the local residential and commercial real estate markets we serve.
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While economic growth and business activity has been generally favorable in our market area in recent years, there can be no assurance that economic conditions will recover to pre-pandemic levels, and these conditions could worsen.
−Removed: In addition, unfavorable global economic conditions, including the effects of the COVID-19 pandemic discussed above, have had a negative impact on financial markets and could adversely impact our customers, which in turn could lead to lower business activity and higher loan delinquencies.
+Added: In addition, unfavorable global economic conditions, including the lingering effects of the COVID-19 pandemic, have had a negative impact on financial markets and could adversely impact our customers, which in turn could lead to lower business activity and higher loan delinquencies.
Weakness in any of our market areas could have an adverse impact on our earnings, and consequently our financial condition and capital adequacy.
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Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money.
−Removed: Recently, there has been a pronounced rise in inflation and the Federal Reserve has raised certain benchmark interest rates in an effort to combat this trend.
+Added: In recent years, there has been a pronounced rise in inflation and the Federal Reserve has raised certain benchmark interest rates in an effort to combat this trend.
Our customers may also be affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with us.
Recessionary conditions could result in increases in our level of nonperforming loans and/or reduce demand for our products and services, which would lead to lower revenue, higher loan losses and lower earnings.
−Removed: Recessionary conditions and/or continued negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability.
+Added: Recessionary conditions and/or negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability.
Declines in real estate values and sales volumes and increased unemployment levels may result in higher than expected loan delinquencies, increases in our levels of nonperforming and classified assets and a decline in demand for our products and services.
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These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where we operate as well as those across the United States and abroad.
−Removed: Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans and the value of the collateral securing these loans.
+Added: Increases in interest rates and/or negative economic conditions could adversely impact the ability of borrowers to repay outstanding loans and the value of the collateral securing these loans.
We seek to mitigate the risks inherent in our loan portfolio by adhering to specific underwriting practices.
−Removed: Although we believe that our underwriting criteria are appropriate for the various kinds of loans we make, we may incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts set aside as reserves in our allowance for loan losses.
+Added: Although we believe that our underwriting criteria are appropriate for the various kinds of loans we make, we may incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts set aside as reserves in our allowance for credit losses.
Our loan portfolio includes loans with a higher risk of loss.
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If the appraisal does not reflect the amount that may be obtained upon any sale or foreclosure of the property, we may not realize an amount equal to the indebtedness secured by the property.
−Removed: Our allowance for loan losses may be insufficient and could therefore reduce earnings.
+Added: Our allowance for credit losses may be insufficient and could therefore reduce earnings.
The risk of credit losses on loans varies with, among other things, general economic conditions, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the loan.
−Removed: Management maintains an allowance for loan losses based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality.
+Added: Management maintains an allowance for credit losses based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality.
Management believes it has established the allowance in accordance with U.S.
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Although management uses the best information available to make evaluations, significant future additions to the allowance may be necessary based on changes in economic and other conditions, thus adversely affecting the operating results of the Company.
−Removed: If management’s assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb future losses, or if the bank regulatory authorities require the Bank to increase the allowance for loan losses as a part of their examination process, the Bank’s earnings and capital could be significantly and adversely affected.
−Removed: For further discussion related to our process for determining the appropriate level of the allowance for loan losses, see “Allowance for Loan Losses” within “Item 7.
+Added: If management’s assumptions and judgments prove to be incorrect and the allowance for credit losses is inadequate to absorb future losses, or if the bank regulatory authorities require the Bank to increase the allowance for credit losses as a part of their examination process, the Bank’s earnings and capital could be significantly and adversely affected.
+Added: For further discussion related to our process for determining the appropriate level of the allowance for credit losses, see “Allowance for Credit Losses” within “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results and Operation” of the Annual Report, which is included in this Form 10-K as Exhibit (13).
−Removed: In addition, the measure of our allowance for loan losses is dependent on the adoption of new accounting standards.
−Removed: The FASB issued an Accounting Standards Update related to CECL, the new credit impairment model, which was implemented by the Company for reporting periods beginning on January 1, 2023.
−Removed: This new model requires financial institutions to estimate and develop a provision for credit losses at origination for the lifetime of the loan, as opposed to reserving for probable incurred losses up to the balance sheet date.
−Removed: Under the CECL model, credit deterioration will be reflected in the income statement in the period of origination or acquisition of the loan, with changes in expected credit losses due to further credit deterioration or improvement reflected in the periods in which the expectation changes.
−Removed: The CECL framework is expected to result in earlier recognition of credit losses and is expected to be significantly influenced by the composition, characteristics and quality of the Company’s loan portfolio, as well as the prevailing economic conditions and forecasts.
−Removed: The Company will initially apply the impact of the new guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of implementation.
−Removed: The CECL standard provides significant flexibility and requires a high degree of judgment with regards to pooling financial assets with similar risk characteristics and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses.
−Removed: Providing for losses over the life of the Bank’s loan portfolio is a change to the previous method of providing allowances for loan losses that are probable and incurred.
−Removed: This change may require us to increase our allowance for loan losses rapidly in future periods, and greatly increases the types of data we need to collect and review to determine the appropriate level of the allowance for loan losses.
−Removed: It may also result in even small changes to future forecasts having a significant impact on the allowance, which could make the allowance more volatile, and regulators may impose additional capital buffers to absorb this volatility.
If our non-performing assets increase, our earnings will suffer.
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Further, the resolution of non-performing assets requires the active involvement of management, which can distract them from more profitable activity.
−Removed: Finally, if our estimate for the recorded allowance for loan losses proves to be incorrect and our allowance is inadequate, we will have to increase the allowance accordingly.
+Added: Finally, if our estimate for the recorded allowance for credit losses proves to be incorrect and our allowance is inadequate, we will have to increase the allowance accordingly.
Changes in interest rates affect profitability and assets.
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In general, the larger the spread, the more the Bank earns.
−Removed: When market rates of interest change, and in particular during periods of rapid rate movements as experienced in 2022, the interest the Bank receives on its assets and the interest the Bank pays on its liabilities will fluctuate.
+Added: When market rates of interest change, and in particular during periods of rapid rate movements as experienced in 2022 and 2023, the interest the Bank receives on its assets and the interest the Bank pays on its liabilities will fluctuate.
This can cause decreases in the “spread” and can adversely affect the Bank’s income.
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This trend is likely to continue in the future.
−Removed: Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on operations, the classification of our assets and the determination of the level of allowance for loan losses.
+Added: Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on operations, the classification of our assets and the determination of the level of allowance for credit losses.
Changes in the regulations that apply to us, or changes in our compliance with regulations, could have a material impact on our operations.
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If any such challenges are made and are not resolved in our favor, they could have an adverse effect on our financial condition and results of operations.
−Removed: As discussed in Item 3.
−Removed: Legal Proceedings, the North Carolina Department of Revenue is seeking to disallow certain tax credits taken by the Bank in prior tax years from an investment made by the Bank.
−Removed: While the Bank purchased a Guaranty Agreement along with the investment, which we believe limits our potential exposure, in the event the tax credits are ultimately disallowed, there can be no assurance that the guarantor will perform under the Guaranty Agreement or that we will recover all of any of these potential losses under the Guaranty Agreement.
−Removed: This could have a material adverse effect on our results of operations and financial condition.
Changes in our accounting policies or in accounting standards could materially affect how we report our financial results and condition.
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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, results of operations, and financial condition.
−Removed: Impairment of investment securities or deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations.
−Removed: In assessing the impairment of investment securities, management considers 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 issues, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery of fair value in the near term.
+Added: Credit losses on investment securities or deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations.
+Added: In assessing the impairment of investment securities, management considers the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issues, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery of fair value in the near term.
In assessing the future ability of the Company to realize the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
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If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired and our stock price negatively affected.
−Removed: UNRESOLVED STAFF COMMENTS
−Removed: Not applicable.
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.