What changed in this filing

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Item 1A. Risk Factors

2024-03-29 compared with 2023-03-31 · 125 added, 150 removed, 168 unchanged (62% of the section changed)

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Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included and incorporated by reference in this report.

In addition to the risks and uncertainties described

below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition, capital levels, cash flows, liquidity, results of operations and prospects.

In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition, capital levels, cash flows, liquidity, results of operations and prospects.

The market price of our common stock could decline significantly due to any of these identified or other risks, and you could lose some or all of your investment.

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A return of recessionary conditions or adverse economic conditions in our market areas may reduce our rate of growth, affect our customers' ability to repay loans and adversely impact our business, financial condition, and results of operations.

A deterioration in economic conditions in the market areas we serve as a result of inflation, a recession, the effects of COVID-19 variants or other factors could result in the following consequences, any of which could have a material adverse effect on our business, financial condition and results of operations:

A deterioration in economic conditions in the market areas we serve as a result of inflation, a recession,

or other factors could result in the following consequences, any of which could have a material adverse effect on our business, financial condition and results of operations:

• demand for our products and services may decline;

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Future changes in interest rates could reduce our profits and affect the value of our assets and liabilities .

Net income is the amount by which net interest income and non-interest income exceed non-interest expense, the provision for loan and lease losses and taxes.

Net interest income makes up a majority of our net income and is based on the difference between the interest income we earn on interest-earning assets, such as loans and securities, and the interest expense we pay on interest-bearing liabilities, such as deposits and borrowings.

Our net income is primarily derived from the excess of net interest income and non-interest income over non-interest expenses, provisions for credit losses, and taxes.

The core component of our net income is driven by net interest income, which centers on the variance between the interest income accrued from interest-earning assets, such as loans and securities, and the interest expense incurred on interest-bearing liabilities, including deposits and borrowings.

The yields we earn on our assets and the rates we pay on our liabilities are generally fixed for a contractual period of time.

Like many financial institutions, our liabilities generally have shorter contractual maturities than our assets.

This imbalance can create significant earnings volatility because market interest rates change over time.

In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities.

In a period of rising interest rates, the interest income we earn on our assets may not increase as rapidly as the interest we pay on our liabilities.

A decline in interest rates results in increased prepayments of loans and mortgage-backed and related securities as borrowers refinance their debt to reduce their borrowing costs.

This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities.

Furthermore, an inverted interest rate yield curve, where short-term interest rates (which are usually the rates at which financial institutions borrow funds) are higher than long-term interest rates (which are usually the rates at which financial institutions lend funds for fixed-rate loans) can reduce a financial institution’s net interest margin and create financial risk for financial institutions that originate longer-term, fixed-rate mortgage loans.

At December 31, 2022, 41.5% of our loan and lease portfolio consisted of fixed-rate loans and leases.

As is the case with many banks our emphasis on increasing core deposits has resulted in an increasing percentage of our deposits being comprised of deposits bearing no or a relatively low rate of interest and having a shorter duration than our assets.

At December 31, 2022, we had $314.3 million in certificates of deposit that mature within one year and $544.5 million in noninterest bearing, NOW checking, savings and money market accounts.

We would incur a higher cost of funds to retain these deposits in a rising interest rate environment.

If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected.

Any substantial prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations.

Changes in the level of interest rates also may negatively affect the value of our assets and liabilities and ultimately affect our earnings.

This mismatch exposes us to significant earnings volatility as market interest rates fluctuate.

Shifts in interest rates can also impact the average lifespan of loans and mortgage-backed securities.

In periods of rising interest rates, the growth rate of interest income from our assets might lag behind the accelerating interest expenses on liabilities.

Conversely, declining interest rates can trigger increased loan prepayments and mortgage-backed security redemptions as borrowers seek lower borrowing costs through refinancing.

This introduces reinvestment risk, where the challenge lies in reinvesting prepayments at rates comparable to those initially earned on the prepaid loans or securities.

Moreover, an inverted interest rate yield curve, wherein short-term interest rates (which are usually the rates at which financial institutions borrow funds) surpass long-term rates (which are usually the rates at which financial institutions lend funds for fixed-rate loans), can compress a financial institution's net interest margin.

This occurrence poses financial risks, particularly for institutions that originate longer-term, fixed-rate mortgage loans.

As of December 31, 2023, approximately 43.9% of our loan and lease portfolio consisted of fixed-rate loans and leases, potentially exposing us to these risks.

As of December 31, 2023, our deposit composition included $349.6 million in certificates of deposit maturing within one year and $523.0 million in noninterest-bearing, NOW checking, savings, and money market accounts.

In an increasing interest rate environment, retaining these deposits could lead to a higher cost of funds.

Should the interest rates associated with our deposits and borrowings increase at a faster pace than the rates received from loans and other investments, our net interest income and overall earnings might be adversely affected.

A sustained and substantial change in market interest rates could significantly impact our financial condition, liquidity, and operational results.

Furthermore, fluctuations in interest rates may adversely affect the valuation of our assets and liabilities, ultimately affecting our earnings.

Inflationary pressures and rising prices may affect our results of operations and financial condition.

Inflation has risen sharply since the end of 2021 and throughout 2022 at levels not seen for over 40 years.

Inflationary pressures are currently expected to remain elevated throughout 2023.

Small to medium-sized businesses may be impacted more during periods of high inflation as they are not able to leverage economics of scale to mitigate cost pressures compared to larger businesses.

Consequently, the ability of our business customers to repay their loans may deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact our results of operations and financial condition.

Furthermore, a prolonged period of inflation could cause wages and other costs to the Company to increase, which could adversely affect our results of operations and financial condition.

The economic impact of the COVID-19 pandemic could continue to affect our financial condition and results of operations.

The COVID-19 pandemic could continue to pose risks and could harm our business, our results of operations and the prospects of the Company.

The COVID-19 pandemic has adversely impacted the global and national economy and certain industries and geographies in which our clients operate.

Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on the business of the Company, its clients, employees and third-party service providers.

The extent of such impact will depend on future developments, which are highly uncertain.

Additionally, the responses of various governmental and nongovernmental authorities and consumers to the pandemic may have material long-term effects on the Company and its clients which are difficult to quantify.

We could be subject to a number of risks as the result of the continuing COVID-19 pandemic and COVID 19 variants, any of which could have a material, adverse effect on our business, financial condition, liquidity, results of operations, ability to execute our growth strategy and ability to pay dividends.

These risks include, but are not limited to, changes in demand for our products and services;

increased loan losses or other impairments in our loan portfolios and increases in our allowance for loan losses;

a decline in collateral for our loans, especially real estate;

unanticipated unavailability of employees;

increased cyber security risks as employees work remotely;

a prolonged weakness in economic conditions resulting in a reduction of future projected earnings could necessitate a valuation allowance against our current outstanding deferred tax assets and increased costs as the Company and our regulators, customers and vendors adapt to evolving pandemic conditions.

Inflation has surged markedly since the close of 2021 and continued its ascent throughout 2022, marking the highest levels experienced in over four decades.

Inflationary pressures persisted at elevated rates through 2023, creating challenges for businesses, particularly small to medium-sized enterprises that lack the scale advantages enjoyed by larger corporations.

This discrepancy in leveraging economies of scale may intensify cost pressures for smaller businesses.

The heightened inflationary environment could potentially impact our business customers' ability to repay loans, especially among those facing swift deteriorations in financial conditions.

Consequently, our operational and financial standings

may face adverse effects.

Moreover, a sustained period of inflation holds the potential to drive up wages and other expenses for the Company, further posing risks to our operational performance and financial health.

Considering the continued inflationary landscape and its associated impacts, our business outlook could be significantly affected.

Risks Related to Our Business

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These loans involve credit risks that could adversely affect our financial condition and results of operations.

At December 31, 2022, our commercial real estate, multi-family real estate and commercial and industrial loans totaled $523.4 million, or 53.7% of our total loans and leases.

While these types of loans are potentially more profitable than residential mortgage loans, they are generally more sensitive to regional and local economic conditions, making loss levels more difficult to predict.

These loans also generally have relatively large balances to single borrowers or related groups of borrowers.

Given their larger balances and the complexity of the underlying collateral, commercial and multi-family real estate and commercial and industrial loans generally have more risk than the one- to four-family residential real estate loans we originate.

Because the repayment of these types of loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment can be affected by factors outside the borrower's control, such as adverse conditions in the real estate market or the economy, disruptions in supply chains, or change in government regulations.

In recent years, commercial real estate markets have been experiencing substantial growth, and increased competitive pressures have contributed significantly to historically low capitalization rates and rising property values.

Furthermore, commercial real estate markets have been particularly impacted by the economic disruption resulting from the COVID-19 pandemic.

The COVID-19 pandemic has also been a catalyst for the evolution of various remote work options which could impact the long-term performance of some types of office properties within our commercial real estate portfolio.

Accordingly, the federal banking regulatory agencies have expressed concerns about weaknesses in the current commercial real estate market.

Further, unlike residential mortgage loans, commercial and industrial loans may be secured by collateral other than real estate, such as inventory and accounts receivable, the value of which may depreciate over time, may be more difficult to appraise or liquidate and may be more susceptible to fluctuation in value at default.

Failures in our risk management policies, procedures and controls could adversely affect our ability to manage this portfolio going forward and could result in an increased rate of delinquencies in, and increased losses from, this portfolio, which, accordingly, could have a material adverse effect on our business, financial condition and results of operations.

As of December 31, 2023, our portfolio included commercial real estate, multi-family real estate, and commercial and industrial loans totaling $595.8 million, constituting approximately 53.8% of our total loans and leases.

While these loan types typically offer higher potential profitability compared to residential mortgage loans, they inherently carry heightened sensitivity to regional and local economic conditions, posing challenges in accurately forecasting potential losses.

Further, these loans often involve substantial balances granted to individual borrowers or related groups, elevating their risk profile, particularly when considering the complexity of the underlying collateral.

Commercial and multi-family real estate, as well as commercial and industrial loans, entail higher risk levels compared to our one- to four-family residential real estate loans.

The repayment of such loans depends significantly on the effective management and operation of borrowers’ properties or related businesses.

Factors outside the borrower’s control, including adverse market conditions, economic downturns, supply chain disruptions, or shifts in government regulations, among other factors, can significantly impact the repayment ability of these loans.

Recent years have witnessed substantial growth in commercial real estate markets, compounded by intensified competitive pressures that have led to historically low capitalization rates and surging property valuations.

The economic disruption spurred by the COVID-19 pandemic has particularly affected commercial real estate markets.

Additionally, the pandemic has accelerated the adoption of remote work options, potentially influencing the long-term performance of certain office properties within our commercial real estate portfolio.

Moreover, the federal banking regulatory agencies have raised concerns about vulnerabilities within the current commercial real estate market, recognizing the risks associated with these assets.

Unlike residential mortgage loans, commercial and industrial loans may be backed by collateral beyond real estate, such as inventory and accounts receivable.

The valuation and liquidation of such collateral may pose challenges and are subject to fluctuations in value, especially during defaults.

Failures in our risk management policies, procedures, and controls could impede our ability to effectively manage this portfolio, potentially leading to increased delinquencies and higher losses, thereby materially impacting our business, financial condition, and operational performance.

We have focused on growing our construction and development loan portfolio in recent years which adds additional risks to our loan portfolio.

Construction and development loans totaled $139.9 million, or 14.4% of total loans, as of December 31, 2022, of which $127.0 million were commercial construction loans and $12.9 million were residential real estate construction loans, compared to total construction and development loans of $58.4 million, or 7.8% of total loans, at December 31, 2020.

Construction lending generally involves greater credit risk than long-term financing on improved, owner-occupied real estate.

In the event a loan is made on property that is not yet approved for the planned development or improvements, there is a risk that necessary approvals will not be granted or will be delayed.

Risk of loss on a construction loan also depends upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions.

If the estimate of construction cost is inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property.

Moreover, if the estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property.

Construction loans also carry the risk that construction will not be completed on time in accordance with specifications and projected costs.

In addition, repayment of these loans can be dependent on the sale or rental of the property to third parties, and the ultimate sale or rental of the property may not occur as anticipated.

Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold, which complicates the process of working with our problem construction loans.

Further, in the case of speculative construction loans, there is the added risk associated with the borrower obtaining a take-out commitment for a permanent loan.

Loans on land under development or held for future construction also pose additional risk because of the lack of income production by the property and the potential illiquid nature of the collateral.

Other risks may include the fraudulent diversion of construction funds, the filing of mechanics liens by contractors, subcontractors or suppliers, or the contractor’s failure to complete the construction of the project.

Our portfolio of loans with a higher risk of loss is increasing and the unseasoned nature of our commercial loan portfolio may result in errors in judging its collectability, which may lead to additional provisions for loan losses or charge-offs, which would hurt our profits.

As of December 31, 2023, our construction and development loans totaled $157.8 million, accounting for approximately 14.2% of our total loan portfolio.

This comprises $148.5 million in commercial construction loans and $9.3 million in residential real estate construction loans, reflecting a substantial increase from the $58.4 million, constituting 7.8% of total loans, reported at December 31, 2020.

Engaging in construction lending inherently carries higher credit risk compared to long-term financing for improved, owner-occupied real estate.

Loans granted for properties not yet approved for planned development or improvements pose the risk of potential denials or delays in necessary approvals.

Additionally, the risk of loss on a construction loan heavily relies on the accuracy of initial property value estimates upon completion compared to the estimated construction costs (inclusive of interest) and other assumptions.

Inaccurate cost estimates may necessitate additional fund disbursements beyond the committed amount to protect the property's value.

Moreover, misjudgment in estimating the completed project's value may result in the borrower holding a property insufficient to fully repay the construction loan upon its sale.

Delays or cost overruns in construction can compound risks, especially when repayments rely on property sales or rentals to third parties, which may not transpire as anticipated.

The sale of properties under construction is often challenging and typically requires completion for successful transactions, complicating the handling of problematic construction loans.

Speculative construction loans carry additional risks, including the borrower's ability to secure a take-out commitment for a permanent loan.

Loans associated with undeveloped land or future construction also present added risks due to the lack of

income generation from the property and its potential illiquid nature as collateral.

Furthermore, various risks, such as fraudulent diversion of construction funds, mechanics' liens filed by contractors, subcontractors, or suppliers, and potential contractor failures in completing projects, contribute to the complexity and uncertainties associated with construction and development loans.

Our portfolio of loans with a higher risk of loss is increasing and the unseasoned nature of such loans could lead to misjudgments in collectability, triggering additional provisions or charge-offs, impacting our profits.

Our commercial loan portfolio, which includes commercial and multi-family real estate loans, commercial and industrial loans and construction loans, has increased to $753.6 million, or 68.0% of total loans and leases, at December 31, 2023 from $226.9 million, or 48.5% of total loans and leases, at December 31, 2016.

A large portion of our commercial loan portfolio is unseasoned, meaning they were originated recently.

A large portion of our commercial loan portfolio is unseasoned, meaning loans were originated recently.

Our limited experience with these borrowers does not provide us with a significant payment history pattern with which to judge future collectability.

Further, these loans have not been subjected to unfavorable economic conditions.

Further, these loans may not have been subjected to unfavorable economic conditions.

As a result, it is difficult to predict the future performance of this part of our loan portfolio.

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None of our relationships are exclusive and any may be terminated at any time.

During 2022, of our total $70.3 million in lease originations, the top five brokers/third party originators accounted for approximately 50.3% of our total volume of lease originations, one of whom accounted for approximately 15.6% of our total volume of lease originations.

During 2023, of our $89.7 million in lease originations, the top five brokers/third party originators accounted for approximately 45.6% of our total volume of lease originations, one of whom accounted for approximately 13.3% of our total volume of lease originations.

At December 31, 2023, our top 25 brokers/third party originators collectively accounted for 81.7% of our total direct financing lease portfolio, with our largest broker/third party originator accounting for 10.9% of the portfolio.

If our highest producing brokers/third party originators cease to do business with us, or if their customers cease to do business with them, and we or they are unable to find alternative customers with comparable financing needs, we may experience decreased leasing volume and our revenues may decline as a result, which may materially and adversely affect our business, financial condition and results of operations.

Losing top brokers or third-party originators, or their customers, without finding comparable alternatives, could decrease leasing volume, leading to potential revenue decline, materially impacting our business, financial condition, and results of operations.

Our leasing business exposes us to different credit risks than our real estate secured lending.

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A return of recessionary conditions or adverse economic conditions within these market areas may reduce our leasing volume and affect our customers' ability to make lease payments, resulting in higher defaults, which may result in our inability to fully recover our investment in the related equipment and adversely impact our business, financial condition, and results of operations.

If our allowance for loan and lease losses is not sufficient to cover actual losses, our earnings could decrease.

We periodically review our allowance for loan and lease losses for adequacy considering economic conditions and trends, collateral values and credit quality indicators, including past charge-off experience and levels of past due loans and nonperforming assets.

We cannot be certain that our allowance for loan and lease losses will be adequate over time to cover credit losses in our portfolio because of unanticipated adverse changes in the economy, market conditions or events adversely affecting specific customers, industries or markets, and changes in borrower behaviors.

If our allowance for credit losses is not sufficient to cover actual losses, our earnings could decrease.

We periodically review our allowance for credit losses for adequacy considering economic conditions and trends, collateral values and credit quality indicators, including past charge-off experience and levels of past due loans and nonperforming assets.

We cannot be certain that our allowance for credit losses will be adequate over time to cover credit losses in our portfolio because of unanticipated adverse changes in the economy, market conditions or events adversely affecting specific customers, industries or markets, and changes in borrower behaviors.

Differences between our actual experience and assumptions and the effectiveness of our models may adversely affect our business, financial condition, including liquidity and capital, and results of operations.

In addition, the FASB has adopted an accounting standard referred to as Current Expected Credit Loss, or CECL, which will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses.

This will change the current method of providing allowances for credit losses only when they have been incurred and are probable, which is expected to require us to increase our allowance for loan losses and greatly increase the types of data we need to collect and review to determine the appropriate level of the allowance for credit losses.

This accounting pronouncement is applicable to us effective January 1, 2023.

As of the adoption and day one measurement date of January 1, 2023, the Company expects to record a one-time cumulative-effect adjustment to retained earnings, net of income taxes, on the consolidated balance sheet.

The allowance will increase between

$2.3 million and $3.0 million from December 31, 2022.

CECL also requires the establishment of a reserve for potential losses from unfunded commitments that is recorded in other liabilities, separate from the allowance for credit losses, which will be approximately $1.8 million to $2.5 million.

Also, as required by CECL, the Company reviewed the held-to-maturity debt securities portfolio and determined the expected losses were immaterial.

The magnitude of the change in the Company’s allowance for credit losses at the adoption date will depend upon the nature and characteristics of the portfolio at the adoption date, as well as macroeconomic conditions and forecasts at that time, other management judgements, and continued refinement and validation of the model and methodologies.

See also, “Note 2 — Accounting Pronouncements” in the Notes to the Consolidated Financial Statements contained in “Item 8.

Financial Statements and Supplementary Data” of this Form 10‑K.

The federal banking regulators, including the Federal Reserve and the FDIC, have adopted a rule that gives a banking organization the option to phase in over a three- year period the day-one adverse effects of CECL on its regulatory capital.

In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs based on their judgment about information available to them at the time of their examination.

Any increases in the provision for loan losses will result in a decrease in net income and may have a material adverse effect on our financial condition, results of operations, and capital.

If lead institutions fail to provide timely updates on changes in credit quality for the underlying loans in our loan participation agreements, it could lead to misstatements in our ACL and potential losses on these loans.

If the lead institutions on our loan participation agreements do not keep us informed about the changes in credit quality on the underlying loans in a timely manner, this could result in misstatements in our ACL, or possibly losses on these loans.

Additionally, reliance on lead institutions for credit information exposes us to counterparty risk, where financial difficulties or failures on their part could jeopardize our ability to accurately assess and manage risks associated with loan participations.

Inadequate disclosure or reporting of credit quality changes by lead institutions may lead to non-compliance with regulatory requirements, exposing us to regulatory scrutiny, fines, or other penalties.

Furthermore, misstatements in ACL due to delayed credit updates could damage our reputation and credibility in the market, posing a significant reputational risk.

Moreover, failure to accurately assess and disclose risks associated with loan participations may expose us to legal liabilities, including lawsuits from investors or regulatory agencies alleging inadequate risk management practices and misleading disclosures.

At December 31, 2023, we had $93.4 million in loan participations in which we were not the lead lender.

Changes in the valuation of our securities portfolio could hurt our profits and reduce our capital levels.

Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings.

Our securities portfolio is impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings.

Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand.

Management evaluates securities for other-than-temporary impairment on a quarterly basis, with more frequent evaluation for selected issues.

Management evaluates securities for impairment on a quarterly basis, with more frequent evaluation for selected issues.

In analyzing a debt issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, industry analysts’ reports and, to a lesser extent given the relatively insignificant levels of depreciation in our debt portfolio, spread differentials between the effective rates on instruments in the portfolio compared to risk-free rates.

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We increase or decrease our stockholders’ equity by the amount of change in the estimated fair value of the available-for-sale securities, net of taxes.

Declines in market value could result in other-than-temporary impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.

Declines in market value could result in impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.

As of December 31, 2023, we had no securities that were deemed impaired.

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

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

Factors that could detrimentally impact our access to liquidity sources include adverse regulatory action against us or a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated.

Our ability to borrow also could be impaired by factors that are not specific to us, such as a disruption in the financial markets, negative views and expectations about the prospects for the financial services industry or deterioration in credit markets.

Our access to funding sources in amounts adequate to finance our

activities or on terms that are acceptable to us could be impaired by factors that affect us specifically, or the financial services industry or economy in general.

Factors that could detrimentally impact our access to liquidity sources include adverse regulatory action against us, a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated, or a decrease in the confidence of our depositors in our ability to meet withdrawal demands.

Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets, negative views and expectations about the prospects for the financial services industry or deterioration in credit markets.

We use estimates in determining the fair value of certain assets, such as mortgage servicing rights (“MSRs”).

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At December 31, 2023, the book value of our MSRs was $1.9 million.

financial model that uses, wherever possible, quoted market prices to value our MSRs.

We use a financial model that uses, wherever possible, quoted market prices to value our MSRs.

This model is complex and also uses assumptions related to interest and discount rates, prepayment speeds, delinquency and foreclosure rates and ancillary fee income.

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Operational risk is the risk of loss from operations, including fraud by employees or outside persons, employees’ execution of incorrect or unauthorized transactions, data processing and technology errors or hacking and breaches of internal control systems.

If our reputation is negatively affected by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers, or otherwise, our business and, therefore, our operating results may be materially adversely affected.

If our reputation is negatively affected by the actions of our employees, by our inability to conduct our

operations in a manner that is appealing to current or prospective customers, or otherwise, our business and, therefore, our operating results may be materially adversely affected.

We face significant operational risks because the financial services business involves a high volume of transactions and because of our reliance on technology.

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Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits.

This risk of loss also includes

the potential legal actions that could arise as a result of operational deficiencies or as a result of non-compliance with applicable regulatory standards or customer attrition due to potential negative publicity.

This risk of loss also includes the potential legal actions that could arise as a result of operational deficiencies or as a result of non-compliance with applicable regulatory standards or customer attrition due to potential negative publicity.

In the event of a breakdown in our internal control systems, improper operation of systems or improper employee actions, or a breach of our security systems, including if confidential or proprietary information were to be mishandled, misused or lost, we could suffer financial loss, face regulatory action, civil litigation and/or suffer damage to our reputation.

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Our risk and exposure to these matters remain heightened because of, among other things, the evolving nature of these threats and our role as a provider of financial services, our continuous transmission of sensitive information to, and storage of such information by, third parties, including our vendors and regulators, the outsourcing of some of our business operations, threats of cyber-terrorism, and system and customer account updates and conversions.

As a result, cyber-security and the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority.

Our information systems may experience failure, interruption or breach in security.

In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and to store sensitive data.

Any failure, interruption or breach in security of these systems could result in significant disruption to our operations.

Information security breaches and cybersecurity-related incidents include, but are not limited to, attempts to access information, including customer and company information, malicious code, computer viruses and denial of service attacks that could result in unauthorized access, theft, misuse, loss, release or destruction of data (including confidential customer information), account takeovers, unavailability of service or other events.

These types of threats may derive from human error, fraud or malice on the part of external or internal parties, or may result from accidental technological failure.

Our technologies, systems, networks and software have been and continue to be subject to cybersecurity threats and attacks.

Any failures related to upgrades and maintenance of our technology and information systems could further increase our information and system security risk.

Our increased use of cloud and other technologies, such as remote work technologies, also increase our risk of being subject to a cyber-attack.

The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased.

Our customers, employees and third parties that we do business with have been, and will continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate passwords, bank account information or other personal information or to introduce viruses or other malware programs to our information systems, the information systems of our merchants or third-party service providers and/or our customers' personal devices, which are beyond our security control systems.

Though we endeavor to mitigate these threats through product improvements, use of encryption and authentication technology and customer and employee education, such cyber-attacks against us, our merchants, our third-party service providers and our customers remain a serious issue and have been successful in the past.

Although we make significant efforts to maintain the security and integrity of our information systems and have implemented various measures to manage the risks of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging.

Even well protected information, networks, systems and facilities remain potentially vulnerable to attempted security breaches or disruptions because the techniques used in such attempts are constantly evolving and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected.

Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is virtually impossible for us to entirely mitigate this risk.

Furthermore, in the event of a cyber-attack, we may be delayed in identifying or responding to the attack, which could increase the negative impact of the cyber-attack on our own business, financial condition and results of operations.

While we maintain specific "cyber" insurance coverage, which would apply in the event of various breach scenarios, the amount of coverage may not be adequate in any particular case.

Furthermore, because cyber threat scenarios are inherently difficult to predict and can take many forms, some breaches may not be covered under our cyber insurance coverage.

A security breach or other significant disruption of our information systems or those related to our customers, merchants or our third-party vendors, including as a result of cyber-attacks, could (i) disrupt the proper functioning of our networks and systems and therefore our operations and/or those of our customers;

(ii) result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of confidential, sensitive or otherwise valuable information of ours or our customers;

(iii) result in a violation of applicable privacy, data breach and other laws, subjecting us to additional regulatory scrutiny and exposing us to civil litigation, enforcement actions, governmental fines and possible financial liability;

(iv) require significant management attention and resources to remedy the damages that result;

or (v) harm our reputation or cause a

decrease in the number of customers that choose to do business with us.

The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.

Our business heavily relies on electronic communication and information systems, serving as the backbone for our operations and storage of sensitive data.

Any disruption, failure, or breach in the security of these systems could significantly disrupt our operations.

Cybersecurity threats encompass a range of incidents, including unauthorized access attempts, data breaches, computer viruses, and denial-of-service attacks.

These events may lead to data theft, misuse, loss, or destruction, compromising confidential customer information, account takeovers, or service unavailability.

These threats can stem from multiple sources, ranging from human errors to deliberate acts of malice from internal or external parties, or even unforeseen technological failures.

Despite our proactive measures, including encryption, authentication technologies, and extensive education initiatives for both employees and customers, the expanding use of cloud services and remote work technologies exposes us to heightened vulnerability to cyber-attacks.

The risk associated with security breaches or disruptions, especially those stemming from cyber-attacks, has become more pronounced due to the increasing sophistication and frequency of global intrusion attempts.

Despite our continuous efforts to maintain the security and integrity of our information systems and implement robust risk management strategies, there's an inherent challenge.

Cyber-attacks often evolve at a pace that makes it difficult to proactively anticipate and mitigate them effectively.

The dynamic nature of these threats means it's nearly impossible to entirely eliminate the risk.

In the unfortunate event of a cyber-attack, delayed identification or response to the breach could significantly worsen its impact on our business, financial standing, and operational integrity.

While we maintain specialized cyber insurance coverage, it may not cover every potential breach scenario, leaving certain instances uncovered.

The repercussions of a security breach or major disruption to our information systems, as well as those of our customers, merchants, or third-party vendors, can be extensive.

This includes disrupting operations, unauthorized access to sensitive information, potential legal violations, increased regulatory scrutiny, civil litigation, resource-intensive efforts to rectify the situation, damage to our reputation, or loss of customers.

Any of these scenarios could have a material and adverse effect on our business, financial position, and operational outcomes.

Our operations rely on certain external vendors.

We rely on certain external vendors to provide products and services necessary to maintain our day-to-day operations.

These third-party vendors are sources of operational and informational security risks to us, including risks associated with operational errors, information system failures, interruptions or breaches and unauthorized disclosures of sensitive or confidential client or customer information.

These third-party vendors are sources of operational and informational security risks to us, including risks associated with

operational errors, information system failures, interruptions or breaches and unauthorized disclosures of sensitive or confidential client or customer information.

If these vendors encounter any of these issues, or if we have difficulty communicating with them, we could be exposed to disruption of operations, loss of service or connectivity to customers, reputational damage, and litigation risk that could have a material adverse effect on our business and, in turn, our financial condition and results of operations.

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Replacing these external vendors could also entail significant delay and expense.

We will be required to transition from the use of the London Interbank Offered Rate ("LIBOR") in the future.

We have certain loans indexed to LIBOR to calculate the interest rate.

ICE Benchmark Administration, the authorized and regulated administrator of LIBOR, ended publication of the one-week and two-month USD LIBOR tenors on December 31, 2021 and the remaining USD LIBOR tenors will end publication in June 2023.

Financial services regulators and industry groups have collaborated to develop alternate reference rate indices or reference rates.

The transition to a new reference rate requires changes to contracts, risk and pricing models, valuation tools, systems, product design and hedging strategies.

At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR (with the exception of overnight repurchase agreements, which are expected to be based on the Secured Overnight Financing Rate ("SOFR").

Uncertainty as to the nature of such potential changes, alternative reference rates, the elimination or replacement of LIBOR, or other reforms may adversely affect the value of, and the return on our loans and our investment securities, and may impact the availability and cost of borrowings.

The language in our LIBOR-based contracts and financial instruments has developed over time and may 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 may give the calculation agent discretion over the substitute index or indices for the calculation of interest rates to be selected.

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

We are subject to environmental liability risk associated with lending activities or properties we own.

We are subject to environmental liability risk associated with lending activities on properties we own.

A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties, or with respect to properties that we own in operating our business.

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Such regulation and supervision govern the activities in which an institution and its holding company may engage and are intended primarily for the protection of the federal deposit insurance fund and the depositors of First Bank Richmond, rather than for our stockholders.

Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan and lease losses.

allowance for credit losses.

These regulations, along with existing tax, accounting, securities, insurance and monetary laws, rules, standards, policies, and interpretations, control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures.

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These changes could materially impact, potentially even retroactively, how we report our financial condition and results of operations.

The Company’s reported financial results depend on management’s selection of accounting methods and certain assumptions and estimates, which, if incorrect, could cause unexpected losses in the future.

The Company’s accounting policies and methods are fundamental to how the Company records and reports its financial condition and results of operations.

The Company’s management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with generally accepted accounting principles and reflect management’s judgment regarding the most appropriate manner to report the Company’s financial condition and results of operations.

In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances, yet might result in the Company’s reporting materially different results than would have been reported under a different alternative.

Certain accounting policies are critical to presenting the Company’s financial condition and results of operations.

They require management to make difficult, subjective or complex judgments about matters that are uncertain.

Materially different amounts could be reported under different conditions or using different assumptions or estimates.

These critical accounting policies include the allowance for loan losses, estimations of fair value and income taxes.

Because of the uncertainty of estimates involved in these matters, the Company may be required to do one or more of the following:

significantly increase the allowance for loan losses and/or sustain credit losses that are significantly higher than the reserve provided, recognize significant losses on the remeasurement of certain asset and liability balances, or significantly increase its accrued taxes liability.

For more information, refer to “Critical Accounting Estimates” included in Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.

We are subject to an extensive body of accounting rules and best practices.

Periodic changes to such rules may change the treatment of critical financial line items and affect our profitability.

Our business operations are significantly influenced by the extensive body of accounting regulations in the United States.

Regulatory bodies periodically issue new guidance, altering accounting rules and reporting requirements, which can substantially affect the preparation and reporting of our financial statements.

These changes might necessitate retrospective application, potentially leading to restatements of prior period financial statements.

One such significant change from 2022 was the implementation of the Current Expected Credit Losses (“CECL”) model, which we adopted on January 1, 2023.

Under the CECL model, financial assets carried at amortized cost, such as loans and held-to-maturity debt securities, will be presented at the net amount expected to be collected.

This forward-looking approach in estimating expected credit losses contrasts starkly with the former GAAP's "incurred loss" model, delaying recognition until a loss is probable.

CECL mandates considering historical experience, current conditions, and reasonable forecasts affecting collectability, leading to periodic adjustments of financial asset values.

However, this forward-looking methodology, reliant on macroeconomic variables, introduces the potential for increased earnings volatility due to unexpected changes in these indicators between periods.

An additional consequence of CECL is an accounting asymmetry between loan-related income, recognized periodically based on the effective interest method, and credit losses, recognized upfront at origination.

This asymmetry might create the perception of reduced profitability during loan expansion periods due to the immediate recognition of expected credit losses.

Conversely, periods with stable or declining loan levels might seem relatively more profitable as income accrues gradually for loans where losses had been previously recognized.

On January 1, 2023, we adopted the accounting standard referred to as CECL.

As a result of the change in methodology from the incurred loss method to the CECL model, on January 1, 2023 the Company recorded a one-time adjustment from equity into the allowance for credit losses on loans and leases in the amount of $2.0 million, net of tax.

Additionally, as a part of the CECL adoption, we established an allowance for credit losses on unfunded commitments by recording a one-time adjustment from stockholder’s equity of $1.8 million, which is reported in other liabilities on the Condensed Consolidated Balance Sheets.

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

The effects of climate change continue to create an alarming level of concern for the state of the global environment.

As a result, the global business community has increased its political and social awareness surrounding the issue, and the United States has entered into international agreements in an attempt to reduce global temperatures, such as reentering the Paris Agreement.

Further, the U.S.

Congress, state legislatures and federal and state regulatory agencies continue to propose numerous initiatives to supplement the global effort to combat climate change.

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

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

The lack of empirical data surrounding the credit and other financial risks posed by climate change render it difficult, or even impossible, to predict how specifically climate change may impact our financial condition and results of operations;

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

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

Further, the effects of climate change may negatively impact regional and local economic activity, which could lead to an adverse effect on our customers and

impact the communities in which we operate.

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

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We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations.

We believe the net proceeds of our recent initial public offering will be sufficient to permit us to maintain regulatory compliance for the foreseeable future.

We believe the net proceeds of our initial public offering will be sufficient to permit us to maintain regulatory compliance for the foreseeable future.

Nevertheless, we may elect to raise more capital to support our business or to finance acquisitions, if any, or we may otherwise elect or be required to raise additional capital in the future.

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In addition, the board has the power, generally without stockholder approval, to set the terms of any such classes or series of preferred stock that may be issued, including voting rights, dividend rights and preferences over the common stock with respect to dividends or upon the liquidation, dissolution or winding-up of our business and other terms.

If we issue additional preferred stock in the future that has a preference over the common stock with respect to the payment of dividends or upon liquidation, dissolution or winding-up, or if we issue additional preferred stock with voting rights that dilute the voting power of the common stock, the rights of holders of the common stock or the market value of the common stock could be adversely affected.

If we issue preferred stock in the future that has a preference over the common stock with respect to the payment of dividends or upon liquidation, dissolution or winding-up, or if we issue preferred stock with voting rights that dilute the voting power of the common stock, the rights of holders of the common stock or the market value of the common stock could be adversely affected.

You may not receive dividends on our common stock.

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The declaration and payment of future cash dividends will be subject to, among other things, regulatory restrictions, our then current and projected consolidated operating results, financial condition, tax considerations, future growth plans, general economic conditions, and other factors our board of directors deems relevant.

Richmond Mutual Bancorporation will depend primarily upon the proceeds it retained from the offering as well as earnings of First Bank Richmond to provide funds to pay dividends on our common stock.

The payment of dividends by First Bank Richmond also is subject to certain regulatory restrictions.

Richmond Mutual Bancorporation will depend primarily upon the proceeds it retained from the initial public offering as well as earnings of First Bank Richmond to provide funds to pay dividends on our common stock.

The payment of dividends by First Bank Richmond is also subject to certain regulatory restrictions.

Federal law generally prohibits a depository institution from making any capital distributions (including payment of a dividend) to its parent holding company if the depository institution would thereafter be or continue to be undercapitalized, and dividends by a depository institution are subject to additional limitations.

As a result, any payment of dividends in the future by Richmond Mutual Bancorporation may depend on First Bank Richmond’s ability to satisfy these regulatory restrictions and its earnings, capital requirements, financial condition and other factors.

Unresolved Staff Comments

Not applicable.

As a result, any payment of dividends in the future by Richmond Mutual Bancorporation may depend on First Bank

Richmond’s ability to satisfy these regulatory restrictions and its earnings, capital requirements, financial condition and other factors.

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