What changed in this filing

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Item 1A. Risk Factors

2024-02-13 compared with 2023-02-09 · 128 added, 146 removed, 379 unchanged (42% of the section changed)

8 unchanged sentences

• The Company must effectively manage its credit risks.

• A significant portion of the Company’s assets consists of commercial loans, which involve a high degree of credit risk.

• A significant portion of the Company’s assets consists of commercial loans, which may involve a higher degree of credit risk.

• The Company is subject to risks arising from conditions in the real estate market, as a significant portion of its loans are secured by commercial and residential real estate.

• Future profitability depends, to a significant extent, upon commercial business customers.

• The Company’s business is concentrated in Texas and energy industry exposure could adversely affect its performance.

• The Company’s business is concentrated in Texas and exposure to the Texas economy, including the energy industry, could adversely affect its performance.

• The Company must effectively manage its counterparty risk.

6 unchanged sentences

• The Company must effectively manage its interest rate risks.

• The Company must effectively manage market risk associated primarily with its sales and trading activities.

• The Company may be adversely affected by the transition away from LIBOR for its variable rate loans, derivative contracts and other financial assets and liabilities.

• The Company must effectively manage market risk associated primarily with sales and trading activities.

• Rising interest rates have decreased the value of the Company’s securities portfolio, and the Company may realize losses if it were to sell such securities.

Strategic Risks

4 unchanged sentences

• The Company, its vendors and customers must effectively manage information systems and cyber risk and threats which may result in disruptions, failures or breaches in security.

• A successful cyber attack affecting the Company could cause significant harm to the Company and its clients and customers.

• The Company’s operations rely extensively on a broad range of external vendors.

1 unchanged sentence

• The Company’s accounting estimates and risk management processes rely on management judgment, which may prove inadequate, wrong or be adversely impacted by inaccurate or mistakes in assumptions or models.

• The risk management strategies and processes may not be effective;

the Company’s controls and procedures may fail or be circumvented.

• The business is susceptible to fraud.

• The risk management strategies and processes may not be effective and the Company’s controls and procedures, including disclosure controls and procedures and internal control over financial reporting, may fail or be circumvented.

• The business is susceptible to fraud and conduct risk.

Legal, Regulatory and Compliance Risks

1 unchanged sentence

• The Company must maintain adequate regulatory capital to support its business objectives and strategy.

• The Company is subject to claims and litigation in the ordinary course of business, including claims that may not be covered by insurance.

• The Company is subject to claims and litigation in the ordinary course of its business, including claims that may not be covered by insurance.

• Any regulatory examination scrutiny or new regulatory requirements arising from the recent events in the banking industry could increase the Company’s expenses and affect the Company’s operations.

Other Risks Affecting the Business

• The business faces unpredictable economic and business conditions.

• The COVID-19 pandemic continues to affect the Company and its customers, employees and third-party service providers.

• The soundness of other financial institutions could adversely affect the business.

• The impact of the Tax Cuts and Jobs Act (the “Tax Act”) on the Company and its customers contributes to uncertainty and risk related to customers’ future demand for credit and its future results.

• Recent negative developments affecting the banking industry, and resulting media coverage, have eroded customer confidence in the banking system.

• The Company is subject to environmental liability risk associated with lending activities.

1 unchanged sentence

• Climate change and related legislative and regulatory initiatives including interpretations thereof have the potential to disrupt the business and result in operational changes and expenditures that could significantly impact the business and the operations and creditworthiness of the Company’s clients.

• Negative public opinion could damage the Company’s reputation and adversely affect earnings.

Risks Relating to Securities

• Negative public opinion could damage the Company’s reputation and adversely affect its earnings.

• Environmental, social and governance (“ESG”) risks could adversely affect the Company’s reputation and shareholder, employee, client and third-party relationships and may negatively affect the Company’s stock price.

Risks Relating to Company Securities

• The Company’s stock price can be volatile.

• The trading volume in the Company’s common stock is less than that of other larger financial services companies.

• The Company’s preferred stock is thinly traded.

• An investment in the Company’s securities is not an insured deposit.

• The holders of the Company’s indebtedness and preferred stock have rights that are senior to those of its common stockholders.

• The Company does not currently pay dividends on its common stock.

• Federal legislation and regulations impose restrictions on the ownership of the Company’s common stock.

• Anti-takeover provisions of the Company’s certificate of incorporation, bylaws and Delaware law may make it more difficult for holders to receive a change in control premium.

• The Bank is subject to regulatory and contractual limitations on the payment of its subordinated notes.

Risk Factors Associated with the Business

2 unchanged sentences

• Adverse changes in local, U.S.

and global economic and industry conditions;

• Business and market disruptions as a result of the COVID-19 pandemic, future pandemics and governmental restrictions imposed in response to the pandemic;

and global economic and industry conditions, and other geopolitical events;

• Declines in the value of collateral, including asset values that are directly or indirectly related to external factors such as commodity prices, real estate values, interest rates or geopolitical risks;

6 unchanged sentences

Competitive pressures could erode underwriting standards, leading to a decline in general credit quality and increases in credit defaults and non-performing asset levels.

If the Company’s credit portfolio management routines, policies and procedures are not able to adequately adapt to

changes in economic, competitive or other conditions that affect customers and the quality of the loan portfolio, the Company may incur increased losses that could adversely affect its financial results and lead to increased regulatory scrutiny, restrictions on its lending activity or financial penalties.

A significant portion of the Company’s assets consists of commercial loans, which involve a high degree of credit risk.

If the Company’s credit portfolio management routines, policies and procedures are not able to adequately adapt to changes in economic, competitive or other conditions that affect customers and the quality of the loan portfolio, the Company may incur increased losses that could adversely affect its financial results and lead to increased regulatory scrutiny, restrictions on its lending activity or financial penalties.

A significant portion of the Company’s assets consists of commercial loans, which may involve a higher degree of credit risk.

The Company generally invests a greater proportion of its assets in commercial loans to business customers than other banking institutions of its size, and its business plan calls for continued efforts to increase its assets invested in these loans.

12 unchanged sentences

Additionally, the Company’s inability to grow its commercial business customer base in a highly competitive market could affect its future growth and profitability.

The Company’s business is concentrated in Texas and energy industry exposure could adversely affect its performance .

The Company’s business is concentrated in Texas and exposure to the Texas economy, including the energy industry, could adversely affect its performance .

Although more than 50% of the Company’s loan exposure is outside of Texas and more than 50% of its deposits are sourced outside of Texas, the Texas concentration remains significant compared to peer banks.

1 unchanged sentence

As a result, the Company’s financial condition and results of operations may be strongly affected by any prolonged period of economic recession or other adverse business, economic or regulatory conditions affecting Texas businesses and financial institutions.

While the Texas economy is more diversified than it was in the 1980s, the energy sector continues to play an important role.

Furthermore, while the Texas economy is increasingly more diversified, the energy sector continues to play an important role in the overall Texas economy.

Furthermore, energy production and related industries represent a significant part of the economies in some of the primary markets in which the Company operates.

1 unchanged sentence

These businesses are significantly affected by volatility in oil and natural gas prices, reserve depletion curves, material declines in the level of drilling and production activity in Texas and in other areas of the United States and material fluctuations in investor interest in oil and gas exploration and production investments.

There is no assurance that the Company will not be materially adversely impacted by the direct and indirect effects of current and future conditions in the energy industry in Texas, nationally or abroad.

There is no assurance that the Company will not be materially adversely impacted by the direct and indirect effects of current and future economic conditions in Texas.

The Company must effectively manage its counterparty risk .

9 unchanged sentences

Management’s methodology for establishing the appropriateness of the allowance for credit losses on loans depends on subjective application of risk grades as indicators of each borrower’s ability to repay specific loans, together with an assessment of how actual or projected changes in competitor underwriting practices, competition for borrowers and depositors and other conditions in markets are likely to impact improvement or deterioration in the collectability of loans as compared to historical experience.

The Company’s business model makes it more vulnerable to changes in underlying business credit quality than other entities with which the Company competes.

The Company has a substantially larger percentage of commercial, real estate and other categories of business loans relative to total assets than most other banks in the market and individual loans are generally larger as a percentage of the Company’s total earning assets than other banks.

The Company has substantially increased its liquidity in recent years, and these funds have primarily been invested in low-yielding deposits with federal agencies and other financial institutions.

And, the Company has had a substantially smaller portion of its assets consist of securities and other earning asset categories that can be less vulnerable to changes in local, regional or industry-specific economic trends, causing the potential for credit losses to be more severe than other banks.

During 2021, these balances have remained elevated, although they have begun to run off as the Company has purchased investment securities and proactively exited certain high-cost indexed deposit products;

however, the most significant portion of earning assets still remains in loans.

The failure to maintain above-peer credit quality metrics would have a material adverse impact on growth and profitability.

As a result, the Company’s business model may make it more vulnerable to changes in the underlying business credit quality than other entities with which the Company competes.

The failure to maintain above-peer credit quality metrics could have a material adverse impact on growth and profitability.

Historically, the Company has sought to take action prior to economic downturns by slowing growth rates and decreasing the risk level of its assets by, among other things, allowing runoff of loans that the Company believes may not perform well during a weakening or declining economic environment.

If management’s assessment of inherent risk and losses in the loan portfolio is inaccurate, or geopolitical, economic and market conditions or borrowers' financial performance experience material unanticipated changes, including as a result of the COVID-19 pandemic and other pandemics, the allowance may become inadequate, requiring larger provisions for loan losses that can materially decrease the Company’s earnings or profitability.

If management’s assessment of inherent risk and losses in the loan portfolio is inaccurate, or geopolitical, economic and market conditions or borrowers' financial performance experience material unanticipated changes, the allowance may become inadequate, requiring larger provisions for loan losses that can materially decrease the Company’s earnings or profitability.

Federal regulators periodically review the Company’s allowance for credit losses and based on their judgments or interpretations, which may be different than management’s, may require the Company to change classifications or grades of loans, increase the allowance for credit losses or recognize further loan charge-offs.

13 unchanged sentences

The Company’s principal source of funding consists of customer deposits, supplemented by its short-term and long-term borrowings, including federal funds purchased and Federal Home Loan Bank (“FHLB”) borrowings.

Recently proposed changes to the FHLB system could adversely impact the

Company’s access to FHLB borrowings or increase the cost of such borrowings.

The Company also relies on the availability of the mortgage secondary market provided by Ginnie Mae and the government sponsored entities (“GSEs”) to support the liquidity of its residential mortgage assets.

A substantial majority of the Company’s liabilities consist of demand, savings, checking and money market deposits,

which are payable on demand or upon relatively short notice.

A substantial majority of the Company’s liabilities consist of demand, savings, checking and money market deposits, which are payable on demand or upon relatively short notice.

By comparison, a substantial portion of the assets are loans, most of which, excluding mortgage finance loans, cannot be collected or sold in so short a time frame, creating the potential for an imbalance in the availability of liquid assets to satisfy depositors and loan funding requirements.

An inability to raise funds through deposits, borrowings, the sale of securities and loans and other sources, or an inability to access the capital markets, could have a substantial negative effect on the Company’s liquidity.

Furthermore, such funding sources even if available could become more expensive, which could negatively impact the Company’s profitability and net interest margin.

The Company actively manages its available sources of funds to meet expected or anticipated needs under normal and financially stressed conditions, but there is no assurance that the Company will be able to make new loans, meet ongoing funding commitments to borrowers, or replace maturing deposits and advances as necessary under all possible circumstances.

The Company’s ability to obtain funding could be impaired by factors beyond its control, such as disruptions in financial markets, negative expectations regarding the financial services industry generally or in the markets or negative perceptions of the Company, including credit ratings.

The Company sources a significant volume of its non-interest bearing deposits from financial services companies, mortgage finance customers and other commercial sources, resulting in a larger percentage of large deposits and a smaller number of sources of deposits than would be typical of other banks in competing markets, creating concentrations of deposits that carry a greater risk of unexpected material withdrawals.

In recent periods, over half of total deposits have been attributable to customers whose balances exceed the $250,000 FDIC insurance limit.

Many of these customers actively monitor the Company’s financial condition and results of operations and could withdraw their deposits quickly upon the occurrence of a material adverse development affecting the Company or its businesses.

Significant deterioration in the Company’s credit quality or a downgrade in its credit or other ratings could affect funding sources such as financial institutions and broker dealers.

The Company’s ability to obtain funding, including on attractive terms, could be impaired by factors beyond its control, such as disruptions in financial markets, negative expectations regarding the financial services industry generally or in the markets or negative perceptions of the Company, including credit ratings.

The Company sources a significant volume of its non-interest bearing deposits from its commercial clients, creating concentrations of deposits that may carry a greater risk of unexpected material withdrawals.

These customers are more likely to actively monitor the Company’s financial condition and results of operations and could withdraw their deposits quickly upon the occurrence of a material adverse development affecting the Company or its businesses or based on market rumors regarding the Company or other regional banks.

In response to this risk, the Company has increased its liquidity and developed techniques for monitoring and planning for changes in liquidity and capital, but there is no assurance that the Company will maintain or have access to sufficient funding and capital to fully mitigate its liquidity risk.

2 unchanged sentences

The deposits are subject to regulatory classification as brokered deposits even though the Company considers these to be relationship deposits and they are not subject to the typical risks or market pricing associated with conventional brokered deposits.

However, brokered deposits are generally considered to be more sensitive to interest rates, with a higher withdrawal than other deposits if the rates offered are not competitive with rates offered by the Bank’s competitors.

Furthermore, banks with higher levels of brokered deposits may be viewed as having higher liquidity risks, which may lead to further deposit outflow.

If the Bank does not maintain regulatory capital above the level required to be well capitalized the Bank would be required to obtain FDIC consent for it to continue to accept, renew or roll over most deposits classified as brokered deposits, and there can be no assurance that the FDIC would consent under any circumstances.

2 unchanged sentences

These non-traditional deposits are subject to greater operational and reputational risk of unexpected withdrawal than traditional demand and time deposits, particularly those provided by consumers.

A significant decrease in balances of relationship brokered deposits could have a material adverse effect on the Bank’s and the Company’s financial condition, results of operations or profitability.

A significant decrease in balances of brokered deposits could have a material adverse effect on the Bank’s and the Company’s financial condition, results of operations or profitability.

See Management’s Discussion and Analysis of Financial Condition and Results of Operations below for further discussion of liquidity.

1 unchanged sentence

The Company’s historical ability to raise capital through the sale of capital stock and debt securities may be affected by economic and market conditions or regulatory changes that are beyond its control.

Adverse changes in its operating performance or financial condition could make raising additional capital difficult or more expensive or limit access to customary sources of funding, including inter-bank borrowings, repurchase agreements and borrowings from a Federal Reserve Bank (“FRB”) or the FHLB.

Unexpected changes in requirements for capital resulting from regulatory actions could require the Company to raise capital at a time, and at a price, that might be unfavorable, or could require that the Company forego continuing growth or reduce its then current loan portfolio.

3 unchanged sentences

Increases in cost of capital, including dilution and increased interest or dividend requirements, could have a direct adverse impact on the Company’s operating performance and its ability to achieve its growth objectives.

Trust preferred securities are no longer viable as a source of new long-term debt capital as a result of regulatory changes.

The treatment of existing trust preferred securities as capital may be subject to further regulatory change prior to their maturity, which could require the Company to seek additional capital.

The Company’s mortgage finance business has experienced, and will likely continue to experience, highly variable usage of the Company’s funding capacity resulting from seasonal demands for credit, surges in consumer demand driven by changes in interest rates and month-end “spikes” of residential mortgage closings.

These spikes could also result in the Company and the

Bank having capital ratios that are below internally targeted levels or even levels that could cause the Bank to not be well capitalized and could affect liquidity levels.

interest rates and month-end “spikes” of residential mortgage closings.

These spikes could also result in the Company and the Bank having capital ratios that are below internally targeted levels or even levels that could cause the Bank to not be well capitalized and could affect liquidity levels.

At the same time, managing this risk by declining to respond fully to the needs of customers could severely impact the business.

The Company has historically responded to these variable funding demands by, among other things, increasing the extent of participations sold in its mortgage loan interests, as needed, and by maintaining a substantial borrowing relationship with the FHLB.

Its mortgage finance customers have in recent periods provided significant low-cost deposit balances associated with the borrower escrow accounts created at the time certain mortgage loans are funded, which have benefited liquidity and net interest margin.

In response to competitive pressures, the Company sometimes finds it necessary to pay interest on some of these accounts, as regulations allow or require and this trend may continue, which can affect its ability to reduce its costs of funds.

Its mortgage finance customers have also provided significant low-cost deposit balances associated with the borrower escrow accounts created at the time certain mortgage loans are funded, which have benefited liquidity and net interest margin.

Individual escrow account balances also experience significant variability monthly as principal and interest payments, including ad valorem taxes and insurance premiums, are paid periodically.

3 unchanged sentences

The Company conducts no material business or other activity at the parent company level other than activities incidental to holding equity and debt investments in the Bank.

As a result, the Company relies on the proceeds of capital transactions, borrowings under its revolving line of credit, payments of interest and principal on loans made to the Bank and dividends on preferred stock issued by the Bank to pay its operating expenses, to satisfy its obligations to debtholders and to pay dividends on its preferred stock.

As a result, the Company relies on the proceeds of capital transactions, borrowings under its revolving line of credit and payments of interest and principal on loans made to the Bank to pay its operating expenses, to satisfy its obligations to debt holders and to pay dividends on its preferred stock.

The profitability of the Bank is subject to fluctuation based upon, among other things, the cost and availability of funds, changes in interest rates and economic conditions in general.

2 unchanged sentences

If the Company is unable to access funds from capital transactions, borrowing under its revolving line of credit or dividends or interest on loan payments from the Bank, the Company may be unable to satisfy its obligations to creditors or debtholders or pay dividends on its preferred stock.

Changes in the Bank’s operating results or capital requirements could require the Company to convert subordinated notes or preferred stock of its Bank held by the Company into common equity, reducing cash flow available to meet its obligations.

The Company must effectively manage its interest rate risk .

2 unchanged sentences

Models that the Company uses to forecast and plan for the impact of rising and falling interest rates may be incorrect or fail to consider the impact of competition and other conditions affecting loans and deposits.

Periods of unusually low or volatile interest rates have a material effect on the Company’s earnings.

During the first quarter of 2020, in response to the COVID-19 pandemic, the Federal Reserve reduced the target Federal Funds rate to between zero and 0.25%.

During 2022, the Federal Reserve began to increase this rate and at the most recent meeting, the Federal Reserve voted to increase rates 25 basis points to a range between 4.50% and 4.75%.

Periods of volatile interest rates may have a material effect on the Company’s earnings.

Throughout 2023, the Federal Reserve has increased the target Federal Funds rate at a steady pace, reaching its current range of 5.25% to 5.50% at the July 2023 meeting.

At the most recent meeting in November 2023, the Federal Reserve voted to maintain this target range.

Increases in interest rates and economic conditions affecting consumer demand for housing can have a material impact on the volume of mortgage originations and refinancings, adversely affecting the profitability of the mortgage finance business.

6 unchanged sentences

The company must effectively manage market risk associated primarily with sales and trading activities.

In addition to interest rate risk, the Company is exposed to other forms of market risk, principally related to trading activities which support

customer transactions.

In addition to interest rate risk, the Company is exposed to other forms of market risk, principally related to trading activities which support customer transactions.

The Company has typically minimized the market and liquidity risks of customer-related positions with similar offsetting positions with broker-dealers.

1 unchanged sentence

VaR is calculated based on one year historical moves in key market risk factors relevant to the portfolio and it estimates potential loss on current portfolio at 95th percentile confidence interval.

The Company may be adversely affected by the transition away from LIBOR for its variable rate loans, derivative contracts and other financial assets and liabilities .

The business relies upon a large volume of loans, derivative contracts and other financial instruments which are directly or indirectly dependent on LIBOR to establish their interest rate and/or value.

The administrator of LIBOR extended publication of the most commonly used U.S.

dollar LIBOR settings to June 30, 2023 and ceased publishing other LIBOR settings on December 31, 2021.

On March 15, 2022, President Biden signed into law the “Adjustable Interest Rate (LIBOR) Act,” as part of the Consolidated Appropriations Act, 2022, which provides for a statutory transition to a replacement rate selected by the Federal Reserve based on the SOFR for contracts referencing LIBOR that contain no fallback provisions or ineffective fallback provisions, unless a replacement rate is selected by a determining person as outlined in the statute.

On December 16, 2022, the Federal Reserve adopted a final rule implementing the Adjustable Interest Rate (LIBOR) Act by identifying benchmark rates based on SOFR that will replace LIBOR in certain financial contracts after June 30, 2023.

federal banking agencies issued guidance strongly encouraging banking organizations to cease using U.S.

dollar LIBOR as a reference rate in new contracts as soon as practicable and in any event by December 31, 2021.

The Company has significant but declining exposure to financial instruments with attributes that are either directly or indirectly dependent on LIBOR to establish their interest rate and/or value, some of which mature after June 30, 2023.

The Company established a working group, consisting of key stakeholders from throughout the company, to monitor developments relating to LIBOR changes and to guide the Bank’s response.

This team is continuing to work to ensure that technology systems are prepared for the transition, loan documents that reference LIBOR-based rates have been appropriately amended to reference other methods of interest rate determinations and internal and external stakeholders are apprised of the transition.

Based on the transition progress to date, the Company ceased originating LIBOR-based products and began originating alternative indexed products in December 2021.

Over the next 6 months, the Company will continue to transition all remaining LIBOR-based products to an alternative benchmark.

The Company will also continue to evaluate the transition process and align its trajectory with regulatory guidelines regarding the cessation of LIBOR including monitoring new developments for transitioning to alternative reference rates, if necessary and as needed.

Any successor or replacement interest rates to LIBOR may perform differently, which may affect net interest income, change market risk profile and require changes to risk, pricing and hedging strategies.

Any failure to adequately manage this transition could adversely impact the Company’s or the Bank’s reputation or lead to regulatory action .

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

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

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

banks’ securities portfolios.

If the Company were to sell such securities with embedded unrealized losses, it may incur losses, which could impair the Company’s capital, financial condition, and results of operations and require the Company to raise additional capital on unfavorable terms, thereby negatively impacting its profitability.

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

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

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

Strategic Risks

The Company must be effective in developing and executing new lines of business and new products and services while managing associated risks .

The Company’s business strategy requires that it develop and grow new lines of business and offer new products and services within existing lines of business in order to ensure future client acquisition and retention of existing clients and realize strategic priorities for both loans and deposits.

The Company’s business strategy involves developing and growing new lines of business and offering new products and services within existing lines of business to grow its client base, retain existing clients and realize strategic priorities for both loans and deposits.

Substantial costs, risks and uncertainties are associated with these efforts, particularly in instances where the markets are not fully developed.

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Competition among providers of financial services in markets, in Texas, regionally and nationally, is intense.

The Company competes with other financial and bank holding companies, state and national commercial banks, savings and loan associations, consumer finance companies, credit unions, securities brokerages, insurance companies, mortgage banking companies, money market mutual funds, asset-based non-bank lenders, government sponsored or subsidized lenders and other financial services providers.

and services than the Company can, including systems and services that could more effectively protect customers from cyber threats.

Many of these competitors have substantially greater financial resources, lending limits and technological resources and larger branch networks than the Company does and are able to offer a broader range of products and services than the Company can, including systems and services that could more effectively protect customers from cyber threats.

Many competitors offer lower interest rates and more liberal loan terms that appeal to borrowers but adversely affect net interest margin and assurance of repayment.

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Any disruptions, failures or breaches in security of these systems could result in significant disruption to the Company’s operations.

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

Information security breaches and cyber-security-related incidents include, but are not limited to, attempts to access information, theft of information, credentials or other intellectual property, including customer and company information, malicious code, computer viruses and denial of service attacks that could result in unauthorized access, data breaches resulting in misuse, loss or destruction of data (including confidential customer and employee information), ransomware attacks, 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.

The risk, frequency and intensity of such attacks is escalating, including as a result of remote working arrangements implemented in response to the COVID-19 pandemic or other public health or societal crises, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication of these threats.

The risk, frequency and intensity of such attacks is escalating, including as a result of remote working arrangements, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication of these threats.

Material failures or interruptions of these systems could impair the Company’s ability to serve customers and to operate the business and could damage the Company’s reputation, result in a loss of business, subject the Company or the Bank to additional regulatory scrutiny or enforcement or exposure to civil litigation, criminal penalties or financial liability.

While the Company has developed extensive recovery plans, the Company cannot assure that those plans will be effective to prevent adverse effects resulting from system failures.

The use of the Company’s cloud technologies are also critical to the operation of systems, and its reliance on cloud technologies is growing.

The use of the Company’s cloud technologies is also critical to the operation of systems, and its reliance on cloud technologies is growing.

Service disruptions in cloud technologies may lead to delays in accessing, or the loss of, data that is important to the businesses and may hinder clients’ access to products and services.

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Breaches can be perpetrated by unknown third parties, but could also be facilitated by employees either inadvertently or by consciously attempting to create disruption or certain acts of fraud.

The Company’s customers and employees 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 through “Trojan horse” programs to the Company’s information systems, the information systems of merchants or third-party service providers and/or customers' computers.

The Company’s customers and employees 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 through “Trojan horse” programs to the Company’s information systems, the information systems of merchants or third-party service providers and/or customers' computers.

Although the Company, with the help of third-party service providers, will continue to implement information security technology solutions and establish operational procedures to protect sensitive data, there can be no assurance that these measures will be effective.

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

A successful cyber attack affecting the Company could cause significant harm to the Company and its clients and customers.

The Company and similar financial institutions are subject to continuous threats from cyber attacks on its computer systems, software, networks and other technology from various actors, including groups acting on behalf of hostile countries, cyber-criminals, “hacktivists” (i.e., individuals or groups that use technology to promote a political agenda or social change) and others.

These cyber attacks can take many forms, including attempts to introduce computer viruses or malicious code, which are commonly referred to as “malware,” into the Company’s systems.

These attacks are often designed to:

obtain unauthorized access to confidential information belonging to the Company or its clients, customers, counterparties or employees, manipulate data, destroy data or systems with the aim of rendering services unavailable, disrupt, sabotage or degrade service on the Company’s systems, steal money, or extort money through the use of so-called “ransomware.” The Company has experienced security breaches and cyber attacks in the past, and it is inevitable that additional breaches and attacks will occur in the future.

While such breaches and attacks have not materially impacted the Company to date, future security breaches and cyber attacks could result in serious and harmful consequences for the Company or its clients and customers.

A principal reason that the Company cannot provide absolute security against cyber attacks is that it may not always be possible to anticipate, detect or recognize threats to the Company’s systems, or to implement effective preventive measures against all breaches because:

the techniques used in cyber attacks evolve frequently and are increasingly sophisticated, and therefore may not be recognized until launched, cyber attacks can originate from a wide variety of sources, including the Company’s own employees, cyber-criminals, hacktivists, groups linked to terrorist organizations or hostile countries, or third parties whose objective is to disrupt the operations of financial institutions more generally, the Company does not have control over the cybersecurity of the systems of the large number of clients, customers, counterparties and third-party service providers with which it does business, and it is possible that a third party, after establishing a foothold on an internal network without being detected, might obtain access to other networks and systems.

The risk of a security breach due to a cyber attack could increase in the future due to factors such as:

the Company’s ongoing expansion of its mobile and digital banking and other internet-based product offerings and its internal use of internet-based products and applications and the increased use of remote access to facilitate remote arrangements for employees, vendors and other third parties.

In addition, a third party could misappropriate confidential information obtained by intercepting signals or communications from mobile devices used by the Company’s employees.

A successful penetration or circumvention of the security of the Company’s systems or the systems of a vendor, governmental body or another market participant could cause serious negative consequences, including:

significant disruption of the Company’s operations and those of its clients, customers and counterparties, including losing access to operational systems, misappropriation of confidential information of the Company or that of its clients, customers, counterparties, employees or regulators, disruption of or damage to the Company’s systems and those of its clients, customers and counterparties, the inability, or extended delays in the ability, to fully recover and restore data that has been stolen, manipulated or destroyed, or the inability to prevent systems from processing fraudulent transactions, allegations or violations by the Company of applicable privacy and other laws, financial loss to the Company or to its clients, customers, counterparties or employees, loss of confidence in the Company’s cybersecurity and business resiliency measures, dissatisfaction among the Company’s clients, customers or counterparties, significant exposure to litigation and regulatory fines, penalties or other sanctions, and harm to the Company’s reputation.

The extent of a particular cyber attack and the steps that the Company may need to take to investigate the attack may not be immediately clear, and it may take a significant amount of time before such an investigation or determination, judicial or otherwise, can be completed.

While such an investigation is ongoing, the Company may not necessarily know the full extent of the harm caused by the cyber attack,

and that damage may continue to spread.

These factors may inhibit the Company’s ability to provide rapid, full and reliable information about the cyber attack to its clients, customers, counterparties and regulators, and the public.

Furthermore, it may not be clear how best to contain and remediate the harm caused by the cyber attack, and certain errors or actions could be repeated or compounded before they are discovered and remediated.

Any or all of these factors could further increase the costs and consequences of a cyber attack.

The Company’s operations rely extensively on a broad range of external vendors.

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The Company’s adoption of the CECL model has increased the complexity, and associated risk, of the analysis and processes relying on management judgment, which could negatively impact the financial condition, results of operations or profitability of the Company.

The risk management strategies and processes may not be effective;

the Company’s controls and procedures may fail or be circumvented .

The risk management strategies and processes may not be effective and the Company’s controls and procedures, including disclosure controls and procedures and internal control over financial reporting, may fail or be circumvented .

The Company continues to invest in the development of risk management techniques, strategies, assessment methods and related controls and monitoring approaches on an ongoing basis.

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Management regularly reviews and updates internal controls over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures.

In particular, any failure to maintain or develop effective internal control over financial reporting and disclosure controls and procedures and or any difficulties encountered in their implementation or improvement could cause the Company to fail to meet its reporting obligations and may result in a restatement of its financial statements for prior periods.

Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in the Company’s reported financial and other information, including if the Company were to report a material weakness, which would likely have a negative effect on the trading price of the Company’s common stock.

If the Company has a material weakness in its internal control over financial reporting, the Company may not detect errors on a timely basis and its financial statements may be materially misstated.

If the Company is unable to maintain effective internal controls over financial reporting and disclosure controls, the Company could become subject to investigations by the NASDAQ, the SEC or other regulatory authorities or shareholder litigation, which could require additional management attention and which could adversely affect the Company’s business, financial condition and results of operations.

Any system of controls, however well designed and operated, is based in part on certain assumptions and management judgment and can provide only reasonable, not absolute, assurances that the objectives of the system are met.

Any failure or circumvention of controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the business, financial condition, results of operations or profitability.

The business is susceptible to fraud.

The business is susceptible to fraud and conduct risk.

The Company’s business exposes it to fraud risk from loan and deposit customers, the parties they do business with, as well as from employees, contractors and vendors.

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The Company’s and its customers’ exposure to fraud may increase the Company’s financial risk and reputation risk as it may result in unexpected loan losses that exceed those that have been provided for in the allowance for credit losses.

In addition, the Company is subject to risk from the conduct of its employees, including the negative impact that can result from employee misconduct or failure by employees to conduct themselves in accordance with the Company’s policies.

All of which could damage the Company’s reputation and result in loss of customers or other financial loss or expose the Company to increased regulatory or other risk.

Legal, Regulatory and Compliance Risks

The Company is subject to extensive government regulation and supervision and interpretations thereof .

The Company, as a bank holding company and financial holding company, and the Bank, as a Texas state-chartered bank, are subject to extensive federal and state regulation and supervision and the potential for regulatory enforcement actions, that impact the business on a daily basis.

TCBI Securities, Inc., the Bank’s wholly owned non-bank subsidiary, is also subject to the jurisdiction of several regulatory bodies, including the SEC, FINRA and state securities regulators.

See the discussion above at Business - Regulation and Supervision .

These regulations affect lending practices, permissible products and services and their terms and conditions, customer relationships, capital structure, investment practices, accounting, financial reporting, operations and ability to grow, among other things.

These regulations also impose obligations to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identities of customers.

See the discussion above at Business - Regulation and Supervision for additional discussion of the extensive regulation and supervision the Company and the Bank are subject to.

The level of regulatory scrutiny that the Company and the Bank are subject to may fluctuate over time, based on numerous factors.

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Such changes could result in new regulatory obligations which could prove difficult, expensive or competitively impractical to comply with if not equally imposed upon non-bank financial services providers with whom the Company competes.

interest rate management, liquidity, capital and operational risk, enterprise risk management, regulatory and financial accounting practices and policies and related matters, which can divert management’s time and attention from focusing on the business.

The Company is subject to a continuous program and routine of examinations by regulators concerning, among other things, lending practices, reserve methodology, compliance with changing regulations and interpretations, BSA/AMLA compliance, interest rate management, liquidity, capital and operational risk, enterprise risk management, regulatory and financial accounting practices and policies and related matters, which can divert management’s time and attention from focusing on the business.

The Company devotes a significant amount of management time and expense to enhancing the infrastructure to support its compliance obligations, which can pose significant regulatory enforcement, financial and reputational risks if not appropriately addressed.

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Uncertainty regarding how regulators will evaluate or require capital and liquidity planning going forward remains a risk.

The Company continues to increase its capital and liquidity and expand regulatory compliance staffing and systems in order to address continuing regulatory requirements.

The Company continues to increase its capital and liquidity and expand regulatory compliance staffing and systems in order to address evolving regulatory requirements.

There is no assurance that financial performance in future years will not be similarly burdened.

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The Company cannot offer assurance that these efforts will be accepted by regulators as satisfying the applicable legal and regulatory requirements.

Failure to comply with relevant laws, regulations, recommendations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the business, financial condition and results of operations.

Failure to comply with relevant laws, regulations, recommendations

or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the business, financial condition and results of operations.

While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.

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The Company is subject to claims and litigation in the ordinary course of its business, including claims that may not be covered by insurance.

Customers and other parties the Company engages with may, on a regular basis, assert claims and take legal action against the Company and the Company regularly takes legal action to collect unpaid borrowers’ obligations, realize on collateral and assert rights in commercial and other contexts.

Customers and other parties the Company engage with may, on a regular basis, assert claims and take legal action against the Company and the Company regularly takes legal action to collect unpaid borrowers’ obligations, realize on collateral and assert rights in commercial and other contexts.

These actions frequently result in counter claims against the Company.

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The Company could be required to pursue legal actions against insurers to obtain payment of amounts owed, and there is no assurance that such actions, if pursued, would be successful.

Any regulatory examination scrutiny or new regulatory requirements arising from the recent events in the banking industry could increase the Company’s expenses and affect the Company’s operations.

The Company also anticipates increased regulatory scrutiny – in the course of routine examinations and otherwise – and new regulations directed towards banks of similar size to the Bank, designed to address the recent negative developments in the banking industry, all of which may increase the Company’s costs of doing business and reduce its profitability.

Among other things, there may be an increased focus by both regulators and investors on the on-balance sheet liquidity of and funding sources for financial institutions, the composition of their deposits and the level of uninsured deposits, the amount of accumulated other comprehensive loss, capital levels and interest rate risk management.

As primarily a commercial bank, the Bank has a high degree of uninsured deposits

compared to larger national banks or smaller community banks with a stronger focus on retail deposits.

As a result, the Bank could face increased scrutiny or be viewed as higher risk by regulators and the investor community.

Other Risks Affecting the Business

The business faces unpredictable economic and business conditions .

The business is directly impacted by general economic and business conditions in Texas, the United States and internationally.

The business is directly impacted by general economic, business and political conditions in Texas, the United States and internationally.

The credit quality of the loan portfolio necessarily reflects, among other things, the general economic conditions in the areas in which the Company and its customers conduct their respective businesses.

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• the performance of both domestic and international equity and debt markets and valuation of securities traded on recognized domestic and international exchanges;

• general economic consequences of international conditions, such as weakness in European and South American sovereign debt and currencies and the U.K.'s referendum to exit from the European Union, and the impact of those conditions on the U.S.

• general economic consequences of international conditions and the impact of those conditions on the U.S.

and global economies;

• legislative and regulatory changes impacting the banking industry;

• impact of the 2024 presidential and congressional elections and other political conditions;

• the financial health of customers and economic conditions affecting them and the value of collateral, including effects from the COVID-19 pandemic and other pandemics and the continued price volatility of oil and gas and other commodities;

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• changes in governmental economic and regulatory policies, including the extent and timing of intervention in credit markets by the Federal Reserve or withdrawal from that intervention, generally including changes attributable to presidential and congressional elections;

• acts or threats of war;

• acts or threats of war, including the ongoing war in Ukraine and the Israeli Palestinian conflict;

• changes in the availability of liquidity at a systemic level;

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When the outlook for such economic conditions is uncertain or negative, financial market activity generally tends to decrease, which can be expected to reduce the Company’s investment banking revenues and prospects for new business.

The COVID-19 pandemic continues to affect the Company and its customers, employees and third-party service providers, and while the adverse impacts on its business, financial position, operations and prospects have dissipated, they have not been completely eliminated.

During 2020, as a result of the uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity caused by the COVID-19 pandemic, business and consumer customers of the Company experienced varying degrees of financial distress, adversely affecting their ability to timely pay interest and principal on their loans and the value of the collateral securing their obligations.

Effective June 1, 2021, the Company returned to pre-pandemic business operations and brought 100% of its workforce back into the office.

Its branch locations are currently open and operating during normal business hours.

In order to protect the health of its customers and employees, the Company

continues to take additional precautions within its branch locations, including enhanced cleaning procedures.

These actions in response to the COVID-19 pandemic, and similar actions by the Company’s vendors and business partners, have not materially impaired its ability to support its employees, conduct its business and serve its customers, but there is no assurance that these actions will be sufficient to successfully mitigate the risks presented by COVID-19 or that the Company’s ability to operate will not be materially affected going forward.

For instance, business operations may be disrupted if key personnel or significant portions of employees are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the COVID-19 pandemic.

Similarly, if any of its vendors or business partners become unable to continue to provide their products and services, which the Company relies upon to maintain its day-to-day operations, its ability to serve its customers could be impacted.

Although the aforementioned risks have much dissipated compared to historic periods, they have not been completely eliminated.

The risk of new variants and new outbreaks overseas and at home which could impact supply chains continue to exist.

Given the ongoing and dynamic nature of the circumstances, it is not possible to accurately predict the extent, severity or duration of these conditions or when normal economic and operating conditions will resume.

For this reason, the extent to which the COVID-19 pandemic affects the Company’s business, operations and financial condition, as well as its regulatory capital and liquidity ratios and credit ratings, is highly uncertain and unpredictable and depends on, among other things, new information that may emerge concerning the scope, duration and severity of the COVID-19 pandemic, actions taken by governmental authorities and other parties in response to the pandemic, the scale of distribution and public acceptance of the vaccines for COVID-19 and the effectiveness of such vaccines in stemming or stopping the spread of COVID-19.

The soundness of other financial institutions could adversely affect the business.

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The Company has exposure to many different industries and counterparties, and the Company routinely executes transactions with counterparties in the financial services industry, including broker-dealers, commercial banks, investment banks and other institutional clients.

Many of these transactions expose us to credit risk in the event of default of a counterparty or client.

In addition, the Company’s credit risk may be exacerbated when the collateral held by it or the Company cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due.

Many of these transactions expose the Company to credit risk in the event of default of a counterparty or client.

In addition, the Company’s credit risk may be exacerbated when the collateral held by the Company cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due.

There can be no assurance that any such losses would not materially and adversely affect results of operations or profitability.

The impact of the Tax Act on the Company and its customers contributes to uncertainty and risk related to customers' future demand for credit and its future results.

The extent to which increased economic activity expected to result from the Tax Act has spurred additional economic activity or affected the extent of borrowing by customers is unclear, although the continuation of the current economic expansion provides some evidence of a positive effect.

At the same time, some of the Company’s customers may have elected to use their additional cash flow from lower taxes to fund their business, decreasing borrowing needs.

The elimination of the federal income tax deductibility of business interest expense for a significant number of customers effectively increases the cost of borrowing and makes equity or hybrid funding relatively more attractive.

This could have a long-term negative impact on business customer borrowing.

The Company realized a significant increase in after-tax net income available to stockholders attributable to the Tax Act beginning in 2018, but there is no guarantee that future years' results will have the same benefit.

The continued compression of net interest margin at the Company and for competitor banks indicates that some or all of the expected benefit from the Tax Act has been lost as the banks and financial services companies the Company competes with have elected to lower interest rates and fees and the Company has responded in order to remain competitive.

Additionally, the tax benefits could be repealed as a result of future political or regulatory actions, including as a result of changes proposed by the U.S.

presidential administration and newly elected Congress.

There is no assurance that the current or anticipated benefits of the Tax Act will be realized in future periods.

Recent negative developments affecting the banking industry, and resulting media coverage, have eroded customer confidence in the banking system.

The closures of Silicon Valley Bank and Signature Bank in March 2023 and First Republic Bank in

May 2023, and concerns about similar future events, have generated significant market volatility among publicly traded bank holding companies and, in particular, regional banks like the Company.

These market developments have negatively impacted customer confidence in the safety and soundness of regional banks.

As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact the Company’s liquidity, loan funding capacity, net interest margin, capital and results of operations.

While the Department of the Treasury, the Federal Reserve, and the FDIC took action to ensure that depositors of these failed banks had access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional banks and the banking system more broadly.

Furthermore, there is no guarantee that regional bank failures or bank runs similar to the ones that occurred in 2023 will not occur in the future and, if they were to occur, they may have a material and adverse impact on customer and investor confidence in regional banks negatively impacting the Company’s liquidity, capital, results of operations and stock price.

The Company is subject to environmental liability risk associated with lending activities.

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Such events could affect the stability of its deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses.

Recent hurricanes caused extensive flooding and destruction along the

coastal areas of Texas and in other areas in the U.S., including communities where the Company conducts business.

In recent years, hurricanes have caused extensive flooding and destruction along the coastal areas of Texas and in other areas in the U.S., including communities where the Company conducts business.

Although management has established disaster recovery policies and procedures, the occurrence of any such events could have a material adverse effect on the business, financial condition, results of operations or profitability.

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Climate change has caused severe and abnormal weather patterns and events that could disrupt operations at one or more of the Company’s locations, which may disrupt its ability to provide financial products and services to clients.

Climate change could also have a negative effect on the financial status and creditworthiness of clients, which may decrease revenues and business activities from those clients, increase the credit risk associated with loans and other credit exposures to such clients, and decrease the value of warrants and direct equity investments in such clients, if any.

The current and anticipated effects of climate change are creating an increasing level of concern for the state of the global environment.

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For example, weather disasters, shifts in local climates and other disruptions related to climate change may adversely affect the value of real properties securing loans, which could diminish the value of the loan portfolio.

Such events may also cause reductions in regional and local economic activity that may have an adverse effect on customers, which could limit the Company’s ability to raise and invest capital in these areas and communities, each of which could have a material adverse effect on the financial condition, results of operations or profitability.

Such events may also cause reductions in regional and local economic activity that may have an adverse effect on customers, which could limit the Company’s ability to raise and invest capital in

these areas and communities, each of which could have a material adverse effect on the financial condition, results of operations or profitability.

Negative public opinion could damage the Company’s reputation and adversely affect its earnings.

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The Company takes steps to minimize reputation risk, but its efforts may not be sufficient.

ESG risks could adversely affect the Company’s reputation and shareholder, employee, client, and third party relationships and may negatively affect the Company’s stock price.

The Company faces increasing public scrutiny related to ESG activities and if the Company.

fails to act responsibly in a number of areas, such as DEI, environmental stewardship, including with respect to climate change, human capital management, support for our local communities, corporate governance, and transparency, or fails to consider ESG factors in our business operations, the Company’s brand and reputation may be damaged.

Furthermore, as a result of the Company’s diverse base of clients and business partners, the Company may face potential negative publicity based on the identity of its clients or business partners and the public’s (or certain segments of the public’s) view of those entities.

Such publicity may arise from traditional media sources or from social media and may increase rapidly in size and scope.

If the Company’s client or business partner relationships were to become intertwined in such negative publicity, the Company’s ability to attract and retain clients, business partners, and employees may be negatively impacted, and the Company’s stock price may also be negatively impacted.

Additionally, the Company faces pressure to not do business in certain industries that are viewed as harmful to the environment or are otherwise negatively perceived, which could impact our growth.

Additionally, investors and shareholder advocates are placing ever increasing emphasis on how corporations address ESG issues in their business strategy when making investment decisions and when developing their investment theses and proxy recommendations.

The Company may incur meaningful costs with respect to its ESG efforts and if such efforts are negatively perceived, its reputation and stock price may suffer.

Risks Relating to Company Securities

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General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause the Company’s stock price to decrease regardless of operating results.

The trading volume in the Company’s common stock is less than that of other larger financial services companies.

Although the common stock is traded on Nasdaq, the trading volume in the Company’s common stock is less than that of other larger financial services companies.

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

In addition, a substantial majority of common stock outstanding is held by institutional investors, and trading activity involving large positions may increase volatility of the stock price.

Concentration of ownership by institutional investors and inability to execute trades covering large numbers of shares can increase volatility of stock price.

Changes in general economic outlook or perspectives on the Company’s business or prospects by its institutional investors, whether factual or speculative, can have a major impact on the stock price.

The Company’s preferred stock is thinly traded .

There is only a limited trading volume in the Company’s preferred stock due to the small size of the issue and its largely institutional holder base.

Significant sales of the Company’s preferred stock, or the expectation of these sales, could cause the price of the preferred stock to fall substantially.

An investment in the Company’s securities is not an insured deposit.

The Company’s common stock, preferred stock and indebtedness are not bank deposits and, therefore, are not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity.

Investment in the common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of securities of any company.

As a result, acquisition of the Company’s common stock, preferred stock or indebtedness may result in loss of the investment.

Additionally, the trading volume in the Company’s common stock is less than that of other larger financial services companies.

Given the lower trading volume of the common stock, significant sales of the common stock, or the expectation of these sales, could increase the volatility of the Company’s stock price and cause the stock price to fall.

The holders of the Company’s indebtedness and preferred stock have rights that are senior to those of its common stockholders .

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The Company must be current on dividends payable to holders of preferred stock before any dividends can be paid on the common stock.

In the event of the

Company’s bankruptcy, dissolution or liquidation, the holders of preferred stock must be satisfied before any distributions can be made to common stockholders.

The Company does not currently pay dividends on its common stock .

The Company has not paid dividends on its common stock and the Company does not expect to do so for the foreseeable future.

The Company’s ability to pay dividends is limited by regulatory restrictions and the need to maintain sufficient consolidated capital.

The ability of the Bank to pay dividends to the Company is limited by its obligation to maintain sufficient capital and by other regulatory restrictions as discussed above under the heading Supervision and Regulation - Restrictions on Payment of Dividends by the Bank .

In the event of the Company’s bankruptcy, dissolution or liquidation, the holders of preferred stock must be satisfied before any distributions can be made to common stockholders.

Federal legislation and regulations impose restriction on the ownership of the Company’s common stock .

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In addition, as a Delaware corporation, the Company is subject to Section 203 of the Delaware General Corporation Law which, in general, prevents an interested stockholder, defined generally as a person owning 15% or more of a corporation's outstanding voting stock, from engaging in a business combination with the Company for three years following the date that person became an interested stockholder unless certain specified conditions are satisfied.

The Bank is subject to regulatory and contractual limitation on the payment of its subordinated notes .

Under the FDIA, “critically undercapitalized” banks may not, beginning 60 days after becoming critically undercapitalized, make any payment of principal or interest on their subordinated debt (subject to certain limited exceptions).

In addition, under Section 18(i) of the FDIA, the Bank is required to obtain the advance consent of the FDIC to retire any part of its subordinated notes.

Under the FDIA, a bank may not pay interest on its subordinated notes if such interest is required to be paid only out of net profits, or distribute any of its capital assets, while it remains in default on any assessment due to the FDIC.

The Bank’s subordinated indebtedness is unsecured and subordinate and junior in right of payment to the Bank’s obligations to its depositors, its obligations under banker’s acceptances and letters of credit, its obligations to any FRB, certain obligations to the FDIC, and its obligations to its other creditors, whether now outstanding or hereafter incurred, except any obligations which expressly rank on a parity with or junior to the subordinated notes.

UNRESOLVED STAFF COMMENTS

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What changed 10-K

Item 1A. Risk Factors