What changed in this filing

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Item 1A. Risk Factors

2023-05-10 compared with 2022-11-09 · 36 added, 12 removed, 3 unchanged (94% of the section changed)

Item 1A - Risk Factors

The following risk factor represents a material update and addition to the risk factors previously disclosed in the Company’s 2022 Annual Report on Form 10-K.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, “Item 1A.

Risk Factors” in our 2022 Annual Report on Form 10-K, which could materially affect our business, financial condition, or results of operations.

In the first quarter of 2022, we identified the following additional risk factor:

Instability in global economic conditions and geopolitical matters, as well as volatility in financial markets, could have a material adverse effect on the Company’s results of operations and financial condition.

The macroeconomic environment in the United States is susceptible to global events and volatility in financial markets.

For example, trade negotiations between the U.S.

and other nations remain uncertain and could adversely impact economic and market conditions for the Company and its clients and counterparties.

In addition, global demand for products may exceed supply during the economic recovery from the COVID-19 pandemic, and such shortages may cause inflation, adversely impact consumer and business confidence, and adversely affect the economy as well as the Company’s financial condition and results.

Specifically, on February 24, 2022, Russian military forces invaded Ukraine, and sustained conflict and disruption in the region is likely.

Although the length, impact and outcome of the ongoing war in Ukraine is highly unpredictable, this conflict could lead to significant market and other disruptions, including significant volatility in commodity prices and supply of energy resources, instability in financial markets, supply chain interruptions, political and social instability, changes in consumer or purchaser preferences as well as increase in cyberattacks and espionage.

The extent and duration of the military action, sanctions and resulting market disruptions could be significant and could potentially have substantial impact on the global economy and our business for an unknown period of time.

Any of the above-mentioned factors could affect our business, financial condition and operating results.

Any such disruptions may also magnify the impact of other risks described in this Quarterly Report on Form 10-Q and our Form 10-K for the year ended December 31, 2021.

Adverse developments affecting the financial services industry, such as recent bank failures or concerns involving liquidity, may have a material effect on the Company’s operations, earnings and financial condition.

Late in the first quarter of 2023, the financial services industry was negatively affected by several bank failures.

These recent events have caused general uncertainty and concern regarding the adequacy of liquidity within the banking sector as a whole and have decreased confidence in banks among depositors and investors.

Although we were not directly affected by these bank failures, the resulting speed and ease in which news or rumors, including social media commentary, led depositors to withdraw or attempt to withdraw their funds from these and other financial institutions as well as caused the stock prices of many financial institutions to become volatile, in particular regional, as well as community banks like the Company.

As a result of these recent events, customers may choose to maintain deposits with larger financial institutions or in other higher yielding alternatives, which could materially adversely impact the Company’s liquidity, loan funding capacity, net interest margin, capital and results of operations.

In response to these failures and the resulting market reaction, the Secretary of the Treasury approved actions enabling the FDIC to complete its resolutions of the failed banks in a manner that fully protects depositors by utilizing the Deposit Insurance Fund, including the use of Bridge Banks to assume all of the deposit obligations of the failed banks, while leaving unsecured lenders and equity holders of such institutions exposed to losses.

In addition, the Federal Reserve Bank announced it would make available additional funding to eligible depository institutions under a Bank Term Funding Program to help assure banks have the ability to meet the needs of all their depositors.

In an effort to strengthen public confidence in the banking system and protect depositors, regulators announced that any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law, which is expected to increase the cost of our FDIC insurance assessments.

However, it is uncertain whether these steps by the government will be sufficient to calm the financial markets, reduce the risk of significant depositor withdrawals at other institutions and thereby reduce the risk of additional bank failures.

As a result of this uncertainty, we face the potential for reputational risk, deposit outflows, increased costs and competition for liquidity, and increased credit risk which, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operations.

Banking regulators have signaled further review of regulatory requirements and the potential for changes to laws or regulations governing banks and bank holding companies.

Changes resulting from these events could include increased regulatory focus on deposit composition, the level of uninsured deposits, the level of unrealized losses in either available for sale or held to maturity securities portfolios, contingent liquidity, CRE loan composition and concentration, capital position and general oversight or supervisory or internal control structures regarding the foregoing.

Changes in regulatory requirements could impact our ability to achieve our strategic objectives and may result in changes to our balance sheet position or business which could, in turn, negatively impact our profitability.

If we are required to sell securities to meet liquidity needs, we could realize significant losses.

As a result of increases in interest rates over the last year, the market values of previously issued government and other debt securities have declined in value, resulting in unrealized losses in our securities portfolio.

While we anticipate that the scheduled cash flows generated from our investment portfolio will be adequate to support the liquidity needs of the Company, if we were required to sell these securities to expedite the generation of cash flows to meet liquidity needs, we may incur significant losses, which could impair our capital and financial condition and adversely affect our results of operations.

Further, while we have taken actions to maximize our sources of liquidity, there is no guarantee that such sources will be available or sufficient in the event of sudden liquidity needs.

The following risk factor updates and supplements the risk factor regarding cyberattacks appearing on page 18 of the Company’s Form 10-K filed with the SEC on March 1, 2023.

We were subject to a cyberattack, which could damage our reputation, result in the disclosure of confidential information, or create additional financial and legal exposure.

As previously disclosed in the Current Report 8-K filed by us on February 14, 2023, the Bank experienced a cybersecurity incident, where unusual network activity was detected, and management shut down networked systems which prevented access to internal systems, data and telephones for a limited period of time.

Upon discovering the incident, the Bank immediately launched an investigation.

A digital forensics firm was engaged to help determine the scope of the incident and identify potentially impacted data.

We received a demand for

ransom from a party claiming responsibility for the incident and the Bank promptly notified law enforcement and banking regulators.

The Bank believes that its core banking systems, including those that facilitate loan or deposit related transactions, were not affected by this incident as evidenced by the Bank’s general ability to resume customer facing operations within two days.

However, the Bank’s internal system access as well as communication capabilities, including e-mail correspondence and telephones, required approximately one week of time for the restoration process to be completed in a safe and secure environment.

The Bank continues to work with third-party forensic investigators to understand the nature and scope of the incident and to determine what information was accessed and who was impacted.

The investigation is on-going.

While we continue to evaluate the full impact of this incident, we remain subject to a number of risks and uncertainties, including legal, reputational, and financial risks, the results of our ongoing investigation of this security incident, any potential regulatory inquiries and/or litigation to which we may become subject in connection with this incident, and the extent of remediation and other additional costs that may be incurred by us.

To date, we do not believe such financial consequences will be material, however the cybersecurity incident is still under investigation.

Although the Company has insurance coverage, including cybersecurity insurance, the amount of coverage maintained may not cover all losses.

We anticipate that we will incur additional expenses in future periods, including the notification of those impacted by the cybersecurity incident in accordance with applicable laws.

Given the uncertainties about the impact of the incident and the inherent uncertainties involved in litigation, contractual obligations, government investigations and regulatory enforcement decisions, any outcomes from these risks could have a material adverse effect on our reputation, business and/or financial condition.

In addition, litigation, regulatory interventions, and media reports of perceived security vulnerabilities and any resulting damage to our reputation or loss of confidence in the security of our systems could adversely affect our business.

As cyber threats and the sophistication of threat actors continue to evolve, we have been and will likely continue to enhance our protective measures and will expend resources to investigate and remediate any information security vulnerabilities or incidents.

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-Q

Item 1A. Risk Factors