What changed in this filing

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Item 1A. Risk Factors

2022-03-09 compared with 2021-03-11 · 63 added, 93 removed, 306 unchanged (34% 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 or incorporated by reference in this report.

Risks Related to the COVID-19 Pandemic

The outbreak of COVID-19, or other such epidemic, pandemic, or outbreak of a highly contagious disease, occurring in the United States or in the geographies in which it conducts operations, could adversely affect the Corporation’s business operations, asset valuations, financial condition, and results of operations.

The Corporation’s business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions.

The COVID-19 outbreak, or an outbreak of another highly contagious or infectious disease, could negatively impact the ability of our employees and customers to conduct such transactions and disrupt the business activities and operations of our customers in the geographic areas in which we operate.

The spread of the COVID-19 virus had an impact on the Corporation’s operations during fiscal year 2020, and we expect that the virus will continue to have an impact on business, financial condition, and results of operations and our customers during fiscal year 2021.

The COVID-19 pandemic has caused changes in the behavior of our customers, businesses, and employees, including illness, quarantines, social distancing practices, cancellation of events and travel, business and school shutdowns, reduction in commercial activity and financial transactions, supply chain interruptions, increased unemployment, and overall economic and financial market instability.

Future effects, including additional actions taken by federal, state, and local governments to contain COVID-19 or treat its impact, are unknown.

Any sustained disruption to our operations is likely to negatively impact our financial condition and results of operations.

Notwithstanding our contingency plans and other safeguards against pandemics or another contagious disease, the spread of COVID-19 could also negatively impact the availability of our personnel who are necessary to conduct our business operations, as well as potentially impact the business and operations of our third party service providers who perform critical services for us.

If the response to contain COVID-19, or another highly infectious or contagious disease, is unsuccessful, we could experience a material adverse effect on our business operations, asset valuations, financial condition, and results of operations.

Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, investments, loans, loan servicing rights, deferred tax assets, or counter-party risk derivatives.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business.

The extent of such impact will depend on future developments, which are highly uncertain, including when COVID-19 be controlled and abated and when and how the economy may be reopened.

We are subject to increasing credit risk as a result of the COVID-19 pandemic, which could adversely impact our profitability.

Our business depends on our ability to successfully measure and manage credit risk.

We are exposed to the risk that the principal of, or interest on, a loan will not be paid timely or at all or that the value of any collateral supporting a loan will be insufficient to cover our outstanding exposure.

In addition, we are exposed to risks resulting from changes in economic and industry conditions and risks inherent in dealing with loans and borrowers.

As the overall economic climate in the U.S., generally, and in our market areas specifically, experience material disruption due to the COVID-19 pandemic, our borrowers may have difficulties in repaying their loans.

Governmental actions providing payment relief to borrowers affected by COVID-19 could preclude our ability to initiate foreclosure proceedings in certain circumstances and, as a result, the collateral

we hold may decrease in value or become illiquid, and the level of our nonperforming loans, charge-offs and delinquencies could rise and require significant additional provisions for credit losses.

Additional factors related to the credit quality of certain commercial real estate and multifamily residential loans include the duration of state and local moratoriums on evictions for non-payment of rent or other fees.

The payment on these loans that are secured by income producing properties are typically dependent on the successful operation of the related real estate property and may subject us to risks from adverse conditions in the real estate market or the general economy.

Bank regulatory agencies and various governmental authorities are urging financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19.

We are actively working to support our borrowers to mitigate the impact of the COVID-19 pandemic on them and on our loan portfolio, including through loan modifications that defer payments for those who experienced a hardship as a result of the COVID-19 pandemic.

Although recent regulatory guidance provides that such loan modifications are exempt from the calculation and reporting of troubled debt restructurings (“TDRs”) and loan delinquencies, we cannot predict whether such loan modifications may ultimately have an adverse impact on our profitability in future periods.

Our inability to successfully manage the increased credit risk caused by the COVID-19 pandemic could have a material adverse effect on our business, financial condition and results of operations.

Our participation in the SBA Paycheck Protection Program (“PPP”) exposes us to credit risk and regulatory enforcement risk, which could have a material adverse impact on our business, financial condition, and results of operations.

The Corporation is a participating lender in the PPP, a loan program administered through the SBA, which was created to help eligible businesses, organizations and self-employed persons fund their operational costs during the COVID-19 pandemic.

Under this program, the SBA guarantees 100% of the amounts loaned under the PPP.

As of December 31, 2020, the Corporation obtained approval from the SBA for 1,734 PPP loans totaling $169.8 million for both existing and new customers, with an average loan size of approximately $98 thousand.

The net deferred fee related to PPP loan origination totaled $2.4 million at December 31, 2020.

The Corporation may be exposed to credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which these loans were originated, funded, or serviced.

If a deficiency is identified, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Corporation.

These PPP loans are subject to the regulatory requirements that would require forbearance of loan payments and other relief to borrowers for a specified time or that would limit our ability to pursue all available remedies in the event of a loan default.

If the borrower under the PPP loan fails to qualify for loan forgiveness, we are at the heightened risk of holding these loans at unfavorable interest rates as compared to the loans to customers that we would have otherwise extended credit.

Interest rate volatility stemming from COVID-19 could negatively affect our net interest income, lending activities, deposits, and profitability.

Our net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19.

Following the COVID-19 outbreak and during 2020, market interest rates have declined significantly.

The yields on 10-year and 30-year treasury notes have declined to historic lows, and in March 2020, the Federal Open Market Committee (“FOMC”) of the Federal Reserve reduced the federal funds rate to a target range of 0.00% to 0.25% citing concerns about the impact of COVID-19 on markets and stress in certain sectors.

Additionally, the Federal Reserve announced it will take the following actions:

• purchase U.S.

Treasury bills;

• initiate overnight repurchase agreement operations;

• reinvest principal received on the Federal Reserve’s securities portfolio;

• reduce the interest paid on excess bank reserves held by the Federal Reserve.

A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies.

Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in current fair market values of our assets.

Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, and financial condition.

The Corporation may become subject to Covid-19-related litigation.

Litigation related to the COVID-19 pandemic has been commenced against some banks.

These lawsuits assert a variety of claims, including alleged mishandling of the PPP loans, violations of executive orders and regulatory guidance prohibiting or limiting debt collection, evictions and foreclosures, discriminatory program administration, workplace safety claims and claims alleging minimization in securities filings of the COVID-19 effect on operations.

The Corporation is not a party to any such litigation, and we are not aware of any facts which may give rise to such litigation.

While we believe our strong compliance and risk culture, proactive pandemic actions and clear communication with our customers employees and shareholders mitigate this legal risk, there can be no assurance that we will not become a party to COVID-19 related litigation.

Risks Related to Economic and Market Conditions

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The Corporation’s financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services that the Corporation offers, is highly dependent upon the business environment in the markets where the Corporation operates and in the U.S.

An economic downturn or sustained, high unemployment levels, decreased investor or business confidence, trade wars and the imposition of tariffs on goods purchased or sold by our customers, the effect of a pandemic, epidemic, or outbreak of an infectious disease on our customers, stock market volatility, and other factors beyond our control may have a negative effect on the ability of our borrowers to make timely repayments of their loans (thereby, increasing the risk of loan defaults and losses), the value of collateral securing those loans, demand for loans and other products and services we offer, and our deposit levels and composition.

An economic downturn or sustained, high unemployment levels, inflation, supply chain disruptions that impact borrowers, recession, currency devaluation, changes in the monetary supply, decreased investor or business confidence, trade wars and the imposition of tariffs on goods purchased or sold by our customers, the effect of a pandemic, epidemic, or outbreak of an infectious disease on our customers, stock market volatility, and other factors beyond our control may have a negative effect on the ability of our borrowers to make timely repayments of their loans (thereby, increasing the risk of loan defaults and losses), the value of collateral securing those loans, demand for loans and other products and services we offer, and our deposit levels and composition.

As a result, our operating results could be negatively impacted.

Continued elevated levels of inflation could adversely impact our business and results of operations.

The United States has recently experienced elevated levels of inflation, with the consumer price index reaching approximately 7.0% in late 2021.

Continued levels of inflation could have complex effects on our business and results of operations, some of which could be materially adverse.

While we generally expect any inflation-related increases in our interest expense to be offset by increases in our interest revenue, inflation-driven increases in our levels of non-interest expense could negatively impact our results of operations.

Additionally, if interest rates were to rise, we could see consumer sentiment shift and demand for loans may decrease which would impact our results of operations.

Continued elevated levels of inflation could also increase volatility and uncertainty in the business environment, which could adversely affect loan demand and our clients’ ability to repay indebtedness.

It is also possible that governmental policy responses to the current inflation environment could further affect our business, such as changes to monetary and fiscal policy.

The duration and severity of the current inflationary period, and the governmental responses thereto, are unknown and cannot be estimated with precision.

Changes in interest rates could adversely affect the Corporation’s results of operations and financial condition.

The Corporation’s earnings and cash flows are largely dependent upon the Corporation’s net interest income.

Net interest income is the difference between interest income earned on interest earning assets, such as loans and securities, and interest expense paid on interest bearing liabilities, such as deposits and borrowed funds.

Interest rates are highly sensitive to many factors that are beyond the Corporation’s control, including general economic conditions, domestic and international events, changes in U.S.

and other financial markets, and policies of various governmental and regulatory agencies.

Changes in monetary policy, including changes in interest rates, could influence not only the interest that is received on loans and securities and the interest that is paid on deposits and borrowings, but such changes could also affect the Corporation’s ability to originate loans and obtain deposits and the fair value of the Corporation’s financial assets and liabilities.

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

Such an interest rate environment may also result in us incurring a higher cost to retain our deposits.

While the higher payment amounts we would receive on adjustable-rate or variable-rate loans in a rising interest rate environment may increase our interest income, some borrowers may be unable to afford the higher payment amounts, and this could result in a higher rate of default.

Rising interest rates also may reduce the demand for loans and the value of fixed-rate investment securities.

Accordingly, changes in interest rates could adversely affect our results of operations and financial condition.

Labor shortages and the loss of one or more of those key personnel may materially and adversely affect our business.

Our success depends, in large part, on our ability to attract and retain key personnel.

Key personnel that have regular direct contact with customers and clients often build strong relationships that are important to our business.

In addition, we rely on key personnel to manage and operate our business, including major revenue producing functions, such as loan and deposit generation.

Competition for qualified personnel in the financial services industry can be intense and we may not be able to hire or retain the key personnel that we depend upon for success.

Frequently, we compete in the market for talent with entities that are not subject to comprehensive regulation.

The competition for talent has become exacerbated by the labor shortage in the U.S.

caused by the increase in employee resignations as a result of the COVID-19 pandemic, which is commonly referred to as the “great resignation.” The “great resignation” has been, and continues to be, felt across all levels of employment.

The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of the markets in which we operate, years of industry experience, and the difficulty of promptly finding qualified replacement personnel.

Also, the loss of key personnel could jeopardize our relationships with customers and clients and could lead to the loss of accounts.

Losses of accounts managed by key personnel could have a material adverse impact on our business.

Terrorist attacks, threats or actual war, natural disasters, global climate change, pandemics, other catastrophic events, trade policies, civil unrest, protests, and other global and domestic conflicts may impact all aspects of our operations, revenues, costs, and stock price in unpredictable ways.

Terrorist attacks in the U.S.

and abroad, as well as future events occurring in response to or in connection with them, including, without limitation, future terrorist attacks against U.S.

targets, rumors or threats of war, actual conflicts involving the U.S.

or its allies, or military or trade disruptions, may impact our operations.

In addition, natural disasters, global climate change, pandemics (in addition to the COVID-19 pandemic), other catastrophic events, trade policies, domestic civil unrest, protest, and other global or domestic conflicts may impact our operations as well.

Any of these occurrences could have an adverse impact on our operating results, revenues, and costs and may result in the volatility of the market price for our common stock and on the future price of our common stock.

The COVID-19 pandemic has had and may continue to have an adverse effect on the Corporation’s business operations, asset valuations, financial condition, profitability as a result of potential increased credit risk of our borrowers and results of operations.

While progress has been made in efforts to contain the COVID-19 pandemic, including vaccinations, and some restrictions have relaxed, new variants of the virus have and may continue to have, significant economic and policy impacts.

Even with these efforts to contain the pandemic, it is possible that continued developments, including new variants, could adversely affect

the Corporation’s operations, asset valuations, financial condition, profitability as a result of potential increased credit risk of our borrowers, and results of operations.

Notwithstanding our contingency plans and other safeguards against pandemics or another contagious disease, the spread of COVID-19 or new variants could also negatively impact the availability of our personnel who are necessary to conduct our business operations, as well as potentially impact the business and operations of our third-party service providers who perform critical services for us.

Material adverse impacts as a result of the COVID-19 pandemic may include all or a combination of valuation impairments on our intangible assets, investments, loans, loan servicing rights, deferred tax assets, or counter-party risk derivatives.

Banks, such as the Corporation, still face a risk of potential COVID-19 litigation alleging the mishandling of the Paycheck Protection Program (“PPP”) loans, violations of executive orders and regulatory guidance prohibiting or limiting debt collection, evictions and foreclosures, discriminatory program administration, workplace safety claims and claims alleging minimization in securities filings of the COVID-19 effect on operations.

The dynamic nature of COVID-19, and policies adopted to combat the pandemic, make it difficult to project the impact it will have on the Corporation’s business.

The Corporation was a participating lender in the PPP, a loan program administered through the SBA, which was created to help eligible businesses, organizations and self-employed persons fund their operational costs during the COVID-19 pandemic.

Under this program, the SBA guaranteed 100% of the amounts loaned under the PPP The Corporation made total loans under the PPP program in the amount of $275.1 million, of which all but $27.2 million have been forgiven by the SBA.

The Corporation may be exposed to credit risk on a PPP loan (even if such loan has been forgiven) if a determination is made by the SBA that there is a deficiency in the manner in which these loans were originated, funded, or serviced.

Geographic concentration of the Corporation’s markets makes our business highly susceptible to local economic conditions and a downturn in local economic conditions may adversely affect our business.

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• a decrease in deposits balances.

Changes in interest rates could adversely affect the Corporation’s results of operations and financial condition.

The Corporation’s earnings and cash flows are largely dependent upon the Corporation’s net interest income.

Interest rates are highly sensitive to many factors that are beyond the Corporation’s control, including general economic conditions, domestic and international events, changes in U.S.

and other financial markets, and policies of various governmental and regulatory agencies.

For several years prior to December 2015, the FOMC kept the target federal funds rate between 0% to 0.25% to help the overall U.S.

Beginning in late 2015 and continuing through 2018, the FOMC steadily increased the target federal funds rate up to between 2.25% to 2.5%.

In 2019, the FOMC decreased rates on three separate occasions for a total decrease of 75 basis

points, resulting in a target federal funds rate between 1.5% to 1.75%.

Following the COVID-19 outbreak and during 2020, market interest rates have declined significantly.

The 10-year U.S.

Treasury bond fell below 1.00% on March 3, 2020 for the first time and the FOMC reduced the federal funds rate to a target range of 0.00% to 0.25%.

Such an interest rate environment may also result in us incurring a higher cost to retain our deposits.

Rising interest rates also may reduce the demand for loans and the value of fixed-rate investment securities.

Accordingly, changes in interest rates could adversely affect our results of operations and financial condition.

Changes to the London Inter-Bank Offered Rate (“LIBOR”) may adversely impact the value of, and the return on, our financial instruments that are indexed to LIBOR.

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This process, which is critical to our financial results and condition, requires difficult, subjective, and complex judgments, including reviews of economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans.

There is the chance that we will fail to identify the proper factors or that we will fail to

accurately estimate the impacts of factors that we identify.

There is the chance that we will fail to identify the proper factors or that we will fail to accurately estimate the impacts of factors that we identify.

In addition, large loans, letters of credit, and contracts with individual counterparties in our portfolio magnify the credit risk that we face, as the impact of large borrowers and counterparties not repaying their loans or performing according to the terms of their contracts has a disproportionately significant impact on our credit losses and reserves.

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These loans are more likely to be adversely affected by weak conditions in the economy.

Also, the commercial loan balance per borrower is typically larger than that of residential mortgage loans and consumer loans, indicating higher potential losses on an individual loan basis.

Also, the commercial loan balance per borrower is typically

larger than that of residential mortgage loans and consumer loans, indicating higher potential losses on an individual loan basis.

The deterioration of one or a few of these loans could cause a significant increase in nonperforming loans and a reduction in interest income.

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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 are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our business.

Our success depends, in large part, on our ability to attract and retain key personnel.

Key personnel that have regular direct contact with customers and clients often build strong relationships that are important to our business.

In addition, we rely on key personnel to manage and operate our business, including major revenue producing functions, such as loan and deposit generation.

Competition for qualified personnel in the financial services industry can be intense and we may not be able to hire or retain the key personnel that we depend upon for success.

Frequently, we compete in the market for talent with entities that are not subject to comprehensive regulation.

industry experience, and the difficulty of promptly finding qualified replacement personnel.

Also, the loss of key personnel could jeopardize our relationships with customers and clients and could lead to the loss of accounts.

Losses of accounts managed by key personnel could have a material adverse impact on our business.

Our operational systems and networks are subject to an increasing risk of continually evolving cybersecurity or other technological risks, which could result in a loss of customer business, financial liability, regulatory penalties, damage to our reputation, or the disclosure of confidential information.

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External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service.

Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of the Corporation’s system of

internal controls.

Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of the Corporation’s system of internal controls.

Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Corporation’s business, financial condition, and results of operations.

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The Corporation requires liquidity to meet our deposit and other obligations as they come due.

The Corporation’s access to funding sources in amounts adequate to finance its activities or on terms that are acceptable to it could be impaired by factors that affect it specifically or the financial services industry or the general economy.

The Corporation’s access to funding sources in amounts adequate to finance its activities or on terms that are acceptable to it could be impaired by factors

that affect it specifically or the financial services industry or the general economy.

Factors that could reduce its access to liquidity sources include a downturn in the markets in which our loans are concentrated or adverse regulatory actions against the Corporation.

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(ix) governmental rules, regulations, and fiscal policies;

natural disasters.

and (x) natural disasters.

Certain expenditures associated with the ownership of real estate, principally real estate taxes, insurance, and maintenance costs, may adversely affect the income from the real estate.

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Environmental reviews of real property before initiating foreclosure actions may not be sufficient to detect all potential environmental hazards.

The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Corporation’s business, financial condition, and results of operations.

remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Corporation’s business, financial condition, and results of operations.

The Corporation may become subject to claims and litigation pertaining to intellectual property.

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The Bank Secrecy Act, the USA Patriot Act, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate.

The Federal Financial Crimes Enforcement Network is authorized to impose significant civil money penalties for violations of those requirements and has engaged in coordinated enforcement efforts with the other federal agencies,

including federal banking regulators.

We are also subject to increased scrutiny of compliance with the rules enforced by the U.S.

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• changes in applicable government regulation;

• macroeconomic and geopolitical factors discussed in this Risk Factors section;

• the Corporation’s announcement of new acquisitions or other projects.

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Our board of directors may determine from time to time there is a need to or, if our or the Bank’s or the Morris Plan’s regulatory capital ratios fall below the required minimums, we could be forced to raise additional capital through the issuance of additional shares of stock or other securities, including debt securities and senior or subordinated notes.

We are currently authorized to issue up to 40 million shares of common stock, of which 13.6 million shares were outstanding as of December 31, 2020 and up to 10 million shares of preferred stock, of which no shares are outstanding.

We are currently authorized to issue up to 40 million shares of common stock, of which 12,629,893 shares were outstanding as of December 31,

2021, and up to 10 million shares of preferred stock, of which no shares are outstanding.

Subject to certain limitations, our board of directors generally has authority, without action or vote of our shareholders, to issue all or part of the remaining authorized but unissued shares and to establish the rights, preferences, and privileges of any class or series of preferred stock.

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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