What changed in this filing

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Item 1A. Risk Factors

2023-03-08 compared with 2022-03-09 · 39 added, 60 removed, 309 unchanged (24% of the section changed)

7 unchanged sentences

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.

Given the current economic environment, an economic recession or downturn is a greater risk than in previous years.

An economic recession or a downturn in various markets could have the following adverse effects on our business:

• A decrease in net interest income derived from our lending and deposit gathering activities;

• A decrease in the demand of our loans and other products we offer;

• A decrease in our deposit balances due to overall reductions in the number or value in client accounts;

• A decrease in the value of collateral securing our loans

• An increase in the level of nonperforming and classified loans;

• An increase in provisions for credit losses and loan charge-offs;

• An increase in our operating expenses associated with attending to the effects of certain circumstances listed above.

As a result of these potential economic conditions, 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.

The United States has recently experienced elevated levels of inflation, with the consumer price index reaching approximately 6.5% in December 2022.

In connection with elevated levels of inflation, the Federal Reserve Board raised the Effective Federal Funds Rate seven times in 2022, ultimately targeting an Effective Federal Funds Rate between 4.25% and 4.50% in December, 2022.

Interest rates may continue to rise or otherwise stagnate at heightened levels in 2023 in an effort to account for continued levels of inflation.

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.

Additionally, if interest rates continue 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.

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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.

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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.

In addition, natural disasters, global climate change, pandemics, 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.

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 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.

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 has 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.

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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.

The Corporation and its subsidiaries have financial instruments which have a rate indexed to LIBOR.

On July 27, 2017, the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021.

This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021.

In late 2020, the LIBOR administrator published a consultation regarding its intention to delay the date on which it will cease publication of U.S.

dollar LIBOR from December 31, 2021 to June 30, 2023 for the most common tenors of U.S.

dollar LIBOR, including the three-month LIBOR, but indicated no new contracts using U.S.

dollar LIBOR should be entered into after December 31, 2021.

Publication of a non-U.S.

dollar LIBOR would continue to cease after December 31, 2021.

Notwithstanding the publication of this consultation, there is no assurance of how long LIBOR of any currency or tenor will continue to be published.

It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR, whether LIBOR rates will cease or continue to be published before or after December 31, 2021 or June 30, 2023, as applicable, or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere.

As a result of the 2017 announcement, regulators, industry groups, and committees have, among other things, published recommended fallback language for financial instruments indexed to LIBOR, identified and recommended alternatives to LIBOR, and proposed implementations of the recommended alternatives in floating-rate financial instruments.

For example, in June 2017, the Alternative Reference Rate Committee, a committee of private-market derivative participants and their regulators convened by the Federal Reserve to identity alternative reference interest rates, announced a Secured Overnight Funding Rate, a broad Treasuries overnight repurchase agreement (repo) financing rate, as its preferred alternative to U.S.

dollar LIBOR.

It is currently unknown whether any of these recommendations and proposals will be broadly accepted, whether they will continue to evolve, and what effect of their implementation may have on the markets for floating-rate financial instruments.

Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR and the value of financial instruments indexed to LIBOR in our portfolio and may impact the availability and cost of hedging instruments and borrowings.

Transition from LIBOR could create considerable costs and additional risk for us.

Since proposed alternative reference rates are calculated differently, payments under contracts indexed to new rates will differ from those indexed to LIBOR.

The Corporation is continuing to evaluate the impacts of the phase out of LIBOR.

Management has determined to initially replace LIBOR as an index for any new adjustable-rate loans with the Secured Overnight Finance Rate (“SOFR”).

However, the transition from LIBOR could create considerable costs and additional risk for us.

Since SOFR is calculated differently, payments under contracts indexed to new rates will differ from those indexed to LIBOR.

The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design, and hedging strategies.

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If these events or circumstances were to occur, it could result in a potential loss of revenue and have an adverse effect on our business, results of operations, and financial condition.

New accounting standard, effective January 1, 2020, significantly changes how we recognize credit losses and may have a material impact on our financial condition or results of operations.

Effective January 1, 2020, the Corporation implemented the provision of Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 represents a comprehensive change in estimating the allowance for credit losses from the previous “incurred loss” model of losses inherent in the loan portfolio to a current “expected loss” model, which encompasses losses expected to be incurred over the life of the portfolio.

The measurement of expected credit losses under ASU 2016-13 is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter.

This differs significantly from the “incurred loss” model previously required under generally accepted accounting principles, which delays recognition until it is probable a loss has been incurred.

Accordingly, we expect that the adoption of ASU 2016-13 could materially affect how we determine our allowance for credit losses and may require us to significantly increase our allowance.

Moreover, ASU 2016-13 may create more volatility in the level of our allowance for credit losses.

If we are required to materially increase our level of allowance for credit losses for any reason, such increase could adversely affect our business, financial condition and results of operations.

The Corporation operates in a highly competitive industry and market, and our business will suffer if we are unable to compete effectively.

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These loans are generally viewed as having more inherent risk of default than residential mortgage or consumer loans.

The repayment of these loans often depends on the successful operation of a business.

The repayment of these loans often depends on the successful operation of a business and could be impacted by a recession or economic downturn.

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.

An increase in nonperforming loans could result in an increase in the provision for loan losses and an increase in loan charge-offs, both of which could have a material adverse effect on the Corporation’s business, financial condition, and results of operations.

An increase in nonperforming loans could result in an increase in the provision for loan

losses and an increase in loan charge-offs, both of which could have a material adverse effect on the Corporation’s business, financial condition, and results of operations.

The Corporation’s accounting estimates and risk management processes rely on analytical and forecasting models, which, if inadequate, may result in a material adverse effect on our business, financial condition, or results of operation.

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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.

The Corporation’s access to deposits may also be affected by the liquidity needs of depositors.

The Corporation may not be able to replace maturing deposits and advances as necessary in the future, especially if a large number of depositors sought to withdraw their deposits, regardless of the reason.

The Corporation may not be able to replace maturing deposits and advances as necessary in the future, especially if a large number of depositors sought to withdraw their deposits,

regardless of the reason.

A failure to maintain adequate liquidity could have a material adverse effect on the Corporation’s business, financial condition, and result of operations.

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

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 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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These dividends are the principal source of funds to pay dividends on the Corporation’s common stock and interest and principal on the Corporation’s debt.

Various federal and state laws and regulations limit the amount of dividends that the Bank and the Morris Plan may pay to the Corporation.

Various federal and state laws and regulations limit the amount of dividends that the Bank may pay to the Corporation.

Also, the Corporation’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.

In the event the Bank and/or the Morris Plan are unable to pay dividends to the Corporation, the Corporation may not be able to service debt, pay obligations, or pay dividends on the Corporation’s common stock.

The inability to receive dividends from the Bank and/or the Morris Plan could have a material adverse effect on the Corporation’s business, financial condition, and results of operations.

In the event the Bank is unable to pay dividends to the Corporation, the Corporation may not be able to service debt, pay obligations, or pay dividends on the Corporation’s common stock.

The inability to receive dividends from the Bank could have a material adverse effect on the Corporation’s business, financial condition, and results of operations.

Risks Related to the Legal and Regulatory Environment

We operate in a highly regulated environment and the regulatory framework to which we are subject may adversely affect our results of operations.

The Corporation, the Bank, and the Morris Plan operate in a highly regulated environment and we are subject to extensive regulation, supervision, and examination by the Federal Reserve, the OCC, and the FDIC and DFI, respectively.

The Corporation, and the Bank operate in a highly regulated environment and we are subject to extensive regulation, supervision, and examination by the Federal Reserve, the OCC, and the FDIC and DFI, respectively.

Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds, and the banking system as a whole, not our shareholders.

Further, as a bank holding company, we are required to act as a source of financial and managerial strength to the Bank and the Morris Plan and to commit resources to support our subsidiary banks if needed.

Further, as a bank holding company, we are required to act as a source of financial and managerial strength to the Bank and to commit resources to support our subsidiary banks if needed.

This regulatory framework affects our lending practices, capital structure, investment practices, and growth, among other things.

If, as a result of an examination, a banking regulatory were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate.

These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil money penalties, to fine or remove officers and directors, and, if it is concluded that these conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship.

These actions

include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil money penalties, to fine or remove officers and directors, and, if it is concluded that these conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship.

Any regulatory action against us or failure to comply with applicable laws and regulations could have an adverse effect on our reputation, business, financial condition, and results of operations.

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Future capital needs could result in dilution of shareholder investment.

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 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.

Our board of directors may determine from time to time there is a need to or, if our or the Bank’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 12,051,964 shares were outstanding as of December 31, 2022, and up to 10 million shares of preferred stock, of which no shares are outstanding.

privileges of any class or series of preferred stock.

These equity and/or debt issuances could dilute the ownership interest of our shareholders and may dilute the per share book value of our common 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