ITEM 1A. RISK FACTORS
Any of the following risks could harm our business, results of operations and
financial condition and an investment in our
stock.
The risks discussed below also include forward-looking statements, and our
actual results may differ substantially
from those discussed in these forward-looking statements.
Risk Factor Summary
The following summarizes the risks provided after this summary and is qualified
by the more detailed discussion of “Risk
Factors” that follows this Summary,
and which should be read in their entirety.
Our risks include operational risks,
financial risks and legal and regulatory risks, which are related and
intertwined as discussed more fully in the Risk Factors
that follow this summary.
Operational risks are inherent in our business, and include:
●
The effects of local, national and regional market and economic conditions
and cyclicality, including the
levels
and rates of change in inflation and interest rates, and the effects on depositors,
borrowers and markets, including
the real estate and securities markets;
●
Our allowance for credit losses is based on estimates and judgments and may prove
to be inadequate to our credit
risks;
●
The risks and costs of nonperforming assets
●
The soundness of other financial institutions and perceptions regarding our
industry, especially when other
banks
experience difficulties or fail;
●
Our concentrations in commercial real estate loans in our market;
●
We operate in
a highly competitive market and compete against a number of larger national and
regional
competitors, as well as smaller institutions, nonbanks and credit unions;
●
Our ability to attract and retain key people;
●
Inflation and strong labor markets may affect our non-interest expenses;
●
Technological changes
affect our business, and we may have fewer resources than our
larger regulated and
unregulated competitors, both in and outside our market area, which may increase
the competition we face;
●
Potential gaps in our risk management, including managing the risks related
to maintaining our data security and
cybersecurity and those of our third-party service providers;
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●
Continuity risks to us and our service providers due to power,
information technology and telecommunication
disruptions and outages, could affect our customer service,
reputation and our results of operations, financial
condition, customer relationship and reputation;
●
Risks of severe weather, natural disasters, climate changes,
epidemics and severe health issues in the population,
wars and acts of terrorism and other events; and
●
Future acquisitions may disrupt our business, dilute shareholder value
and adversely affect our operating results
and financial condition, among other risks.
Financial risks result in part from our operational risks and the risk of our business,
and include:
●
Increases in costs of funds due to inflation, monetary and fiscal policies, changes
in costumer behaviors and
competitive pressures;
●
Our results of operations and financial condition, including the values of our
assets and liquidity, may be
affected
by changes in interest rates and interest rate levels, the shape of the yield curve and
economic conditions;
●
Liquidity risks, including the costs and availability of funding, and the
liquidity of our assets, including our
investment securities portfolio, and institutional lending sources;
●
Changes in accounting and tax rules;
●
The adequacy of our capital and availability of capital, if needed;
●
Potentially excessive risk taking by our associates;
●
Our ability to pay dividends depends on our earnings, liquidity and regulatory
requirements related to our capital
and our risks; and
●
Our common stock trades in limited volumes.
Legal and regulatory risks include:
●
The Company is a legal entity separate and distinct from the Bank, and
transactions between the Bank and the
Company are limited by law;
●
The Company is required to be a source of financial and managerial strength
to the Bank, even in circumstances
where further investment in the Bank may not be warranted;
●
Privatization of Fannie Mae and Freddie Mac incident to the ending of their conservatorships
and the resulting
effects on the costs and availability of mortgage loans and the mortgage
markets, generally, and
the Company as a
mortgage originator, and seller and
servicer of residential mortgage loans;
●
The scope, volume, complexity and clarity of regulations and regulatory
and legal changes affect us, increase the
time and costs of compliance and may limit our business and adversely
affect our financial condition and results of
operations;
●
The pace and volume of regulatory changes and interpretations, especially by
the bank regulators, the CFPB and
the SEC, and well as numerous Executive Orders, and changes in government
leadership, personnel and policies.
Even where changes ultimately will benefit the Company,
changes in regulation and policies require time and
attention, and involve costs to implement;
●
Litigation, investigations and other claims by government agencies
and private parties and regulatory actions,
including those related to assertions of compliance failures;
●
The amounts and changes in the capital we are required to maintain in respect
of our business and risks, and
regulatory perceptions of us and our industry; and
●
Liquidity requirements and changes in rules that affect brokered
and reciprocal deposits and other sources and
measures of liquidity.
Additional Executive Orders and Administration and regulatory
decisions, directives and actions, including modifications
or changes to those discussed in this report, may occur at any time with currently
unpredictable effects.
Operational Risks
Market conditions and economic cyclicality may adversely affect our industry.
We believe the
following, among other things, may affect us in 2025:
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●
Extraordinary monetary and fiscal stimulus in 2020 and in early 2021 offset
certain of the COVID-19 pandemic’s
adverse economic effects, but together with supply chain disruptions,
continued consumer demand, Russia’s war
in Ukraine and its effects on energy and food prices,
and tight labor markets, resulted in inflation.
Inflation began
running at levels unseen in decades and well above the Federal Reserve’s
long term inflation goal of 2.0%
annually.
Beginning in March 2022, the Federal Reserve raised its target federal
funds interest rates and reduced
its securities holdings in an effort to reduce inflation.
Inflation subsided in 2024.
In February 2025 inflation
remains above the Federal Reserve’s
target rate, the labor market remains strong and the Federal Reserve cut its
target federal funds rate in September through December 2024
100 basis points from 5.25-5.50% to 4.25%-4.50%,
and reduced the rate of decline in reinvestments of maturing securities proceeds.
●
The new presidential Administration that took office in January
2025 has established DOGE to increase
government efficiency and reduce fiscal expenditures, imposed
and threatened tariffs, and proposed tax cuts and
tax cut extensions, the net effect of which is unknown.
The nature and timing of any future changes in monetary
and fiscal policies, government policies and their administration and personnel,
and their effects on us cannot be
predicted.
●
Market developments, including unemployment, inflation
and price levels, stock and bond market volatility,
and
changes, including those resulting from Russia’s
war in Ukraine and governmental fiscal, operational and
monetary policies affect consumer confidence
levels, economic activity and interest rates.
Increases in market
interest rates and inflation, and adverse changes in consumer and business confidence
may change customers’
savings and payment behaviors, including potential increases in loan delinquencies
and default rates.
These could
affect our credit quality,
and our results of operations and financial condition.
●
Our ability to assess the creditworthiness of our customers and those we do business with,
and the values of our
assets and loan collateral may be adversely affected and less predictable
as a result of inflation and fluctuating
market interest rates and changes in monetary and fiscal policies.
We adopted
CECL on January 1, 2023 as
required by generally accepted accounting principles (“GAAP”).
CECL changed the loss model to take into
account current expected credit losses in place of the incurred loss method used historically
under GAAP,
and how
to estimate losses inherent in our credit exposures.
The process for estimating expected losses requires difficult,
subjective, and complex judgments, including forecasts of economic
conditions, unemployment levels in Alabama,
and how those economic predictions might affect the ability of our
borrowers to repay their loans or the value of
assets.
Changes in economic conditions and factors used in our CECL models may
increase the variability of our
provisions for loan losses and our earnings.
●
Changes in market interest rates and the shape of the yield curve affect
the value of our investment securities and
our other accumulated other comprehensive income or “AOCI.”
Our allowance for loan losses may prove inadequate
or we may be negatively affected by credit risk exposures.
We periodically
review the allowance for loan losses for adequacy considering economic conditions
and trends, collateral
values and credit quality indicators, including past charge-off
experience and levels of past due loans and nonperforming
assets.
We cannot be
certain that our allowance for loan losses will be adequate over time to cover credit
losses in our
portfolio because of unanticipated adverse changes in the economy,
including fiscal and monetary policy changes, inflation,
market conditions or events adversely affecting specific customers,
industries or markets, including disruptions of supply
chains, the war in Ukraine, changes in taxes and regulations and changes in borrower
behaviors.
Certain borrowers and their
businesses and real estate and commercial projects and businesses may be adversely
affected by inflation and higher interest
rates, and economic slowdowns arising from tighter monetary policies, and
may request or need loan modifications and
deferrals.
Various
businesses will be unable to fully pass on increased costs due to inflation, supply
chain disruptions and
changes and other factors, and their profits may shrink.
If the credit quality of our customer base materially decreases, if the
risk profile of the market, industry or group of customers changes materially
or weaknesses in the real estate markets
worsen, borrower payment behaviors change, or if our allowance for loan
losses is not adequate, our business, financial
condition, including our liquidity and capital, and results of operations
could be materially adversely affected.
CECL, the
accounting standard for estimating expected future loan losses, became effective
for the Company beginning January 1,
2023, and its effects upon the Company over a full business cycle
are unknown.
The CECL model incorporates various
economic condition factors, where changes in fiscal and monetary policy,
as well as market interest rates and unemployment
rates in our markets, among other factors, could result in more volatility in
our provisions for loan losses under CECL, which
could adversely affect our net income.
See Note 1 to our Financial Statements –
“Allowance for Credit Losses – Loans.”
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Nonperforming and similar assets take significant time to resolve
and may adversely affect our results of operations
and
financial condition.
Our nonperforming loans were 0.09% of total loans as of December 31, 2024,
and we had no other real estate owned as
result of foreclosures or otherwise in full or partial payments in respect of loans (“OREO”).
Non-performing assets may
adversely affect our net income in various ways.
We do not record
interest income on nonaccrual loans or OREO and these
assets require higher loan administration and other costs, thereby adversely
affecting our income.
Decreases in the value of
these assets, or the underlying collateral, or in the related borrowers’ performance
or financial condition, whether or not due
to economic and market conditions beyond our control, could adversely
affect our business, results of operations and
financial condition.
In addition, the resolution of nonperforming assets requires commitments of time from
management,
which can be detrimental to the performance of their other responsibilities.
Loan deferrals and modifications made to help
resolve borrower issues and avoid foreclosures may not be successful.
There can be no assurance that we will not
experience increases in nonperforming loans in the future, much of which
is affected by the economy and the levels of
interest rates, generally.
Changes in the real estate markets, including the
secondary market for residential mortgage loans,
may continue to
adversely affect us.
Beginning in March 2022, inflation and the Federal Reserve increases in interest rates to
fight inflation have caused
mortgage rates to increase significantly.
Higher interest rates and the increased level of housing costs since 2020 have
slowed housing sales.
Although short term interest rates decreased in last half of 2024, longer term rates, including
mortgage rates, have remained elevated.
Inventories of existing homes for sale have remained generally low,
and many
believe that higher mortgage rates discourage potential sellers from selling
their existing houses and incurring higher
mortgage costs on replacement homes.
These conditions have adversely affected housing affordability
and increased
monthly mortgage payments.
These conditions adversely affect our mortgage loan production
and may affect the value of
residential mortgage collateral.
Commercial real estate projects’ economic assumptions may be adversely
affected by
higher interest rates, and certain projects with short term and/or unhedged
variable rate debt may be especially affected by
increased interest rates and/or a slower economy.
The CFPB’s mortgage and servicing
rules, including TRID rules for closed end credit transactions, enforcement actions,
reviews and settlements, affect the mortgage markets and our mortgage
operations.
The Tax Cuts and
Jobs Act’s (the “2017 Tax
Act”) limitations on the deductibility of residential mortgage interest and state
and local property and other taxes often called “SALT,”
could adversely affect consumer behaviors and the volumes of
housing sales, mortgage and home equity loan originations, as well as the value
and liquidity of residential property held as
collateral by lenders such as the Bank, and the secondary markets for
single and multi-family loans.
Acquisition,
construction and development loans for residential development may be similarly
adversely affected.
The new Trump
administration has indicated it is considering increasing the amount of
SALT permitted
to be deducted for federal income
taxes.
Unless extended, many provisions of the 2017 Tax
Act, including the cap on SALT
deductions expire at the end of
2025, and the marginal individual tax brackets will increase.
Fannie Mae and Freddie Mac have been in conservatorship since September
2008.
The newly appointed Secretary of
Housing and Urban Development has stated that coordinating the effort
to privatize these GSEs would be his priority.
Since these GSEs dominate the residential mortgage markets, any changes
in their operations and requirements, as well as
their respective restructurings and capital and the costs of their borrowings
as private institutions, could adversely affect the
primary and secondary mortgage markets, and our residential mortgage
businesses, our results of operations and the returns
on capital deployed in these businesses.
Resolution of these extremely large GSEs will be complex,
and the timing and
effects of such resolution and the effects on
mortgage originators and the mortgage markets and their participants, including
the Company, cannot be
predicted.
We may
be contractually obligated to repurchase
mortgage loans we sold to third parties on terms unfavorable
to us.
As part of its routine business, the Company originates mortgage loans
that it subsequently sells in the secondary market,
generally to Fannie Mae.
In connection with such loan sales, the Company makes customary representations and
warranties, the breach of which may result in the Company being required
to repurchase the loan or loans.
Furthermore, the
amount paid may be greater than the fair value of the loan or loans at the time of the
repurchase.
Although mortgage loan
repurchase requests made to us have been limited historically,
if these increased, we may have to establish reserves for
possible repurchases and adversely affect our results of
operation and financial condition.
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Mortgage servicing rights requirements
may change and require
us to incur additional costs and risks.
The CFPB’s residential mortgage
servicing standards may adversely affect our costs to service residential
mortgage loans.
Reduced mortgage activity due to higher market interest rates has decreased our
generation of new mortgage loans and
related MSRs.
This may be offset partially by decreases in mortgage
prepayments and refinancings, and corresponding
increases in the duration of our existing MSRs and their values.
This net effect could reduce our aggregate income from
servicing these types of loans and make it more difficult and costly to
timely realize the value of collateral securing such
loans upon a borrower default.
The Basel III Capital Rules relating to MSRs may also increase the potential
capital
required as a result of MSRs, when considered with other capital rule adjustments
and deductions.
The soundness of other financial institutions could adversely affect us.
We routinely
execute transactions with counterparties in the financial services industry,
including brokers and dealers,
central clearinghouses, banks, including our correspondent banks and
other financial institutions.
Our ability to engage in
routine investment and banking transactions, as well as the quality and values of our
investments in holdings of obligations
of other financial institutions such as the FHLB-Atlanta, could be adversely affected
by the actions, financial condition,
profitability and regulation of such other financial institutions, including
the FHLB-Atlanta and our correspondent banks.
Financial services institutions are interrelated as a result of shared
credits, trading, clearing, counterparty and other
relationships.
The failures of Silicon Valley
Bank, Signature Bank and First Republic Bank in March and May 2023 due
to concentrations
of deposits and depositors holding large amounts of deposits in
excess of FDIC insurance limits, as well as flawed business
models and management, adversely affected the financial
system and public confidence.
These resulted in increased
regulatory scrutiny of bank liquidity,
funding and capital, depressed bank stock values generally,
and higher FDIC deposit
insurance premiums on the largest banks.
The federal bank regulators have been advocating more use of the Federal
Reserve discount window to improve bank
liquidity.
At the same time, the 2023 bank failures have also led to calls to reduce Federal Home Loan Bank lending
to
banks.
Traditionally,
the Federal Home Loan Banks have been stable sources of liquidity and funding for banks.
The
Federal Housing Finance Agency (“FHFA)
regulates the Federal Home Loan Banks.
The FHFA’s
FHLBank System at
100: Focusing on the Future
(Nov. 2023) indicates less traditional
Federal Home Loan Bank lending to banks, especially
banks experiencing financial stress.
Sandra Thompson, the FHFA
Director retired on January 19, 2025 and Bill Pulte has
been nominated to succeed her, subject to
Senate confirmation.
Mr. Pulte’s
views on Federal Home Loan Bank lending to
banks are unknown.
These changes, together with any exposures that other institutions may
have to crypto or digital assets, or cybersecurity and
data breaches, could cause disruption and unexpected changes in the industry.
The Trump Administration has issued
Executive Order “Strengthening American Leadership in Digital Financial
Technology”
and Congressional hearings on
“debanking” may increase the use of digital assets and the volume of digital
asset transactions with, and the risks to, banks.
Any losses, defaults by, or
failures of, the institutions we do business with could adversely affect our holdings
of the equity
in such other institutions, our participation interests in loans originated by
other institutions, and our business, including our
liquidity, financial condition
and earnings.
Failures of
several banks
in 2023
resulted in
increased
market volatility
for financial
service companies’
securities and
in
changes in regulatory views and emphases that
may adversely affect us and may not be disclosable under law.
The
failures
of
Silicon
Valley
Bank,
Signature
Bank,
First
Republic
and
Heartland
Tri-State
Bank
in
2023
caused
significant
market
volatility
for
bank
stocks,
and
uncertainty
in
the
investor
community
and
among
bank
customers,
generally,
greater
bank
regulatory
scrutiny
of
banking
organizations,
especially
those
experiencing
rapid
growth
and
regional banks
with $100
billion or
more in
assets.
Similarly,
concerns about
credit quality
and capital
adequacy
at New
York
Community
Bank
following
two
acquisitions
raised
market
concerns
and
led
to
replacement
of
management
and
a
dilutive equity capital raise.
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These failures
have resulted
in bank regulators
focusing supervisory
activities, generally,
on capital adequacy
and liquidity
in
light
of
growth;
asset,
liability
and
customer
concentrations
and
risks;
CRE;
levels
of
uninsured
deposits;
crypto
businesses
and
customers;
third-party