ITEM 1A. RISK FACTORS
These disclosures under this item reflect the Company’s
beliefs and opinions as to factors that could materially and
adversely affect the Company and its securities in the future.
References to past events are examples only,
and are not
intended to be a complete listing or a representation as to whether or not such factors
have occurred in the past or their
likelihood of occurring in the future.
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 and financial condition may differ
substantially from those discussed in these forward-looking statements.
Operational Risks
Market conditions and economic cyclicality may adversely affect us and our industry.
The Company’s income depends
largely on the difference between interest income
earned on its loans and securities
(earning assets) and its interest expense on its deposits and other borrowings.
Market interest rates affect the spread
between our interest income and our interest expense and the values of our
investment securities. Market rates are affected
by Federal Reserve monetary policy,
fiscal policy, inflation and inflation
expectations, and various other factors.
Inflation
more directly affects our noninterest costs, as well as our customers’
savings and payment behaviors.
Market developments, including unemployment rates, price and inflation
levels, stock and bond market volatility,
and
changes, including those resulting from Russia’s
war in Ukraine and other wars and armed conflicts, tariffs
and foreign
policies, and government fiscal, operational and monetary policies affect
consumer confidence levels, economic activity
and interest rates. Increases in inflation and market interest rates and future expectations
of these, and adverse changes in
consumer and business confidence may change customers’ savings, payment
and borrowing behaviors, and may increase in
loan delinquencies and loan losses. These could affect our
credit quality, our results of
operations and financial condition.
Changes in market interest rates and the shape of the yield curve affect
the value of our investment securities.
Increased
interest rates may result in unrealized losses on investment securities and accumulated
other comprehensive income
(“AOCI”). Increases in AOCI reduce our reported stockholders’ equity.
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Our allowance for loan losses is affected by general economic conditions
and we may be negatively affected by credit risk
exposures.
Our models for determining our allowance for credit losses are based on “current
expected credit losses” (“CECL”)
principles in generally accepted accounting principles (“GAAP”),
and may be adversely affected by changes in the
economy. CECL uses current
expected credit losses instead of the “as incurred” loss method used historically
under GAAP,
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,
and how those economic predictions might affect the
ability of our borrowers to repay their loans or the value of assets.
Macroeconomic factors used in our CECL model
include the Alabama unemployment rate, the Alabama home price index, the national
commercial real estate price index
and the Alabama gross state product.
Changes in economic conditions and factors used in our CECL models, including the
effects of changes in government policies, including
monetary and fiscal policies, may increase the variability of our
provisions for loan losses and our earnings.
The CECL standard has not been in effect over a full business cycle and
its
effects in times of severe economic stress may not be fully known.
See Note 1 to our Financial Statements –
“Allowance
for Credit Losses – Loans.”
Unanticipated adverse changes in the economy,
including those resulting from
fiscal, monetary or other government
policies adversely
affect us.
We periodically
review the expected effects of economic conditions and trends in reviewing
our allowance for credit
loss models.
We may be adversely affected
because of unanticipated adverse changes in the economy,
including
fiscal and monetary policy changes, unemployment levels, inflation,
market conditions or events adversely affecting
specific customers, industries or markets, including disruptions of supply
chains, war and armed conflicts, changes in taxes
and regulation, and changes in borrower behaviors.
Borrowers and their businesses, and real estate and commercial
projects and businesses may be adversely affected by inflation
and higher interest rates, as well as from tighter monetary
policies, and may request or need loan modifications and deferrals.
Businesses may be unable to fully pass on to their
customers increased costs due to inflation, supply chain disruptions, tariffs
and other factors, and their cash flows and
profits may be adversely affected.
If the credit quality and risk profile of our customers materially change adversely,
or if
the risk profile of the market, industry or group of customers changes materially,
or conditions in the real estate and other
markets worsen, or borrower payment behaviors change, our business,
could be materially
adversely affected.
Changes in the real estate markets, including the
origination and secondary markets for residential mortgage
loans, may
continue to adversely affect us.
Inflation and the Federal Reserve monetary actions to fight inflation have caused
residential mortgage rates to increase
significantly. Higher
interest rates and the increased prices of housing during and following the COVID-19 pandemic
have
slowed housing sales. These conditions have adversely affected
housing affordability and increased monthly mortgage
payments. Although short term interest rates have decreased since Fall 2024, longer
term mortgage rates have remained
higher than before the pandemic, and purchase money residential mortgages
and refinancings continue to be adversely
affected. Our mortgage loan production and income have
been adversely affected.
Our concentration of commercial real
estate loans could result in further increased
loan losses, and adversely affect our
business, earnings, and financial condition.
Commercial real estate (“CRE”) is cyclical.
Rapid CRE growth and concentrations of CRE loans, in dollar amounts and
geographic concentrations, present risks of possible loss.
Loans for the acquisition and development of land and residential
construction which are generally viewed as higher risk than loans on existing
structures.
We had approximately
68% of our loan portfolio in CRE loans at year-end 2025, of which approximately
18% were owner-
occupied.
The bank regulators’ CRE Guidance requires banks with high levels of CRE and
CRE growth, to implement
improved underwriting, internal controls, risk management policies and
portfolio stress testing, as well as higher levels of
allowances for possible losses and capital levels.
Increases in interest rates beginning in March 2022 and reduced market
transactions may adversely affect the assumptions and performance
of CRE, especially for projects financed with short term
or unhedged variable rate debt, and the ability of CRE borrowers to refinance
on terms that their projects can support.
Lower demand for CRE and fewer CRE purchase and sale transactions, and reduced
availability of, and higher interest rates
and costs for, CRE loans could adversely
affect the values and liquidity of CRE collateral and our CRE loans, and
sales of
other real estate owned, and therefore our earnings and financial condition,
including our capital and liquidity.
See Balance
Sheet Analysis - Loans” and “Supervision and Regulation – CRE.”
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Resolution of the Fannie Mae and Freddie Mac Conservatorships
may have adverse consequences
Fannie Mae and Freddie Mac (the “GSEs”) have been in conservatorship
since September 2008.
The federal government is
considering privatizing these GSEs and ending the conservatorship.
Since these GSEs dominate the residential mortgage
markets, any changes in their operations and requirements, as well as their respective
restructurings, and the costs of their
capital and 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 obligated to repurchase
mortgage loans we sold to third parties on terms unfavorable
to us.
The Company originates residential mortgage loans. The Company
sells these loans, primarily to Fannie Mae, pursuant to
customary contract representations and warranties. Mortgage buyers
may request that sellers repurchase mortgages for
breach of their seller obligations, if the mortgages do not perform.
Such requests increased substantially during the Credit
Crisis. Although we have had negligible mortgage loan repurchase requests historically,
including during the Credit Crises,
a stressed economy could increase mortgage loan credit issues that may increase mortgage
repurchase requests.
The soundness of other financial institutions could adversely affect us.
We routinely
execute transactions with counterparties in the financial services industry,
including securities firms, central
clearinghouses, and banks. 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.
Financial services institutions are interrelated as a result of shared
credits, trading, clearing, counterparty and other
relationships.
Failures and near failures of several mid-sized banks in Spring 2023 caused significant
market volatility
issues for bank stocks, regulatory enforcement actions and uncertainty in
the investor community and among bank
regulators, customers and investors, generally.
In such situations, depositors and other customers tend to reduce their
uninsured deposits and bank supervisors more closely scrutinize bank risks.
These failures resulted in bank regulators
focusing, generally,
on capital adequacy and liquidity in light of bank growth rates, customer,
asset and deposit
concentrations and risks; uninsured deposit levels; CRE; crypto business
and customers.
About the same time, smaller
banks’ engagement with third-party vendors or “partners” providing
digital, electronic and (“BaaS”) and fintech
relationships raised bank regulatory concerns and enforcement actions
regarding such activities and their effects on bank
safety and soundness; the banks’ strategic, capital and liquidity
plans and contingency plans; and vendor diligence and risk
management.
Any losses, defaults by, or
failures of, the institutions we do business with or which affect could
adversely affect our
business, including our liquidity,
financial condition and earnings.
The federal government’s
digital innovation focus may increase our competition
and operational risks
The Executive Order “Strengthening American Leadership in Digital Financial Technology”
(2025) and the federal bank
regulators’ implementation of it, including
rapidly chartering new digital asset banks and trust companies, encouraging
stablecoins and other digital assets, as well as
investigating “de-banking” of the crypto industry and others,
may increase
the use of digital assets and the volume of digital asset transactions, and
the risks of such transactions to banks and to
financial stability, generally.
The proposed CLARITY Act legislation may enable the payment of yield or interest
equivalents on stablecoins that may compete with bank transaction accounts.
These changes could increase competition,
disruption and unexpected changes in the banking industry,
including us.
Increases in banks’ and other financial services
companies’ direct and indirect risk exposures to crypto or digital assets may increase their
cybersecurity and data breach
risks, fraud risks, and AML/CFT and sanctions compliance risks.
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Our future success is dependent on our ability
to compete effectively in highly competitive markets.
Lee County and the surrounding areas of East Alabama, where we primarily operate,
are highly competitive.
Our
future growth and success will depend on our ability to compete effectively
in these markets.
Lee County is served by 21
banks, including 12 national and regional competitors.
We compete for
loans, deposits and other financial services and
products with local, regional and national commercial banks, thrifts, credit
unions, mortgage lenders, and securities and
insurance brokerage firms, including services offered in
our market.
Increasingly, non-banking
firms are using technology
to compete for loans, payments, and other banking services.
Various
of these traditional and nontraditional firms offer
services in our market without any physical presence here.
Many competitors have numerous offices and affiliates
operating over wide geographic areas and have diverse customer
and geographic bases to draw upon.
Many of our
competitors offer products and services different
from ours, and have substantially greater resources including technology,
name recognition and advertising than we do, which helps them attract business.
In addition, larger competitors may be
able to price loans and deposits more aggressively than us.
Out of state banks have branched into our markets. See “Item 1
Business.”
Our success depends on local economic conditions.
Our success depends on general economic conditions, especially conditions
in our primary market.
Adverse changes in
such economic conditions, including higher market interest rates and inflation,
supply chain disruptions, changes in
customer behaviors and in the workforce and demand for space since the COVID-19
pandemic, and the timing and
magnitude of future inflation and interest rates, could negatively affect
our results of operations and financial condition.
Our local economy is also affected by the growth of automobile
manufacturing and related suppliers located in Lee County
and nearby.
Auto sales and housing sales are cyclical and generally are affected
adversely by higher prices, higher inflation
and interest rates, and tariffs and changes in tariffs.
Other major employers in our market include education and healthcare,
which may be adversely affected by changes in Federal government
policies, including education and healthcare funding,
and the availability and costs of student loans.
Attractive acquisition opportunities may not be available to us in the
future.
We seek continued
organic growth, including loan growth, and we also may consider the acquisition
of banks, branches,
deposits, or other parts of financial services businesses. We
expect that other financial services companies, including credit
unions and nonbanking institutions, some of which have significantly
greater resources, will compete with us to acquire
financial services businesses. This competition could increase prices for potential
acquisitions that we believe are attractive.
Any acquisition could be dilutive to our earnings and shareholders’ equity per
share of our common stock.
Future acquisitions and expansion activities may disrupt
our business, dilute shareholder value and adversely affect
our
operating results and financial condition.
We evaluate potential
acquisitions and expansion opportunities, including new branches and
other offices.
To the extent
that we grow through acquisitions or new locations, we cannot assure you that we will be able to adequately
or profitably
manage such growth.
Acquiring other banks, branches, or businesses, as well as other geographic
and product expansion
activities involve various known and unknown risks, including credit
quality, valuation and pricing,
systems conversions,
retention and integration of people, retention and growth of customers,
as well as transaction expenses, all of which require
time and coordination with third parties such as service providers. Acquisitions
and other expansion activities may fail to
generate the opportunities and customers, revenues or cost savings forecasted.
Technological
changes affect our business, and we may have fewer resources
than many competitors to invest in and
effectively implement technological improvements;
and manage the related risks related
to operating technology and
realizing returns on technology
investments.
The financial services industry is undergoing rapid technological
changes, including new technology-driven products and
s
ervices and growing demands for user-based banking
applications that can be used anywhere.
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Artificial intelligence is at an early stage of development and is expensive,
but may offer opportunities for better customer
services at reduced costs, but with a high level of unknown risks.
The effective use of technology may help us better
analyze our customers and their needs better,
and the effective use of technology may enable us to increase efficiency
and
reduce our operating costs.
At the same time, the initial costs of acquiring and implementing technology
may be material,
and such technology requires ongoing attention to the related risks, including
fraud, cybersecurity and customer privacy,
compliance with the AML/CFT anti-money laundering and
sanctions laws, among others, and various operational and other
risks.
Our future success will depend, in part, upon our ability to use technology effectively
and efficiently to provide
products and services that meet our customers’ preferences and create additional
efficiencies in operations, while
maintaining the security of our systems and data, and complying with applicable
law.
Severe weather,
natural disasters and conflicts could have significant adverse effects on our business.
Severe weather and natural disasters such as hurricanes, tornados, floods, and
acts of war, terrorism, or armed conflict, may
potentially interrupt our business and damage our properties and
collateral securing our loans, result in lost revenues and
additional expenses. Such events also could affect the general economic
conditions that affect us, the stability of our deposit
base, disrupt our customers’ businesses and impair our borrowers’ capacity
to repay loans. Although management has
established disaster recovery and business continuity policies and procedures,
severe weather and natural disasters and
these other events could have a material adverse effect on our business.
Potential gaps in our risk management policies and internal audit procedures
may leave us exposed to unidentified or
unanticipated risks, which could negatively affect our business.
Our enterprise risk management and internal audit program are designed
to mitigate material risks and losses to us. We
regularly review our risks in an effort to maintain risk management
and internal audit policies and procedures addressing
our risks.
Nonetheless, our policies and procedures may not anticipate and identify timely every
risk to which we may be
exposed. Our internal audit process may fail to detect such weaknesses or deficiencies
timely. Many of our
risk
management models and estimates are based on assumptions, estimates and
judgments from observed historical market
behavior to model or project potential future exposure. Other models used
by our business, including our CECL models,
also are based on assumptions, estimates and projections. These models may
not operate properly or timely,
or our inputs,
estimates and assumptions may be inaccurate, or changes in economic
and market conditions, customer behaviors or
regulations may adversely affect the accuracy or usefulness of
the models. These models may not fully or timely predict
future exposures, which may occur significantly faster or
in greater magnitudes than historically. Other
risk management
methods depend upon the evaluation of information regarding markets,
clients, or other matters that are publicly available
or otherwise accessible. This information may not always be accurate,
complete, up-to-date or properly evaluated.
We may have
to implement more extensive and perhaps different risk management
policies and procedures to reflect
changes in the economy,
threats to our systems and data, our markets and customers, regulation, and technology uses and
exposures.
All of these could adversely affect our costs.
Any failure to protect
the confidentiality of customer information could have material adverse effects on us.
Various
laws enforced by the bank regulators and other government agencies protect
the privacy and security of customers’
non-public personal information maintained by banks and their vendors. Our
internal processes, policies and controls are
designed to protect the confidentiality of customer information
we hold and that is accessible to us, our vendors and
employees. It is possible that a vendor or an employee could permit unauthorized
access to or improperly use confidential
customer information. Personal customer data also could be compromised
via intrusions into our systems or those of our
service providers or other persons we do business with such as credit bureaus,
data processors and merchants who accept
credit or debit cards for payment. If our internal controls are inadequate, or
if our employees, vendors and other third parties
fail to comply with our policies and procedures, misappropriation or inappropriate
disclosure and misuse of customer
information could occur.
Any such internal control inadequacies or non-compliance could materially
damage our
reputation, lead to remediation costs and civil or criminal penalties.
See Item 1C. Cybersecurity for more information
about cybersecurity and our management and strategies.
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Our systems, including those provided
by third parties may be attacked, which could disrupt
our operations and materially
damage our business.
Our systems and networks, including those provided by our third-party
service providers, are subject to security risks and
may be disrupted, such as denial of service attacks, hacking, terrorist activities,
or identity theft. Cybercrime risks have
increased as electronic and mobile banking activities have increased,
and may increase further as a result of wars in Ukraine
or the Middle East, tensions with mainland China and other countries, foreign
government sponsored cybercrime and theft,
and the development of intrusion tools using artificial intelligence.
Other financial service institutions and their service
providers have reported material security breaches, including use of stolen
access credentials, hacking, malware,
ransomware, phishing and distributed denial-of-service attacks, among
other means. Attackers using a wide and increasing
variety of tactics have disrupted the operations of public companies, and have
demanded ransoms to return hijacked
systems, effected unauthorized transfers, obtained unauthorized
access to confidential information, destroyed data, disabled
or degraded service, and sabotaged systems. Any of these could cause material
financial, operational and reputational harm.
Despite our cybersecurity policies, and our efforts to monitor and
maintain the integrity of the systems we and our third-
party service providers use, we may not be able to anticipate or counter all rapidly evolving
security threats.
Artificial
intelligence used by cyber criminals, including foreign governments,
likely will require additional defenses.
The increasing
levels and sophistication of cyber threats may require us and our vendors to
spend more resources to protect our data.
Security breaches or failures may have serious adverse financial and other
consequences, including disruptions to
operations, misappropriation of confidential information, damage
to systems operated by us or our third-party service
providers, as well as damages to our customers and our counterparties, and
significant remediation costs. These events
could damage our reputation, result in loss of customer business, subject us to additional
regulatory scrutiny, or expose us
to civil litigation and possible financial liability,
any of which could have a material adverse effect on our financial
condition and results of operations.
See “Item 1C. – Cybersecurity.
We may
be unable to attract and retain key people to support our business.
Our success depends, in large part, on our ability to attract and retain
key people. We
compete with other financial services
companies for people primarily on the basis of our culture, compensation
and benefits, support services and financial
position. Intense competition exists for key employees with demonstrated
ability, and we may be unable
to hire or retain
such employees. The unexpected loss of one or more of our key persons and or
the failure to effect timely transitions
involving such persons could have a material adverse effect on
our business, earnings or financial condition.
Financial Risks
Our cost of funds may increase as a result
of general economic conditions, inflation, interest
rates, inflation, changes in
customer behaviors and competitive pressures.
Our costs of funds are affected by general and local economic conditions,
changes in market interest rates and competitive
pressures, and inflation, and anticipated future changes in target short
-term interest rates resulting from the Federal
Reserve’s anti-inflation measures.
Traditionally,
we have obtained funds principally through local deposits and borrowings
from the FHLB-Atlanta. Increases in interest rates typically cause consumers
to shift their funds to more interest-bearing
instruments and increase the competition for deposits. If customers move (i) money
out of bank transaction deposits into investments, stablecoins or other yield-bearing
instruments elsewhere, or (ii) they
move their funds within the Bank from transaction deposits to higher cost, interest-bearing
time deposits, our interest
expense may increase, and our net interest income and earnings may be material and adversely
affected income. If our total
deposits decreased, our funds to make loans and grow will be reduced. Any of
these may adversely affect our business.
See
“Supervision and Regulation – Fiscal and Monetary Policy.”
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Our profitability and liquidity may be affected
by changes in interest rates and interest
rate levels, the shape of the yield
curve and economic conditions.
Our profitability is primarily driven by the difference between the
interest rates received on our interest earning assets and
the interest we pay on our deposits and borrowings. Net interest income will be adversely affected
if market interest rates
and the interest we pay on our deposits and borrowings increase faster than the
interest earned on loans and investments,
especially as large portion of our loans have fixed interest
rates. Interest rates, and consequently our results of operations,
are affected by general economic conditions (national,
international and local), fiscal and monetary policies, and
expectations regarding changes in these, and the shape of the yield curve. Net
interest income could be affected by
asymmetrical changes in the different interest rate indexes because
not all of our assets or liabilities are priced with the
same index. and the different indices do not change simultaneously
or at the same magnitude. Higher market interest rates
and continuing run-off of maturing securities held
by the Federal Reserve in its SOMA as quantitative tightening to
curb
inflation and to maintain sufficient reserves in the system policy,
may limit economic growth, and therefore reduce loan
demand and growth.
The production of mortgages and other loans and the value of collateral
securing our loans are dependent on demand within
the markets we serve, as well as interest rates.
Increases in market interest rates tend to decrease mortgage originations,
increase MSR values, decrease the value and liquidity of collateral securing
loans, and may result in unrealized losses on
our investment securities and increase our accumulated other comprehensive
losses.
Accumulated other comprehensive
losses reduce our reported GAAP equity and tangible equity.
See “Management's Discussion and Analysis of Financial
Condition and Results of Operations Table
5,” “Market and Liquidity Risk Management” and Supervision and Regulation.
Liquidity risks could affect operations and jeopardize
our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings
or sales of loans and
investments or otherwise, or due to materially reduced or delayed proceeds
from scheduled loan and securities payments
and maturities, could have a negative effect on our liquidity.
Our funding sources also include federal funds purchased,
securities sold under repurchase agreements, and short- and long-term debt.
We maintain a portfolio
of marketable high-
quality securities that are all held as available for sale, and can be used as a source of liquidity.
As market interest rates