ITEM 1A. RISK FACTORS
An
investment in the Company’s common stock is subject to a variety of risks and uncertainties including, without limitation,
those set forth below, any of which could cause the Company's actual results to vary materially from recent results, or from the
other forward looking statements that the Company may make from time to time in news releases, annual reports and other written
or oral communications. The material risks and uncertainties that management believes may affect the Company are described below.
These risks and uncertainties are not listed in any particular order of priority and are not necessarily the only ones facing
the Company. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems
immaterial may also impair the Company’s business, financial condition and results of operations.
This
annual report on Form 10-K is qualified in its entirety by these risk factors. If any of the following risks actually occur, the
Company’s business, financial condition and results of operations could be materially and adversely affected. If this were
to happen, the value of the Company’s common stock could decline significantly, and stockholders could lose some or all
of their investment.
Risks
Related to our Business and Industry
The
COVID-19 pandemic is adversely impacting us and our customers, counterparties, employees and third-party service providers. Further,
the COVID-19 pandemic has severely disrupted the U.S. economy and may continue disrupting banking and other financial activity
in the areas in which we operate and the adverse impacts on our business, financial position, results of operations and prospects
could continue to be significant. Our business is dependent upon the willingness and ability of our employees and customers
to conduct banking and other financial transactions. The ongoing COVID-19 global public health crisis and the resulting “stay-at-home”
orders have resulted in widespread volatility, severe disruptions in the U.S. economy at large, and for small businesses in particular,
deterioration in household, business, economic and market conditions. The extent of the continued impact of the COVID-19 pandemic
and actions taken in response to the pandemic on our capital, liquidity and other financial positions and on our business, results
of operations and prospects will depend on a number of evolving factors, including:
• The efficacy and availability of widespread vaccinations.
Additionally,
if the ongoing COVID-19 pandemic has an adverse effect on (i) customer deposits, (ii) the ability of our borrowers to satisfy
their obligations to us, (iii) the demand for our loans or our other products and services, (iv) other aspects of our business
operations, or (v) on financial markets, real estate markets, or economic growth, this could, depending on the extent of the decline
in customer deposits or loan defaults, materially and adversely affect our liquidity and financial condition and our results of
operations could be materially and adversely affected. Our business and operations have not been materially impacted by COVID-19
as of December 31, 2021. However, the ongoing pandemic could cause us to experience higher credit losses in our lending portfolio,
impairment of our goodwill and other financial assets, reduced demand for our products and services and other negative impacts
on our financial position, results of operations and prospects. Sustained adverse effects may also prevent us from satisfying
our minimum regulatory capital ratios and other supervisory requirements or result in downgrades in our credit ratings.
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Our
Loan Portfolio Includes Loans with a Higher Risk of Loss. The Company originates commercial and industrial loans, commercial
real estate loans, consumer loans, and residential mortgage loans primarily within its market area. The lending strategy focuses
on residential real estate lending as well as servicing commercial customers, including increased emphasis on commercial and industrial
lending and commercial deposit relationships. Commercial and industrial loans, commercial real estate loans, and consumer loans
may expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these
loans may not be sold as easily as residential real estate. In addition, commercial real estate and commercial and industrial
loans may also involve relatively large loan balances to individual borrowers or groups of borrowers.
These
loans also have greater credit risk than residential real estate for the following reasons:
Any
downturn in the real estate market or local economy could adversely affect the value of the properties securing the loans or revenues
from the borrowers’ businesses thereby increasing the risk of nonperforming loans.
The
Company’s Allowance for Loan Losses May Not be Adequate to Cover Loan Losses, Which Could Have a Material Adverse Effect
on the Company’s Business, Financial Condition and Results of Operations. A significant source of risk for the Company
arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform
in accordance with the terms of their loan agreements. Most loans originated by the Bank are secured, but some loans are unsecured
based upon management’s evaluation of the creditworthiness of the borrowers. With respect to secured loans, the collateral
securing the repayment of these loans principally includes a wide variety of real estate, and to a lesser extent personal property,
either of which may be insufficient to cover the obligations owed under such loans.
Collateral
values and the financial performance of borrowers may be adversely affected by changes in prevailing economic, environmental and
other conditions, including declines in the value of real estate, changes in interest rates and debt service levels, changes in
oil and gas prices, changes in monetary and fiscal policies of the federal government, widespread disease, terrorist activity,
environmental contamination and other external events, which are beyond the control of the Company. In addition, collateral appraisals
that are out of date or that do not meet industry recognized standards might create the impression that a loan is adequately collateralized
when in fact it is not. Although the Company may acquire any real estate or other assets that secure defaulted loans through foreclosures
or other similar remedies, the amounts owed under the defaulted loans may exceed the value of the assets acquired.
The
Company maintains an allowance for loan losses, which is established through a provision for loan losses charged to earnings,
that represents management’s estimate of probable losses inherent within the existing portfolio of loans. The twelve months
ended 2020 was impacted by a higher provision for loan losses resulting from the COVID-19 pandemic mandated shutdowns and economic
disruption that caused elevated unemployment levels and deterioration in household, business, economic and market conditions.
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity
and requires the Company to make significant estimates of current credit risks and trends, all of which may undergo material changes.
In addition, bank regulatory agencies periodically review the Company’s allowance for loan losses and may require an increase
in the provision for loan losses or the recognition of further loan charge-offs, based on judgments that differ from those of
the Company’s management. While the Company strives to carefully monitor credit quality and to identify loans that may become
nonperforming, it may not be able to identify deteriorating loans before they become nonperforming assets, or be able to limit
losses on those loans that have been identified to be nonperforming. The FASB has announced changes to accounting standards that
will impact the way banking organizations estimate their allowance for loan losses beginning in January 2020, with the implementation
of these changes becoming effective for the Company in fiscal years beginning after December 15, 2022. These changes or any others
to accounting rules governing credit impairment estimates and recognition may increase the level of the allowance for loan losses.
Any increases in the allowance for loan losses will result in a decrease in net income and, depending upon the magnitude of the
changes, could have a material adverse effect on the Company’s financial condition and results of operations.
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Increases
in the Company's Nonperforming Assets Could Adversely Affect the Company's Results of Operations and Financial Condition in the
Future. Nonperforming assets adversely affect net income in various ways. While the Company pays interest expense to fund
nonperforming assets, no interest income is recorded on nonaccrual loans or other real estate owned, thereby adversely affecting
income and returns on assets and equity. In addition, loan administration and workout costs increase, resulting in additional
reductions of earnings. When taking collateral in foreclosures and similar proceedings, the Company is required to carry the property
or loan at its then-estimated fair market value less estimated cost to sell, which, when compared to the carrying value of the
loan, may result in a loss. These nonperforming loans and other real estate owned also increase the Company's risk profile and
the capital that regulators believe is appropriate in light of such risks, and have an impact on the Company's FDIC risk based
deposit insurance premium rate. The resolution of nonperforming assets requires significant time commitments from management and
staff. The Company may experience further increases in nonperforming loans in the future, and nonperforming assets may result
in further costs and losses in the future, either of which could have a material adverse effect on the Company's financial condition
and results of operations.
The
Company's Use of Appraisals in Deciding Whether to Make a Loan Does Not Ensure the Value of the Collateral. In considering
whether to make a loan secured by real property or other business assets, the Company generally requires an internal evaluation
or independent appraisal of the asset. However, these assessment methods are only an estimate of the value of the collateral at
the time the assessment is made, and involve a large degree of estimates and assumptions and an error in fact or judgment could
adversely affect the reliability of the valuation. Changes in those estimates resulting from continuing change in the economic
environment and events occurring after the initial assessment may cause the value of the assets to decrease in future periods.
As future events and their effects cannot be determined with precision, actual values could differ significantly from these estimates.
As a result of any of these factors, the value of collateral backing a loan may be less than estimated at the time of assessment,
and if a default occurs the Company may not recover the outstanding balance of the loan.
The
Company is Subject to Environmental Risks Associated with Real Estate Held as Collateral or Occupied. When a borrower
defaults on a loan secured by real property, the Company may purchase the property in foreclosure or accept a deed to the property
surrendered by the borrower. The Company may also take over the management of commercial properties whose owners have defaulted
on loans. The Company also occupies owned and leased premises where branches and other bank facilities are located. While the
Company's lending, foreclosure and facilities policies and guidelines are intended to exclude properties with an unreasonable
risk of contamination, hazardous substances could exist on some of the properties that the Company may own, acquire, manage or
occupy. Environmental laws could force the Company to clean up the properties at the Company's expense. The Company may also be
held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs
incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous
or toxic substances, or chemical releases at a property. The cost associated with investigation or remediation activities could
be substantial and could increase the Company’s operating expenses. It may cost much more to clean a property than the property
is worth and it may be difficult or impossible to sell contaminated properties. The Company could also be liable for pollution
generated by a borrower’s operations if the Company takes a role in managing those operations after a default. In addition,
as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages
and costs resulting from environmental contamination emanating from the property.
The
Company’s Investment Securities Portfolio is Subject to Credit Risk and Liquidity Risk and Declines in Value in its Investment
Securities Portfolio May Require the Company to Record OTTI Charges That Could Have a Material Adverse Effect on the Company’s
Results of Operations and Financial Condition. There are inherent risks associated with the Company’s investment
activities, many of which are beyond the Company’s control. These risks include the impact from changes in interest rates,
weakness in real estate, municipalities, government sponsored enterprises, or other industries, the impact of changes in income
tax rates on the value of tax exempt securities, adverse changes in regional or national economic conditions, and general turbulence
in domestic and foreign financial markets, among other things. These conditions could adversely impact the fair market value and/or
the ultimate collectability of the Company’s investments. In addition to fair market value impairment, carrying values may
be adversely impacted due to a fundamental deterioration of the individual municipality, government agency, or corporation whose
debt obligations the Company owns or of the individual company or fund in which the Company has invested.
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If
an investment’s value is deemed other than temporarily impaired, then the Company is required to write down the carrying
value of the investment which may involve a charge to earnings. The determination of the level of OTTI involves a high degree
of judgment and requires the Company to make significant estimates of current market risks and future trends, all of which may
undergo material changes. Any OTTI charges, depending upon the magnitude of the charges, could have a material adverse effect
on the Company’s financial condition and results of operations.
Interest
Rate Volatility Could Adversely Affect our Results of Operations and Financial Condition. The Company’s earnings
and cash flows are largely dependent upon its net interest income, meaning the difference between interest income earned on interest-earning
assets and interest expense paid on interest-bearing liabilities. The re-pricing frequency and magnitude of the Company’s
assets and liabilities are not identical, and therefore subject the Company to the risk of adverse changes in interest rates.
Interest rates are highly sensitive to many factors that are beyond the Company’s control, including monetary policy of
the federal government, inflation and deflation, volatility of domestic and global financial markets, volatility of credit markets,
and competition. If the interest rates paid on interest-bearing deposits and other liabilities increase at a faster rate or magnitude
than the interest rates received on loans and other investments, the Company’s net interest income, and therefore earnings,
could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments
fall more quickly or steeply than falling interest rates paid on interest-bearing liabilities.
Competition
in Our Primary Market Area May Reduce Our Ability to Attract and Retain Deposits and Originate Loans. We operate in a
competitive market for both attracting deposits, which is our primary source of funds, and originating loans. Historically, our
most direct competition for deposits has come from savings and commercial banks. Our competition for loans comes principally from
commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, mutual funds, insurance companies
and brokerage and investment banking firms. We also face additional competition from internet-based institutions, brokerage firms
and insurance companies. Competition for loan originations and deposits may limit our future growth and earnings prospects.
Deposit
Outflows May Increase Reliance on Borrowings and Brokered Deposits as Sources of Funds. The Company has traditionally
funded asset growth principally through deposits and borrowings. As a general matter, deposits are typically a lower cost source
of funds than external wholesale funding (brokered deposits and borrowed funds), because interest rates paid for deposits are
typically less than interest rates charged for wholesale funding. If, as a result of competitive pressures, market interest rates,
alternative investment opportunities that present more attractive returns to customers, general economic conditions or other events,
the balance of the Company’s deposits decreases relative to the Company’s overall banking operations, the Company
may have to rely more heavily on wholesale or other sources of external funding, or may have to increase deposit rates to maintain
deposit levels in the future. Any such increased reliance on wholesale funding, or increases in funding rates in general could
have a negative impact on the Company’s net interest income and, consequently, on its results of operations and financial
condition.
The
Company, as Part of its Strategic Plans, Periodically Considers Potential Acquisitions. The Risks Presented by Acquisitions Could
Adversely Affect Our Financial Condition and Results of Operations. Any acquisitions will be accompanied by the risks
commonly encountered in acquisitions including, among other things: our ability to realize anticipated cost savings and avoid
unanticipated costs relating to the merger, the difficulty of integrating operations and personnel, the potential disruption of
our or the acquired company’s ongoing business, the inability of our management to maximize our financial and strategic
position, the inability to maintain uniform standards, controls, procedures and policies, and the impairment of relationships
with the acquired company’s employees and customers as a result of changes in ownership and management. These risks may
prevent us from fully realizing the anticipated benefits of an acquisition or cause the realization of such benefits to take longer
than expected.
The
Company Relies on Third-Party Service Providers. The Company relies on independent firms to provide critical services
necessary to conducting its business. These services include, but are not limited to: electronic funds delivery networks; check
clearing houses; electronic banking services; investment advisory, management and custodial services; correspondent banking services;
information security assessments and technology support services; and loan underwriting and review services. The occurrence of
any failures or interruptions of the independent firms’ systems or in their delivery of services, or failure to perform
in accordance with contracted service level agreements, for any number of reasons could also impact the Company's ability to conduct
business and process transactions and result in loss of customer business and damage to the Company's reputation, any of which
may have a material adverse effect on the Company’s business, financial condition and results of operation.
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The
Company Relies on Dividends from the Bank for Substantially All of its Revenue. The Company is a separate and distinct
legal entity from the Bank. It receives substantially all of its revenue from dividends paid by the Bank. These dividends
are the principal source of funds used to pay dividends on the Company’s common stock and interest and principal on the
Company’s subordinated debt. Various federal and state laws and regulations limit the amount of dividends that the Bank
may pay to the Company. If the Bank, due to its capital position, inadequate net income levels, or otherwise, is unable to pay
dividends to the Company, then the Company will be unable to service debt, pay obligations or pay dividends on the Company’s
common stock. The OCC also has the authority to use its enforcement powers to prohibit the Bank from paying dividends if, in its
opinion, the payment of dividends would constitute an unsafe or unsound practice. The Bank’s inability to pay dividends
could have a material adverse effect on the Company’s business, financial condition, results of operations and the market
price of the Company’s common stock.
The
Carrying Value of the Company’s Goodwill Could Become Impaired. In accordance with GAAP, the Company does not amortize
goodwill and instead, at least annually, evaluates whether the carrying value of goodwill has become impaired. Impairment of goodwill
may occur when the estimated fair value of the Company is less than its recorded book value (i.e., the net book value of its recorded
assets and liabilities). This may occur, for example, when the estimated fair value of the Company declines due to changes in
the assumptions and inputs used in management’s estimate of fair value. A determination that goodwill has become impaired
results in an immediate write-down of goodwill to its determined value with a resulting charge to operations. Any write down of
goodwill will result in a decrease in net income and, depending upon the magnitude of the charge, could have a material adverse
effect on the Company’s financial condition and results of operations.
Risks
Related to Legal, Governmental and Regulatory Changes
If
Dividends Are Not Paid on Our Investment in the FHLB, or if Our Investment is Classified as Other-Than-Temporarily Impaired, Our
Earnings and/or Shareholders’ Equity Could Decrease. As a member of the FHLB, the Company is required to own a minimum
required amount of FHLB capital stock, calculated periodically based primarily on its level of borrowings from the FHLB. This
stock is classified as a restricted investment and carried at cost, which management believes approximates fair value of the FHLB
stock. If negative events or deterioration in the FHLB financial condition or capital levels occurs, the Company's investment
in FHLB capital stock may become other-than-temporarily impaired to some degree. There can be no assurance that FHLB stock dividends
will be declared in the future. If either of these were to occur, the Company’s results of operations and financial condition
may be adversely affected.
Concentration
in Commercial Real Estate Lending is Subject to Heightened Risk Management and Regulatory Review. If a concentration in
commercial real estate lending is present, as measured under government banking regulations, management must employ heightened
risk management practices that address the following key elements: board and management oversight and strategic planning, portfolio
management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing,
and maintenance of increased capital levels as needed to support the level of commercial real estate lending. If a concentration
is determined to exist, the Company may incur additional operating expenses in order to comply with additional risk management
practices and increased capital requirements which could have a material adverse effect on the Company’s financial condition
and results of operations.
Replacement
of the London Interbank Offered Rate (“ LIBOR”) Could Adversely Affect Our Business, Financial Condition,
and Results of Operations. LIBOR is expected to be phased out beginning after
December 31, 2021 when private-sector banks are no longer required to report the information used to set the rate. Without this
data, LIBOR may no longer be published, or the lack of quality and quantity of data may cause the rate to no longer be representative
of the market. On March 5, 2021, the U.K. Financial Conduct Authority (“FCA”) published a statement confirming that
all LIBOR settings will either cease to be provided or no longer be representative (i) immediately after December 31, 2021, in
the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings, and (ii)
immediately after June 30, 2023, in the case of all remaining US dollar settings. The International Swaps and Derivative Association
(“ISDA”) or Alternative Reference Rates Committee (“ARRC”) fallback spread adjustments were fixed as of
the FCA announcement date and are expected to be implemented at the point each relevant reference rate ceases or becomes non-representative.
The ARRC formed by the FRB has proposed a paced market transition plan to the Secured Overnight Financing Rate (SOFR) from LIBOR
and organizations are continuing to work on industry wide and company-specific transition plans as it relates to derivatives and
cash markets exposed to LIBOR. The Company is monitoring this activity and evaluating the related risks. This includes identifying
outstanding LIBOR-based loans without ARRC recommended fallback language, internal training and education, and working with our
core provider to ensure proper integration once an alternative reference is implemented. Management is monitoring ARRC publications
for best practices as the Company transitions legacy LIBOR loans by the June 30, 2023 deadline.
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We
have a significant number of loans, derivative contracts, and other financial instruments with attributes that are either directly
or indirectly dependent on LIBOR. The transition from LIBOR, or any changes or reforms to the determination or supervision
of LIBOR, could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other
financial obligations or extensions of credit held by or due to us, could create considerable costs and additional risk and could
have an adverse impact on our overall financial condition or results of operations. Since proposed alternative rates are calculated
differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition will
change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies.
Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation. Although
we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately
manage the transition could have a material adverse effect on our business, financial condition and results of operations.
Sources
of External Funding Could Become Restricted and Impact the Company’s Liquidity. The Company’s external wholesale
funding sources include borrowing capacity at the FHLB, capacity in the brokered deposit markets, other borrowing arrangements
with correspondent banks, as well as accessing the public markets through offerings of the Company’s stock or issuance of
debt. If, as a result of general economic conditions or other events, these sources of external funding become restricted or are
eliminated, the Company may not be able to raise adequate funds or may incur substantially higher funding costs or operating restrictions
in order to raise the necessary funds to support the Company's operations and growth. Any such increase in funding costs or restrictions
could have a negative impact on the Company’s net interest income and, consequently, on its results of operations and financial
condition.
We
Operate In a Highly-Regulated Environment That is Subject to Extensive Government Supervision and Regulation, Which May Interfere
With Our Ability to Conduct Business and May Adversely Impact the Results of our Operations. Banking regulations are primarily
intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not the interests
of stockholders. These regulations affect the Company’s lending practices, capital structure, investment practices, dividend
policy and growth, among other things. The Company is subject to extensive federal and state supervision and regulation that govern
nearly all aspects of our operations and can have a material impact on our business. Federal banking agencies have significant
discretion regarding the supervision, regulation and enforcement of banking laws and regulations.
Financial
laws, regulations and policies are subject to amendment by Congress, state legislatures and federal and state regulatory agencies.
Changes to statutes, regulations or policies, including changes in the interpretation of regulations or policies, could materially
impact our business. These changes could also impose additional costs on us and limit the types of products and services that
we may offer our customers. Compliance with laws and regulations can be difficult and costly, and the failure to comply with any
law, regulation or policy could result in sanctions by financial regulatory agencies, including civil monetary penalties, private
lawsuits, or reputational damage, any of which could adversely affect our business, financial condition, or results of operations.
While we have policies and procedures designed to prevent such violations, there can be no assurance that violations will not
occur. See the section titled, “Supervision and Regulation” in ITEM 1. Business.
Since
the 2008 global financial crisis, financial institutions have been subject to increased scrutiny from Congress, state legislatures
and federal and state financial regulatory agencies. Changes to the legal and regulatory framework have significantly altered
the laws and regulations under which we operate. Compliance with these changes and any additional or amended laws, regulations
and regulatory policies may reduce our ability to effectively compete in attracting and retaining customers. The passage and continued
implementation of the Dodd-Frank Act, among other laws and regulations, has increased our costs of doing business and resulted
in decreased revenues and net income. We cannot provide assurance that future changes in laws, regulations and policies will not
adversely affect our business.
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State
and Federal Regulatory Agencies Periodically Conduct Examinations of Our Business, Including for Compliance With Laws and Regulations,
and Our Failure to Comply With Any Supervisory Actions to Which We Are or Become Subject as a Result of Such Examinations May
Adversely Affect Our Business. Federal and state regulatory agencies periodically conduct examinations of our business,
including our compliance with applicable laws and regulations. If, as a result of an examination, an agency were to determine
that the financial, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of any of our
operations had become unsatisfactory, or violates any law or regulation, such agency may take certain remedial or enforcement
actions it deems appropriate to correct any deficiency. Remedial or enforcement actions include the power to enjoin “unsafe
or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice,
to issue an administrative order that can be judicially enforced against a bank, to direct an increase in the bank’s capital,
to restrict the bank’s growth, to assess civil monetary penalties against a bank’s officers or directors, and to remove
officers and directors. In the event that the FDIC concludes that, among other things, our financial conditions cannot be corrected
or that there is an imminent risk of loss to our depositors, it may terminate our deposit insurance. The OCC, as the supervisory
and regulatory authority for federal savings associations, has similar enforcement powers with respect to our business. The CFPB
also has authority to take enforcement actions, including cease-and-desist orders or civil monetary penalties, if it finds that
we offer consumer financial products and services in violation of federal consumer financial protection laws.
If
we were unable to comply with future regulatory directives, or if we were unable to comply with the terms of any future supervisory
requirements to which we may become subject, then we could become subject to a variety of supervisory actions and orders, including
cease and desist orders, prompt corrective actions, memoranda of understanding, and other regulatory enforcement actions. Such
supervisory actions could, among other things, impose greater restrictions on our business, as well as our ability to develop
any new business. We could also be required to raise additional capital, or dispose of certain assets and liabilities within a
prescribed time period, or both. Failure to implement remedial measures as required by financial regulatory agencies could result
in additional orders or penalties from federal and state regulators, which could trigger one or more of the remedial actions described
above. The terms of any supervisory action and associated consequences with any failure to comply with any supervisory action
could have a material negative effect on our business, operating flexibility and overall financial condition.
The
Company’s Capital Levels Could Fall Below Regulatory Minimums. The Company and the Bank are subject to the capital
adequacy guidelines of the FRB and the OCC, respectively. Failure to meet applicable minimum capital ratio requirements (including
the capital conservation "buffer" imposed by Basel III) may subject the Company and/or the Bank to various enforcement
actions and restrictions. If the Company’s capital levels decline, or if regulatory requirements increase, and the Company
is unable to raise additional capital to offset that decline or meet the increased requirements, then its capital ratios may fall
below regulatory capital adequacy levels. The Company’s capital ratios could decline due to it experiencing rapid asset
growth, or due to other factors, such as, by way of example only, possible future net operating losses, impairment charges against
tangible or intangible assets, or adjustments to retained earnings due to changes in accounting rules.
The
Company's failure to remain "adequately-capitalized" for bank regulatory purposes could affect customer confidence,
restrict the Company's ability to grow (both assets and branching activity), increase the Company's costs of funds and FDIC insurance
costs, prohibit the Company's ability to pay dividends on common shares, and its ability to make acquisitions, and have a negative
impact on the Company's business, results of operation and financial conditions, generally. If the Bank ceases to be a "well-capitalized"
institution for bank regulatory purposes, its ability to accept brokered deposits and the interest rates that it pays may be restricted.
Changes
in Accounting Standards Could Materially Impact the Company's Financial Condition and Results of Operations. From time
to time, the FASB changes the accounting and reporting standards that govern the recording of financial transactions and preparation
of financial statements. Future changes may be difficult to implement and may materially impact how the Company records and reports
its financial transactions, financial condition, and results of operations and could impact the Company's business activities
and strategy.
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Changes
in Tax Policies at Both the Federal and State Levels Could Impact the Company's Financial Condition and Results of Operations.
The Company’s financial performance is impacted by federal and state tax laws. Enactment of new legislation, or
changes in the interpretation of existing law, may have a material effect on the Company’s financial condition and results
of operations. A deferred tax asset is created by the tax effect of the differences between an asset’s book value and its
tax basis. The deferred tax asset is measured using enacted tax rates expected to apply to taxable income in the years in which
the temporary differences are expected to be recovered or settled. Accordingly, a reduction in enacted tax rates may result in
a decrease in current tax expense and a decrease to the Company’s deferred tax asset, with an offsetting charge to current
tax expense. The alternative would occur with an increase to enacted tax rates. In addition, certain tax strategies taken in the
past derive their tax benefit from the current enacted tax rates. Accordingly, a change in enacted tax rates may result in a decrease/increase
to anticipated benefit of the Company’s previous transactions which in turn, could have a material effect on the Company's
financial condition and results of operations.
Risks
Related to Cybersecurity and Data Privacy
We
Face Cybersecurity Risks and Risks Associated With Security Breaches Which Have the Potential to Disrupt Our Operations, Cause
Material Harm to Our Financial Condition, Result in Misappropriation of Assets, Compromise Confidential Information and/or Damage
Our Business Relationships and Can Provide No Assurance That the Steps We and Our Service Providers Take in Response to These
Risks Will Be Effective. We depend upon data processing, communication and information exchange on a variety of computing
platforms and networks and over the internet. In addition, we rely on the services of a variety of vendors to meet our data
processing and communication needs. We face cybersecurity risks and risks associated with security breaches or disruptions
such as those through cyber-attacks or cyber intrusions over the internet, malware, computer viruses, attachments to emails, social
engineering and phishing schemes or persons inside our organization. The risk of a security breach or disruption, particularly
through cyber-attacks or cyber intrusions, including by computer hackers, nation-state affiliated actors, and cyber terrorists,
has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world
have increased. These incidents may result in disruption of our operations, material harm to our financial condition, cash flows
and the market price of our common stock, misappropriation of assets, compromise or corruption of confidential information collected
in the course of conducting our business, liability for stolen information or assets, increased cybersecurity protection and insurance
costs, regulatory enforcement, litigation and damage to our stakeholder relationships. These risks require continuous and likely
increasing attention and other resources from us to, among other actions, identify and quantify these risks, upgrade and expand
our technologies, systems and processes to adequately address them and provide periodic training for our employees to assist them
in detecting phishing, malware and other schemes. Such attention diverts time and other resources from other activities and there
is no assurance that our efforts will be effective.
In
the normal course of business, we collect and retain certain personal information provided by our customers, employees and vendors.
We also rely extensively on computer systems to process transactions and manage our business. We can provide no assurance that
the data security measures designed to protect confidential information on our systems established by us will be able to prevent
unauthorized access to this personal information. There can be no assurance that our efforts to maintain the security and integrity
of the information we and our service providers collect and our and their computer systems will be effective or that attempted
security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks,
systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and
generally are not recognized until launched against a target, and in some cases are designed not be detected and, in fact, may
not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other
preventative measures, and thus it is impossible for us to entirely mitigate this risk.
We
Continually Encounter Technological Change and The Failure to Understand and Adapt to These Changes Could Hurt Our Business. The
financial services industry is undergoing rapid technological change with frequent introductions of new technology-driven products
and services and technological advances are likely to intensify competition. The effective use of technology increases efficiency
and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our
ability to address the needs of our customers by using technology to provide products and services that will satisfy customer
demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources
to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services
or be successful in marketing these products and services to customers. Failure to successfully keep pace with technological changes
affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition
and results of operations.
42
General
Risk Factors
The
Possibility of the Economy’s Return to Recessionary Conditions and the Possibility of Further Turmoil or Volatility in the
Financial Markets Would Likely Have an Adverse Effect on the Company’s Business, Financial Position and Results of Operations.
The Company continues to face risks resulting from the aftermath of the severe recession generally and the moderate pace
of the current recovery. A slowing or failure of the economic recovery would likely aggravate the adverse effects of these difficult
economic and market conditions on the Company and on others in the financial services industry. In particular, the Company may
face the following risks in connection with the economic or market environment:
Changes
in the Local Economy May Affect our Future Growth Possibilities. The Company’s success depends principally on the
general economic conditions of the primary market areas in which the Company operates. The local economic conditions in these
regions have a significant impact on the demand for the Company’s products and services, as well as the ability of the Company’s
customers to repay loans, the value of the collateral securing loans and the stability of the Company’s deposit funding
sources. The Company’s market area is principally located in Hampden and Hampshire Counties, Massachusetts and Hartford
and Tolland Counties in northern Connecticut. The local economy may affect future growth possibilities. The Company’s future
growth opportunities depend on the growth and stability of our regional economy and the ability to expand in our market area.
Natural
Disasters, Acts of Terrorism, Public Health Issues and Other External Events Could Harm Our Business. Natural disasters
can disrupt our operations, result in damage to our properties, reduce or destroy the value of the collateral for our loans and
negatively affect the economies in which we operate, which could have a material adverse effect on our results of operations and
financial condition. The emergence of widespread health emergencies or pandemics, such as the spread of COVID-19, has and may
again lead to regional quarantines, business shutdowns, labor shortages, disruptions to supply chains, and overall economic instability.
Events such as these may become more common in the future and could cause significant damage such as disruptions to power and
communication services, impacting the stability of our facilities and result in additional expenses, impairing the ability of
our borrowers to repay outstanding loans or reducing the value of collateral securing the repayment of our loans, which could
result in the loss of revenue and/or cause us to incur additional expenses. A significant natural disaster, such as a tornado,
hurricane, earthquake, fire or flood, could have a material adverse impact on our ability to conduct business, and our insurance
coverage may be insufficient to compensate for losses that may occur. Acts of terrorism, war, civil unrest, violence or human
error could cause disruptions to our business or the economy as a whole. While we have established and regularly test disaster
recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations and financial
condition.
The
Company May Not be Able to Attract, Retain or Develop Key Personnel. The Company’s success depends, in large part,
on its ability to attract, retain and develop key personnel. Competition for the best people in most activities engaged in by
the Company can be intense, and the Company may not be able to hire or retain the key personnel that it depends upon for success.
The unexpected loss of key personnel or the inability to identify and develop individuals for planned succession to key senior
positions within management, or on the Board, could have a material adverse impact on the Company’s business because of
the loss of their skills, knowledge of the Company’s market, years of industry or business experience and the difficulty
of promptly finding qualified replacements.
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Controls
and Procedures Could Fail, or Be Circumvented by Theft, Fraud or Robbery. Management regularly reviews and updates the
Company’s internal controls over financial reporting, corporate governance policies, compensation policies, Code of Business
Conduct and Ethics and security controls to prevent and detect theft, fraud or robbery from both internal and external sources.
Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable,
not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Company’s internal
controls and procedures, or failure to comply with regulations related to controls and procedures, or a physical theft or robbery,
whether by employees, management, directors, or external elements, or any illegal activity conducted by a Bank customer, could
result in loss of assets, regulatory actions against the Company, financial loss, damage the Company’s reputation, cause
a loss of customer business, and expose the Company to civil litigation and possible financial liability, any of which could have
a material adverse effect on the Company’s business, results of operations and financial condition.
Damage
to the Company’s Reputation Could Affect the Company’s Profitability and Shareholders' Value. The Company
is dependent on its reputation within its market area, as a trusted and responsible financial company, for all aspects of its
business with customers, employees, vendors, third-party service providers, and others, with whom the Company conducts business
or potential future business. Any negative publicity or public complaints, whether real or perceived, disseminated by word of
mouth, by the general media, by electronic or social networking means, or by other methods, regarding, among other things, the
Company’s current or potential business practices or activities, cyber-security issues, regulatory compliance, an inability
to meet obligations, employees, management or directors’ ethical standards or actions, or about the banking industry in
general, could harm the Company’s reputation. Any damage to the Company’s reputation could affect its ability to retain
and develop the business relationships necessary to conduct business which in turn could negatively impact the Company’s
profitability and shareholders’ value.
The
Company is Exposed to Legal Claims and Litigation. The Company is subject to legal challenges under a variety of circumstances
in the course of its normal business practices in regards to laws and regulations, duties, customer expectations of service levels,
in addition to potentially illegal activity (at a federal or state level) conducted by any of our customers, use of technology
and patents, operational practices and those of contracted third-party service providers and vendors, and stockholder matters,
among others. Regardless of the scope or the merits of any claims by potential or actual litigants, the Company may have to engage
in litigation that could be expensive, time-consuming, disruptive to the Company's operations, and distracting to management.
Whether claims or legal action are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable
to the Company, they may result in significant financial liability, damage the Company’s reputation, subject the Company
to additional regulatory scrutiny and restrictions, and/or adversely affect the market perception of our products and services,
as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material
adverse effect on the Company's business, which in turn, could have a material adverse effect on the Company's financial condition
and results of operations.
The
Company’s Insurance Coverage May Not be Adequate to Prevent Additional Liabilities or Expenses. The Company maintains
insurance policies that provide coverage for various risks at levels the Company deems adequate to provide reasonable coverage
for losses. The coverage applies to incidents and events which may impact such areas as: loss of bank facilities; accidental injury
or death of employees; injuries sustained on bank premises; cyber and technology attacks or breaches; loss of customer nonpublic
personal information; processing of fraudulent transactions; robberies, embezzlement and theft; improper processing of negotiable
items or electronic transactions; improper loan underwriting and perfection of collateral, among others. These policies will provide
varying degrees of coverage for losses under specific circumstances, and in most cases after related deductible amounts are paid
by the Company. However, there is no guarantee that the circumstance of an incident will meet the criteria for insurance coverage
under a specific policy, and despite the insurance policies in place the Company may experience a loss incident or event which
could have a material adverse effect on the Company’s business, reputation, financial condition and results of operations.
44
The
Trading Volume in the Company’s Common Stock is Less Than That of Larger Companies. Although the Company’s
common stock is listed for trading on the NASDAQ, the trading volume in the Company’s common stock is substantially less
than that of larger companies. Given the lower trading volume of the Company’s common stock, significant purchases or sales
of the Company’s common stock, or the expectation of such purchases or sales, could cause significant volatility in the
price for the Company’s common stock.
The
Market Price of the Company’s Common Stock May Fluctuate Significantly, and This May Make it Difficult for You to Resell
Shares of Common Stock Owned by You at Times or at Prices You Find Attractive. The price of the Company’s common
stock on the NASDAQ constantly changes. The Company expects that the market price of its
common stock will continue to fluctuate, and the Company cannot give you any assurances regarding any trends in the market prices
for its common stock.
The
Company’s stock price may fluctuate as a result of a variety of factors, many of which are beyond its control. These factors
include the Company’s:
• past and future dividend practice;
• financial condition, performance, creditworthiness and prospects;
• changes in expectations as to the Company’s future financial performance;
• future sales of the Company’s equity or equity-related securities;
In
addition, the banking industry may be more affected than other industries by certain economic, credit, regulatory or information
security issues. Although the Company itself may or may not be directly impacted by such issues, the Company’s stock price
may vary due to the influence, both real and perceived, of these issues, among others, on the banking industry in general. Investment
in the Company's stock is not insured against loss by the FDIC, or any other public or private entity. As a result, and for the
other reasons described in this "Risk Factors" section and elsewhere in this report, if you acquire our common stock,
you may lose some or all of your investment.
Shareholder
Dilution Could Occur if Additional Stock is Issued in the Future. If the Company’s Board of Directors should determine
in the future that there is a need to obtain additional capital through the issuance of additional shares of the Company’s
common stock or securities convertible into shares of common stock, such issuances could result in dilution to existing stockholders’
ownership interest. Similarly, if the Board of Directors decides to grant additional stock awards or options for the purchase
of shares of common stock, the issuance of such additional stock awards and/or the issuance of additional shares upon the exercise
of such options would expose stockholders to dilution.
The
Company's Financial Condition and Results of Operation Rely in Part on Management Estimates and Assumptions. In preparing
the financial statements in conformity with GAAP, management is required to exercise judgment in determining many of the methodologies,
estimates and assumptions to be utilized. These estimates and assumptions affect the reported values of assets and liabilities
at the balance sheet date and income and expenses for the years then ended. Changes in those estimates resulting from continuing
change in the economic environment and other factors will be reflected in the financial statements and results of operations in
future periods. As future events and their effects cannot be determined with precision, actual results could differ significantly
from these estimates and be adversely affected should the assumptions and estimates used be incorrect, or change over time due
to changes in circumstances.
45
business,
financial condition, results of operations and the market price of the Company’s common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
The
Company currently conducts business through our twenty-five banking offices, seventeen off-site ATMs and five seasonal/traveling
ATMs. The following table sets forth certain information regarding our properties as of December 31, 2021. As of this date, the
premises and equipment, net of depreciation, owned by us had an aggregate net book value of $26.2 million. We believe that our
existing facilities are sufficient for our current needs.
Location Ownership Year Opened Year of Lease or License Expiration
Main Office:
141 Elm Street Westfield, MA Owned 1964 N/A
Technology Center:
Retail Lending:
136 Elm Street Westfield, MA Owned 2011 N/A
Commercial Lending & Middle Market:
Commercial Lending/Credit Admin and Training Center:
Branch Offices:
206 Park Street West Springfield, MA Owned 1957 N/A
655 Main Street Agawam, MA Owned 1968 N/A
26 Arnold Street Westfield, MA Owned 1976 N/A
300 Southampton Road Westfield, MA Owned 1987 N/A
462 College Highway Southwick, MA Owned 1990 N/A
382 North Main Street East Longmeadow, MA Leased 1997 2022
1650 Northampton Street Holyoke, MA Owned 2001 N/A
46
Location Ownership Year Opened Year of Lease or License Expiration
560 East Main Street Westfield, MA Owned 2007 N/A
237 South Westfield Street Feeding Hills, MA Leased 2009 2023
12 East Granby Road Granby, CT Owned 2021 N/A
39 Morgan Road West Springfield, MA Owned 2005 N/A
1342 Liberty Street Springfield, MA Owned 2008 NA
70 Center Street Chicopee, MA Owned 1973 N/A
569 East Street Chicopee, MA Owned 1976 N/A
435 Burnett Road Chicopee, MA Owned 1990 N/A
32 Willamansett Street (1) South Hadley, MA Leased 2008 2027
14 Russell Road Huntington, MA Owned 2020 N/A
977 Farmington Avenue West Hartford, CT Leased 2020 2030
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Location Ownership Year Opened Year of Lease or License Expiration
ATMs:
516 Carew Street Springfield, MA Tenant at will 2002 NA
1000 State Street Springfield, MA Tenant at will 2003 NA
788 Memorial Avenue West Springfield, MA Leased 2006 2025
2620 Westfield Street West Springfield, MA Tenant at will 2006 NA
115 West Silver Street Westfield, MA Tenant at will 2005 NA
98 Lower Westfield Road Holyoke, MA Leased 2010 2025
Westfield State University 577 Western Avenue Westfield, MA
110 Cherry Street Holyoke, MA Tenant at will 2018 NA
291 Springfield Street Chicopee, MA Owned 2015 NA
Springfield Visitors Center 1319 Main Street Springfield, MA Leased 2018 2023
Union Station 55 Frank B. Murray Street Springfield, MA Leased 2018 2023
701 Center Street Chicopee, MA Tenant at will 2015 NA
627 Randall Road Ludlow, MA Tenant at will 2015 NA
26 Central Street West Springfield, MA Tenant at will 2021 NA
(1) This lease is for the land only, the building is owned by Westfield Bank.
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ITEM 3. LEGAL PROCEEDINGS.
There
are no material pending legal proceedings to which the Company or its subsidiaries are a party or to which any of its property
is subject, other than routine legal proceedings occurring in the ordinary course of business. Management does not believe resolution
of any present litigation will have a material adverse effect on the business, consolidated financial condition or results of
operations of the Company.
ITEM 4. MINE SAFETY DISCLOSURES.
not
Applicable.
PART
II
Market