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
Our
Business and Results of Operations May be Adversely Affected by the Financial Markets, Fiscal, Monetary, and Regulatory Policies and
Economic Conditions. These Factors Could Have a Material Adverse Effect on Our Earnings, Net Interest Margin, Rate of Growth, Financial
Condition and Stock Price. The economy in the United States and globally has experienced volatility in recent years and may continue
to do so for the foreseeable future, particularly as a result of the COVID-19 pandemic. There can be no assurance that economic conditions
will not worsen. Our business may be affected by unfavorable or uncertain economic conditions such as the level and volatility of interest
rates, availability and market conditions of financing, business activity or investor or business confidence, unexpected changes in gross
domestic product, economic growth or its sustainability, inflation, supply chain disruptions, consumer spending, employment levels, labor
shortages, wage inflation, federal government shutdowns, developments related to the U.S. federal debt ceiling, energy prices, home prices,
commercial property values, bankruptcies, fluctuations or other significant changes in both debt and equity capital markets and currencies,
liquidity of financial markets and the availability and cost of capital and credit, natural disasters, epidemics and pandemics (including
COVID-19), terrorist attacks, acts of war or a combination of these or other factors.
Market
fluctuations may impact our margin requirements and affect our business liquidity. Also, any sudden or prolonged market downturn, as
a result of the above factors or otherwise, could result in a decline in net interest income and noninterest income and adversely affect
our results of operations and financial condition, including asset quality, capital and liquidity levels.
In
particular, the Company may face the following risks in connection with the economic or market environment:
● The value of loans and other assets or collateral securing loans may decrease.
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As
economic conditions relating to the COVID-19 pandemic have improved, the Federal Reserve has shifted its focus to limiting inflationary
and other potentially adverse effects of the extensive pandemic-related government stimulus, which signals the potential for a continued
period of economic uncertainty even though the pandemic has subsided. In addition, there are continuing concerns related to, among other
things, the level of U.S. government debt and fiscal actions that may be taken to address that debt, a potential resurgence of economic
and political tensions with China and the Russian invasion of Ukraine, all of which may have a destabilizing effect on financial markets
and economic activity. Economic pressure on consumers and overall economic uncertainty may result in changes in consumer and business
spending, borrowing and saving habits. These economic conditions and/or other negative developments in the domestic or international
credit markets or economies may significantly affect the markets in which we do business, the value of our loans and investments, and
our ongoing operations, costs and profitability. Declines in real estate values and sales volumes and high unemployment or underemployment
may also result in higher than expected loan delinquencies, increases in our levels of nonperforming and classified assets and a decline
in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity
and financial condition.
The
Continuing COVID-19 Pandemic Could Adversely Affect Our Businesses and Our Customers, Counterparties, Employees, and Third-Party Service
Providers. The pandemic has adversely affected, and may continue to adversely affect, our customers and other businesses in our
market area, as well as counterparties and third party vendors. Although many health and safety restrictions have been lifted and vaccine
distribution has increased, certain adverse consequences of the pandemic continue to impact the macroeconomic environment and may continue
to persist. The growth in economic activity and demand for goods and services, alongside labor shortages and supply chain complications
and/or disruptions, has also contributed to rising inflationary pressures. The final outcome and/or potential duration of the economic
disruption that resulted from the onset and subsequent recovery from COVID-19 remains uncertain at this time as the financial markets
continue to be impacted. Our business and operations have not been materially impacted by COVID-19 as of December 31, 2022. 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. As a result, the full extent of the resulting adverse impacts on our business,
financial condition, liquidity and results of operations remains inestimable at this time, and will depend on a number of evolving factors
and future developments beyond our control and that we are unable to predict.
Interest
Rate Volatility Could Adversely Affect Our Results of Operations and Financial Condition. We cannot predict or control 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. In response to the economic conditions resulting from the COVID-19 pandemic, the Federal Reserve Board's target
Fed Funds Rate was reduced to nearly 0% in March 2020. However, in a series of actions to combat rising inflation that began in March
2022, the Federal Reserve Board raised the Fed Funds Rate to 4.50% - 4.75% as of February 1, 2023. Changes in monetary policy, including
changes in interest rates, influence not only the interest we receive on loans and securities and the interest we pay on deposits and
borrowings, but such changes could affect our ability to originate loans and obtain deposits, the fair value of financial assets and
liabilities, and the average duration of our assets.
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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. Net interest income is the most significant
component of our net income, accounting for approximately 85.5% of total revenues in 2022. Changes in market interest rates, in the shape
of the yield curve or in spreads between different market interest rates can have a material effect on our net interest margin. The rates
on some interest-earning assets, such as loans and investments, and interest-bearing liabilities, such as deposits and borrowings, adjust
concurrently with, or within a brief period after, changes in market interest rates, while others adjust only periodically or not at
all during their terms. Thus, changes in market interest rates might, for example, result in an increase in the interest paid on interest-bearing
liabilities that is not accompanied by a corresponding increase in the interest earned on interest-earning assets, or the increase in
interest earned might be at a slower pace, or in a smaller amount, than the increase in interest paid, reducing our net interest income
and/or net interest margin. In addition, we rely on lower-cost, core deposits as our primary source of funding and changes in interest
rates could increase our cost of funding, reduce our net interest margin and/or create liquidity challenges We have policies and procedures
designed to manage the risks associated with changes in interest rates and actively manage these risks through hedging and other risk
mitigation strategies. However, if our assumptions are wrong or overall economic conditions are significantly different than anticipated,
our hedging and other risk mitigation strategies may be ineffective and may adversely impact our financial condition and results of operations.
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.
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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 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. On
January 1, 2023, FASB-announced changes to accounting standards that impact the way banking organizations estimate their allowance for
loan losses became effective for the Company. 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 subsequent to adoption
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.
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’s Investments are Subject to Interest Rate Risks, Credit Risk and Liquidity Risk and Declines in Value in its Investments
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.
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.
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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.
Climate
Change or Government Action and Societal Responses to Climate Change Could Adversely Affect Our Results of Operations. Climate
change can increase the likelihood of the occurrence and severity of natural disasters and can also result in longer-term shifts in climate
patterns such as extreme heat, sea level rise and more frequent and prolonged drought. Such significant climate change effects may negatively
impact the Company’s geographic markets, disrupting the operations of the Company, our customers or third parties on which we rely.
Damages to real estate underlying mortgage loans or real estate collateral and declines in economic conditions in geographic markets
in which the Company’s customers operate may impact our customers’ ability to repay loans or maintain deposits due to climate
change effects, which could increase our delinquency rates and average credit loss.
Moreover,
as the effects of climate change continue to create a level of concern for the state of the global environment, companies are facing
increasing scrutiny from customers, regulators, investors and other stakeholders related to their environmental, social and governance
(“ESG”) practices and disclosure. New government regulations could result in more stringent forms of ESG oversight and reporting
and diligence and disclosure requirements. Increased ESG related compliance costs, in turn, could result in increases to our overall
operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards,
including with respect to the Company’s involvement in certain industries or projects associated with causing or exacerbating climate
change, may negatively affect the Company’s reputation and commercial relationships, which could adversely affect our business.
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.
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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.
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.
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Replacement
of the London Interbank Offered Rate Could Adversely Affect Our Business, Financial Condition, and Results of Operations.
In 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates the London Interbank Offered
Rate (“LIBOR”), announced that the FCA intends to stop persuading or compelling banks to submit the rates required to calculate
LIBOR after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after
2021. The U.S. bank regulators issued a Statement on LIBOR Transition on November 30, 2020 and subsequent guidance encouraging
banks to transition away from U.S. Dollar (USD) LIBOR by December 31, 2021 at the latest for new contracts. LIBOR is currently anticipated
to be fully phased out by June 30, 2023. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured
Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to LIBOR for use in derivatives
and other financial contracts that are currently indexed to LIBOR. ARRC has proposed a paced market transition plan to SOFR from LIBOR
and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash
markets exposed to LIBOR. Management is monitoring ARRC publications
for best practices as the Company transitions legacy LIBOR loans by the June 30, 2023 deadline. The Company adopted SOFR as its
preferred benchmark as an alternative to LIBOR for use in new and legacy contracts beginning on January 1, 2022.
We
have certain 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.
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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.
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.
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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.
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General Risk Factors
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.
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.
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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.
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.
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The
Company’s stock price may fluctuate significantly as a result of a variety of factors, many of which are beyond its control. These
factors include, but are not limited to, 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.
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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, ten free-standing ATMs and an additional fourteen
free-standing and thirty-one seasonal or temporary ATMs that are owned and serviced by a third party, whereby the Bank pays a
rental fee and shares in the surcharge revenue. The following table sets forth certain information regarding our properties as
of December 31, 2022. As of this date, the premises and equipment, net of depreciation, owned by us had an aggregate net book
value of $25.0 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 2027
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Location Ownership Year Opened Year of Lease or License Expiration
1650 Northampton Street Holyoke, MA Owned 2001 N/A
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 (1) Springfield, MA Owned 2008 N/A
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 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(2):
788 Memorial Avenue West Springfield, MA Leased 2006 2025
2620 Westfield Street West Springfield, MA Tenant at will 2006 N/A
115 West Silver Street Westfield, MA Tenant at will 2005 N/A
98 Lower Westfield Road Holyoke, MA Leased 2010 2025
Westfield State University 577 Western Avenue Westfield, MA
Ely Hall Tenant at will 2010 N/A
Wilson Hall Tenant at will 2010 N/A
110 Cherry Street Holyoke, MA Tenant at will 2018 N/A
291 Springfield Street Chicopee, MA Tenant at will 2015 N/A
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 N/A
627 Randall Road Ludlow, MA Tenant at will 2015 N/A