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Alerus Financial Corporation (ALRS)
NASDAQ:ALRS
Risk Overview Q3, 2024
Risk Distribution
54% Finance & Corporate
16% Legal & Regulatory
11% Macro & Political
9% Production
7% Tech & Innovation
2% Ability to Sell
Finance & Corporate - Financial and accounting risks. Risks related to the execution of corporate activity and strategy
This chart displays the stock's most recent risk distribution according to category. TipRanks has identified 6 major categories: Finance & corporate, legal & regulatory, macro & political, production, tech & innovation, and ability to sell.
Risk Change Over Time
S&P500 Average
Sector Average
Risks removed
Risks added
Risks changed
Alerus Financial Risk Factors
New Risk (0)
Risk Changed (0)
Risk Removed (0)
No changes from previous report
The chart shows the number of risks a company has disclosed. You can compare this to the sector average or S&P 500 average.
The quarters shown in the chart are according to the calendar year (January to December). Businesses set their own financial calendar, known as a fiscal year. For example, Walmart ends their financial year at the end of January to accommodate the holiday season.
The quarters shown in the chart are according to the calendar year (January to December). Businesses set their own financial calendar, known as a fiscal year. For example, Walmart ends their financial year at the end of January to accommodate the holiday season.
Risk Highlights Q3, 2024
Main Risk Category
Finance & Corporate
With 46 Risks
Finance & Corporate
With 46 Risks
Number of Disclosed Risks
85
+1
From last reportS&P 500 Average: 31
85
+1
From last reportS&P 500 Average: 31
Recent Changes
2Risks added
0Risks removed
0Risks changed
Since Sep 2024
2Risks added
0Risks removed
0Risks changed
Since Sep 2024
Number of Risk Changed
0
No changes from last report
S&P 500 Average: 3
0
No changes from last report
S&P 500 Average: 3
See the risk highlights of Alerus Financial in the last period.
Risk Word Cloud
The most common phrases about risk factors from the most recent report. Larger texts indicate more widely used phrases.
Risk Factors Full Breakdown - Total Risks 85
Finance & Corporate
Total Risks: 46/85 (54%)Below Sector Average
Share Price & Shareholder Rights9 | 10.6%
Share Price & Shareholder Rights - Risk 1
The Company's certificate of incorporation has an exclusive forum provision, which could limit a stockholder's ability to obtain a favorable judicial forum for disputes with the Company or its directors, officers or other employees.Share Price & Shareholder Rights - Risk 2
Certain banking laws and certain provisions of the Company's certificate of incorporation and bylaws may have an anti-takeover effect.Provisions of federal banking laws, including regulatory approval requirements, could make it difficult for a third party to acquire the Company, even if doing so would be perceived to be beneficial to the Company's stockholders. In general, acquisitions of 10% or more of any class of voting stock of a bank holding company or depository institution generally creates a rebuttable presumption that the acquirer "controls" the bank holding company or depository institution. Also, a bank holding company must obtain the prior approval of the Federal Reserve before, among other things, acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, including the Bank.
There are also provisions in the Company's certificate of incorporation and bylaws that could have the effect of delaying, deferring or discouraging another party from acquiring control of the Company, even if such acquisition would be viewed by the Company's stockholders to be in their best interests. These include supermajority stockholder voting thresholds and requirements relating to stockholder meetings and nominations or proposals. The Company is also subject to a statutory antitakeover provision included in the DGCL. In addition, the Company's Board of Directors is authorized under its certificate of incorporation to issue shares of preferred stock, and determine the rights, terms conditions and privileges of such preferred stock, without stockholder approval. These provisions may effectively inhibit a non-negotiated merger or other business combination, which, in turn, could have a material adverse effect on the market price of the Company's common stock.
Share Price & Shareholder Rights - Risk 3
The Company is an emerging growth company within the meaning of the Securities Act and because the Company has decided to take advantage of certain exemptions from various reporting and other requirements applicable to emerging growth companies, the Company's common stock could be less attractive to investors.For as long as the Company remains an emerging growth company, as defined in the JOBS Act, it will have the option to take advantage of certain exemptions from various reporting and other requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, being permitted to have an extended transition period for adopting any new or revised accounting standards that may be issued by the FASB or the SEC, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. The Company has elected to, and expect to continue to, take advantage of certain of these and other exemptions until it is no longer an emerging growth company. The Company will remain an emerging growth company until the earliest of (i) the end of the fiscal year during which the Company has total annual gross revenues of $1.235 billion or more, (ii) the end of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities under the Company's registration statement on Form S-1, which was declared effective by the SEC on September 12, 2019, (iii) the date on which the Company has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt and (iv) the end of the first fiscal year in which (A) the market value of the Company's equity securities that are held by non-affiliates exceeds $700 million as of June 30 of that year, (B) the Company has been a public reporting company under the Exchange Act for at least twelve calendar months and (C) the Company has filed at least one annual report on Form 10-K. The Company expects to no longer qualify as an emerging growth company as of December 31, 2024.
Share Price & Shareholder Rights - Risk 4
The Company may be adversely affected by the soundness of certain securities brokerage firms.The Company's client investment accounts are maintained under custodial arrangements with large, well established securities brokerage firms or bank institutions that provide custodial services, either directly or through arrangements made by the Company with those firms. As a result, the performance of, or even rumors or questions about the integrity or performance of, any of those firms could adversely affect the confidence of the Company's clients in the services provided by those firms or otherwise adversely impact their custodial holdings. Such an occurrence could negatively impact the Company's ability to retain existing or attract new clients and, as a result, could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Share Price & Shareholder Rights - Risk 5
The holders of the Company's debt obligations and preferred stock, if any, will have priority over the Company's common stock with respect to payment in the event of liquidation, dissolution or winding up and with respect to the payment of interest and dividends.In any liquidation, dissolution or winding up of the Company, the Company's common stock would rank junior in priority to all claims of debt holders against the Company and claims of all of the Company's outstanding shares of preferred stock. As of December 31, 2023, the Company had $50.0 million of subordinated notes payable and $9.0 million of junior subordinated debentures outstanding. The Company does not currently have any shares of preferred stock issued and outstanding. As a result, holders of the Company's common stock will not be entitled to receive any payment or other distribution of assets upon the liquidation, dissolution or winding up of the Company until after all of its obligations to debt holders have been satisfied and holders of senior equity securities, including any preferred shares, if any, have received any payment or distribution due to them.
Share Price & Shareholder Rights - Risk 6
The Company may issue shares of preferred stock in the future, which could make it difficult for another company to acquire the Company or could otherwise adversely affect holders of the Company's common stock, which could depress the price of the Company's common stock.Although there are currently no shares of the Company's preferred stock issued and outstanding, the Company's certificate of incorporation authorizes the Company to issue up to 2,000,000 shares of one or more series of preferred stock. The Company's Board of Directors also has the power, without stockholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights, preferences over the Company's common stock with respect to dividends or in the event of a dissolution, liquidation or winding up, and other terms. If the Company issues preferred stock in the future that has preference over the Company's common stock with respect to payment of dividends or upon the Company's liquidation, dissolution or winding up, or if the Company issues preferred stock with voting rights that dilute the voting power of the Company's common stock, the rights of the holders of the Company's common stock or the market price of the Company's common stock could be adversely affected. In addition, the ability of the Company's Board of Directors to issue shares of preferred stock without any action on the part of the Company's stockholders may impede a takeover of the Company and prevent a transaction perceived to be favorable to the Company's stockholders.
Share Price & Shareholder Rights - Risk 7
Future issuances of common stock could result in dilution, which could cause the Company's common stock price to decline.The Company is generally not restricted from issuing additional shares of stock, up to totals of 30,000,000 shares of common stock and 2,000,000 shares of preferred stock authorized in the Company's certificate of incorporation, which in each case could be increased by a vote of the holders of a majority of the Company's shares of common stock. The Company may issue additional shares of common stock in the future pursuant to current or future equity compensation plans, upon conversions of preferred stock or debt, or in connection with future acquisitions or financings. If the Company chooses to raise capital by selling shares of common stock for any reason, the issuance would have a dilutive effect on the holders of the Company's common stock and could have a material negative effect on the market price of the Company's common stock.
Share Price & Shareholder Rights - Risk 8
The Company cannot guarantee that its stock repurchase program will be fully implemented or that it will enhance long-term stockholder value.On December 12, 2023, the Company's board of directors approved a new stock repurchase program, which became effective on February 18, 2024, and which authorizes the Company to repurchase up to 1,000,000 shares of its common stock, subject to certain limitations and conditions. The new stock repurchase program replaced and superseded the previous 770,000 share stock repurchase program, under which approximately 413,526 shares remained. The new stock repurchase program will expire on February 18, 2027. The repurchase program does not obligate the Company to repurchase any shares of its common stock, and other than repurchases that have been completed to date, there is no assurance that the Company will do so or that the Company will repurchase shares at favorable prices. The repurchase program may be suspended or terminated at any time and, even if fully implemented, the repurchase program may not enhance long-term stockholder value.
Share Price & Shareholder Rights - Risk 9
The Company could recognize losses on securities held in the Company's securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.As of December 31, 2023, the fair value of the Company's securities portfolio was approximately $745.4 million, or 19.1% of total assets. Factors beyond the Company's control can significantly influence and cause potential adverse changes to the fair value of securities in the Company's portfolio. For example, fixed-rate securities acquired by the Company are generally subject to decreases in market value when interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities or the Company's own analysis of the value of the securities, defaults by the issuers or individual mortgagors with respect to the underlying securities and instability in the credit markets. Any of the foregoing factors, as well as changing economic and market conditions or other factors, could cause write-downs and realized or unrealized losses in future periods and declines in other comprehensive income, which could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects. The process for determining whether a write-down is required usually requires complex, subjective judgments, which could subsequently prove to have been wrong, about the future financial performance and liquidity of the issuer, the fair value of any collateral underlying the security and whether and the extent to which the principal and interest on the security will ultimately be paid in accordance with its payment terms.
A large percentage of the Company's investment securities classified as available-for-sale has fixed interest rates. As is the case with many financial institutions, the Company's emphasis on increasing the development of core deposits, those with no stated maturity date, has resulted in the Company's interest-bearing liabilities having a shorter duration than interest-earning assets. This imbalance can create significant earnings volatility because interest rates change over time. As interest rates have increased, the Company's cost of funds has increased more rapidly than the yields on a substantial portion of the Company's interest-earning assets. In addition, the market value of the Company's fixed-rate assets, for example, investment securities, has declined in recent periods. In line with the foregoing, the Company has experienced and may continue to experience an increase in the cost of interest-bearing liabilities primarily due to raising the rates the Company pays on some of its deposit products to stay competitive within the Company's market and an increase in borrowing costs from increases in the federal funds rate.
At December 31, 2023, the Company had $139.1 million of unrealized losses in its securities portfolio. If the Company is forced to liquidate any of those investments prior to maturity, including because of a lack of liquidity, it would recognize as a charge to earnings the losses attributable to those securities. The Company's securities portfolio has a weighted average effective duration of 5.0 years, so the Company expects an increase in realized losses if interest rates remain elevated or continue to increase in 2024.
Accounting & Financial Operations10 | 11.8%
Accounting & Financial Operations - Risk 1
Nonperforming assets take significant time and resources to resolve and adversely affect the Company's net interest income.Accounting & Financial Operations - Risk 2
The Company's dividend policy may change.Although the Company has historically paid dividends to its stockholders and currently intends to maintain or increase its dividend levels in future quarters, the Company has no obligation to continue doing so and may change the Company's dividend policy at any time without notice to the Company's stockholders. Holders of the Company's common stock are only entitled to receive such cash dividends as the Company's Board of Directors, in its discretion, may declare out of funds legally available for such payments. Further, consistent with the Company's strategic plans, growth initiatives, capital availability, projected liquidity needs, and other factors, the Company has made, and will continue to make, capital management decisions and policies that could adversely impact the amount of dividends paid to the Company's common stockholders.
In addition, the Company is a financial holding company, and the Company's ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends. It is the policy of the Federal Reserve that bank and financial holding companies should generally pay dividends on capital stock only out of earnings, and only if prospective earnings retention is consistent with the organization's expected future needs, asset quality and financial condition.
The Company is a separate and distinct legal entity from its subsidiaries, including the Bank. The Company receives substantially all of its revenue from dividends from the Bank, which it uses as the principal source of funds to pay expenses. Various federal and state laws and regulations limit the amount of dividends that the Bank and certain of the Company's non-bank subsidiaries may pay the Company. Such limits are also tied to the earnings of the Company's subsidiaries. If the Bank does not receive regulatory approval or if its earnings are not sufficient to make dividend payments to the Company while maintaining adequate capital levels, the Company's ability to pay its expenses and its business, financial condition or results of operations could be materially and adversely impacted.
Accounting & Financial Operations - Risk 3
The Company's liquidity is largely dependent on dividends from the Bank.The Company is a legal entity separate and distinct from the Bank, and its other subsidiaries. A substantial portion of the Company's cash flow, including cash flow to pay principal and interest on the Company's debt, comes from dividends the Company receives from the Bank. Various federal and state laws and regulations limit the amount of dividends that the Bank may pay to the Company. As of December 31, 2023, the Bank had the capacity to pay the Company a dividend of up to $61.3 million without the need to obtain prior regulatory approval. Also, the Company's right to participate in a distribution of assets upon a subsidiary's liquidation or reorganization is subject to the prior claims of the subsidiary's creditors. In the event the Bank is unable to pay dividends to the Company, it may not be able to service its debt, which could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Accounting & Financial Operations - Risk 4
If the goodwill that the Company recorded in connection with the Company's recent acquisitions becomes impaired, it could have a negative impact on its financial condition and results of operations.As of December 31, 2023, the Company had goodwill of $46.8 million, or 12.7% of the Company's total stockholders' equity. The excess purchase consideration over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at least annually and on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment has occurred. In testing for impairment, the Company conducts a qualitative assessment, and the Company also estimates the fair value of net assets based on analyses of its market value, discounted cash flows and peer values. Consequently, the determination of the fair value of goodwill is sensitive to market-based economics and other key assumptions. Variability in market conditions or in key assumptions could result in impairment of goodwill, which is recorded as a non-cash adjustment to income. An impairment of goodwill could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Accounting & Financial Operations - Risk 5
The recent change in the Company's independent registered public accounting firm could materially impact the Company's financial statements.On December 1, 2022, the Audit Committee of the Board of Directors of the Company approved the dismissal of CliftonLarsonAllen LLP ("CLA"), as the Company's independent registered public accounting firm because CLA indicated that it would not stand for reappointment following completion of the audit of the Company's consolidated financial statements for the year-ending December 31, 2022. On December 1, 2022, the Audit Committee approved the appointment of RSM, LLP ("RSM") to serve as the Company's independent registered public accounting firm for the year ending December 31, 2023. RSM's future audits of the Company's financial statements may identify errors or omissions in the Company's historical financial statements that were not previously identified and that could require the Company to restate previously issued financial statements or materially impact how the Company reports its financial condition and results of operations going forward. If the Company has to restate any historical financial statements it could have a material adverse effect on its financial condition and results of operations.
Accounting & Financial Operations - Risk 6
The financial reporting resources the Company has put in place may not be sufficient to ensure the accuracy of the additional information the Company is required to disclose as a publicly listed company.As a public company, the Company is subject to heightened financial reporting standards under GAAP and SEC rules, including more extensive levels of disclosure. Complying with these standards required enhancements to the design and operation of the Company's internal control over financial reporting as well as additional financial reporting and accounting staff with appropriate training and experience in GAAP and SEC rules and regulations.
If the Company is unable to meet the demands required of the Company as a public company, including the requirements of the Sarbanes-Oxley Act, the Company may be unable to report its financial results accurately, or report them within the timeframes required by law or stock exchange regulations. Failure to comply with the Sarbanes-Oxley Act, when and as applicable, could also potentially subject the Company to sanctions or investigations by the SEC or other regulatory authorities. If material weaknesses or other deficiencies occur, the Company's ability to report its financial results accurately and timely could be impaired, which could result in late filings of the Company's annual and quarterly reports under the Exchange Act, restatements of the Company's consolidated financial statements, a decline in the Company's stock price, suspension or delisting of the Company's common stock from the Nasdaq Capital Market, and could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects. Even if the Company is able to report its financial statements accurately and in a timely manner, any disclosure of material weaknesses in the Company's future filings with the SEC could cause the Company's reputation to be harmed and the Company's stock price to decline significantly.
The Company did not engage its independent registered public accounting firm to perform an audit of its internal control over financial reporting under the standards of the Public Company Accounting Oversight Board, or PCAOB, as of any balance sheet date reported in the Company's financial statements as of December 31, 2023. Had the Company's independent registered public accounting firm performed an audit of its internal control over financial reporting under the standards of PCAOB, material weaknesses may have been identified. The JOBS Act provides that, so long as the Company qualifies as an emerging growth company, it will be exempt from the provisions of Section 404(b) of Sarbanes-Oxley, which would require that the Company's independent registered public accounting firm provide an attestation report on the effectiveness of its internal control over financial reporting under the standards of PCAOB. The Company may take advantage of this exemption so long as it qualifies as an emerging growth company.
Accounting & Financial Operations - Risk 7
The obligations associated with being a public company require significant resources and management attention, which divert time and attention from the Company's business operations.As a public company, the Company is subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. The Exchange Act requires that the Company file annual, quarterly and current reports with respect to its business and financial condition with the SEC. The Sarbanes-Oxley Act requires, among other things, that the Company establish and maintain effective internal controls and procedures for financial reporting. Compliance with these reporting requirements and other rules and regulations, including period revisions to and additional rules and regulations, of the SEC could increase the Company's legal and financial compliance costs and make some activities more time consuming and costly, which could negatively affect the Company's efficiency ratio. Further, the need to maintain the corporate infrastructure demanded of a public company may divert management's attention from implementing the Company's strategic plan, which could prevent the Company from successfully implementing the Company's growth initiatives and improving its business, results of operations and financial condition.
As an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, the Company is taking advantage of certain temporary exemptions from various reporting requirements, including reduced disclosure obligations regarding executive compensation in the Company's periodic reports and proxy statements and an exemption from the requirement to obtain an attestation from the Company's auditors on management's assessment of its internal control over financial reporting. When these exemptions cease to apply, the Company expects to incur additional expenses and devote increased management effort toward ensuring compliance with them.
Accounting & Financial Operations - Risk 8
Changes in accounting policies or standards could materially impact the Company's financial statements.From time to time, FASB, the Public Company Accounting Oversight Board (or PCAOB) or the SEC, may change the financial accounting and reporting standards that govern the preparation of the Company's financial statements. Such changes may result in the Company being subject to new or changing accounting and reporting standards. In addition, the bodies that interpret the accounting standards (such as banking regulators or outside auditors) may change their interpretations or positions on how these standards should be applied. In addition, trends in financial and business reporting, including environmental social and governance (ESG) related disclosures, could require the Company to incur additional reporting expense. These changes may be beyond the Company's control, can be hard to predict and can materially impact how it records and reports its financial condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retroactively, or apply an existing standard differently, in each case resulting in the Company's needing to revise or restate prior period financial statements.
Accounting & Financial Operations - Risk 9
The Company's accounting estimates and risk management processes and controls rely on analytical and forecasting techniques and models and assumptions, which may not accurately predict future events.The Company's accounting policies and methods are fundamental to the way it records and reports its financial condition and results of operations. The Company's management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with United States generally accepted accounting principles ("GAAP") and reflect management's judgment of the most appropriate manner to report the Company's financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet which may result in the Company's reporting materially different results than would have been reported under a different alternative.
Certain accounting policies are critical to presenting the Company's financial condition and results of operations. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. If the Company's underlying assumptions or estimates prove to be incorrect, it could have a material adverse effect on its business, financial condition, results of operations and growth prospects.
The Company's risk management processes, internal controls, disclosure controls and corporate governance policies and procedures are 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 controls, processes and procedures or failure to comply with regulations related to controls, processes and procedures could necessitate changes in those controls, processes and procedures, which may increase the Company's compliance costs, divert management attention from its business or subject the Company to regulatory actions and increased regulatory scrutiny. Any of these could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Accounting & Financial Operations - Risk 10
Because the Company has elected to use the extended transition period for complying with new or revised accounting standards for an emerging growth company, the Company's financial statements may not be comparable to companies that comply with these accounting standards as of the public company effective dates.The Company has elected to use the extended transition period for complying with new or revised accounting standards under Section 7(a)(2)(B) of the Securities Act. This election allows the Company to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, the Company's financial statements may not be comparable to companies that comply with these accounting standards as of the public company effective dates. Because the Company's financial statements may not be comparable to companies that comply with public company effective dates, investors may have difficulty evaluating or comparing the Company's business, financial results or prospects in comparison to other public companies, which may have a negative impact on the value and liquidity of the Company's common stock. The Company cannot predict if investors will find its common stock less attractive because the Company plans to rely on this exemption. If some investors find the Company's common stock less attractive as a result, there may be a less active trading market for the Company's common stock and the Company's stock price may be more volatile.
Debt & Financing22 | 25.9%
Debt & Financing - Risk 1
The Federal Reserve may require the Company to commit capital resources to support the Bank.Debt & Financing - Risk 2
The Company is subject to stringent capital requirements.Banking institutions are required to hold more capital as a percentage of assets than most industries. In the wake of the global financial crisis, the Company's capital requirements increased, both in the amount of capital it must hold and in the quality of the capital to absorb losses. In addition, following the bank failures in 2023, federal bank regulatory agencies have begun to propose changes and potential increases in existing capital requirements. Holding high amounts of capital compresses the Company's earnings and constrains growth. In addition, the failure to meet applicable regulatory capital requirements could result in one or more of the Company's regulators placing limitations or conditions on the Company's activities, including its growth initiatives, or restricting the commencement of new activities, and could affect client and investor confidence, its costs of funds and FDIC insurance costs and its ability to make acquisitions and result in a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Debt & Financing - Risk 3
The Company's high concentration of large depositors may increase its liquidity risk.The Company has developed relationships with certain individuals and businesses that have resulted in a concentration of large deposits from a small number of clients. As of December 31, 2023, the Company's 10 largest depositor relationships accounted for approximately 8.7% of total deposits. This high concentration of depositors presents a risk to the Company's liquidity if one or more of them decides to change its relationship with the Company and to withdraw all or a significant portion of their accounts, for example as a result of deposits above the FDIC insurance limit. If such an event occurs, the Company may need to seek out alternative sources of funding that may not be on the same terms as the deposits being replaced, which could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Debt & Financing - Risk 4
The Company may not be able to maintain a strong core deposit base or other low-cost funding sources.The Company depends primarily on core deposits from its clients, which consist of noninterest bearing deposits, interest bearing checking accounts, certificates of deposit less than $250,000 and money market savings accounts, as the Company's primary source of funding for lending activities. The Company's future growth will largely depend on its ability to maintain and grow this strong, core deposit base and the Company's ability to retain its retirement and benefit and wealth management clients, many of whom are also depositors. Deposit and account balances can decrease when clients perceive alternative investments, such as the stock market or real estate, as providing a better risk/return tradeoff. If clients, including the Company's retirement and benefit and wealth management clients, move money out of bank deposits or money market accounts and into investments (or similar deposit products at other institutions that may provide a higher rate of return), the Company could lose a relatively low-cost source of funds, increasing funding costs and reducing net interest income and net income.
The Company supplements its core deposit funding with non-core, short-term funding sources, including FHLB advances and fed funds purchased. As of December 31, 2023, the Company had $200.0 million FHLB advances and $114.2 million of fed funds purchased from the FHLB. The Company's maximum borrowing capacity from the FHLB is based on the amount of mortgage and commercial loans the Company can pledge. As of December 31, 2023, the Company's advances from the FHLB were collateralized by $970.4 million of real estate loans. If the Company is unable to pledge sufficient qualifying collateral to secure funding from the FHLB, it may lose access to this source of liquidity. If the Company is unable to access any of these types of funding sources or if its costs related to them increases, the Company's liquidity and ability to support demand for loans could be materially adversely affected.
Debt & Financing - Risk 5
The Company's wealth management business is dependent on asset managers to produce investment returns and financial advisors to solicit and retain clients, and the loss of a key asset manager or financial advisor could adversely affect the Company's wealth management business.The Company relies on its asset managers to produce investment returns and financial advisors to advise clients of the Company's wealth management business. The Company believes that investment performance is an important factor for the growth of its AUM. Poor investment performance could impair the Company's revenues and growth because existing clients might withdraw funds in favor of better performing products, which would result in lower investment management fees, or the Company's ability to attract funds from existing and new clients might diminish.
The market for asset managers and financial advisors is extremely competitive and is increasingly characterized by frequent movement of these types of employees among different firms. In addition, the Company's asset managers and financial advisors often have regular direct contact with the Company's clients, which can lead to a strong client relationship based on the client's trust in that individual manager or advisor. The loss of a key asset manager or financial advisor could jeopardize the Company's relationships with the Company's clients and lead to the loss of client accounts. Losses of such accounts could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Debt & Financing - Risk 6
The Company may be adversely affected by changes in the actual or perceived soundness or condition of other financial institutions.Financial services institutions that deal with each other are interconnected as a result of trading, investment, liquidity management, clearing, counterparty , reputational and other relationships. Concerns about, or a default by, one institution could lead to significant liquidity problems and losses or defaults by other institutions, as the commercial and financial soundness of many financial institutions is closely related as a result of these credit, trading, clearing and other relationships. Even the perceived lack of creditworthiness of, or questions about, a counterparty may lead to market-wide liquidity problems and losses or defaults by various institutions. For example, certain community banks experienced deposit outflows following the failures of Silicon Valley Bank, Signature Bank, and First Republic Bank in 2023. This systemic risk may adversely affect financial intermediaries with which the Company interacts on a daily basis or key funding providers such as the FHLB, any of which could have a material adverse effect on the Company's access to liquidity or otherwise have a material adverse effect on its business, financial condition, results of operations and growth prospects.
Debt & Financing - Risk 7
The Company may need to raise additional capital in the future, and if it fails to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, the Company's business, financial condition, results of operations and growth prospects, as well as its ability to maintain regulatory compliance, would be adversely affected.The Company faces significant capital and other regulatory requirements as a financial institution. The Company may need to raise additional capital in the future to provide it with sufficient capital resources and liquidity to meet the Company's commitments and business needs, which could include the possibility of financing acquisitions. The Company does not have any current plans, arrangements or understandings to make any additional acquisitions. In addition, the Company, on a consolidated basis, and the Bank, on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity. Regulatory capital requirements could increase from current levels, which could require the Company to raise additional capital or contract the Company's operations. The Company's ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, the Company's credit ratings, its ability to maintain a listing on Nasdaq and its financial condition and performance. In particular, if the Company needs to raise additional capital in the current interest rate environment, the Company believes the pricing and other terms investors may require in such an offering may not be attractive to the Company. If the Company fails to maintain an investment grade credit rating, it may adversely impact its ability to raise capital or incur additional debt. Accordingly, the Company cannot assure you that it will be able to raise additional capital if needed or on terms acceptable to the Company. If the Company fails to maintain capital to meet regulatory requirements, or is unable to raise capital to meet its business needs, its business, financial condition, results of operations and growth prospects would be materially and adversely affected.
Debt & Financing - Risk 8
The investment management contracts the Company has with its clients are terminable without cause and on relatively short notice by the Company's clients, which makes it vulnerable to short-term declines in the performance of the securities under the Company's management.Like most investment advisory and wealth management businesses, the investment advisory contracts the Company has with the Company's clients are typically terminable by the client without cause upon less than 30 days' notice. As a result, even short-term declines in the performance of the securities the Company manages, which can result from factors outside the Company's control, such as adverse changes in market or economic conditions or the poor performance of some of the investments the Company has recommended to the Company's clients, could lead some of its clients to move assets under the Company's management to other asset classes such as broad index funds or treasury securities, or to investment advisors which have investment product offerings or investment strategies different than ours. Therefore, the Company's operating results are heavily dependent on the financial performance of the Company's investment portfolios and the investment strategies the Company employs in the Company's investment advisory businesses and even short-term declines in the performance of the investment portfolios the Company manages for the Company's clients, whatever the cause, could result in a decline in AUM and a corresponding decline in investment management fees, which would adversely affect the Company's results of operations.
Debt & Financing - Risk 9
The Company's business and operations may be adversely affected in numerous and complex ways by external business disruptors in the financial services industry.The financial services industry is undergoing rapid change, as technology enables traditional banks to compete in new ways and non-traditional entrants to compete in certain segments of the banking market, in some cases with reduced regulation. As client preferences and expectations continue to evolve, technology has lowered barriers to entry and made it possible for banks to expand their geographic reach by providing services over the internet and for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems, online lending and low-cost investment advisory services. New entrants may use new technologies, advanced data and analytic tools, lower cost to serve, reduced regulatory burden or faster processes to challenge traditional banks. For example, new business models have been observed in retail payments, consumer and commercial lending, foreign exchange and low-cost investment advisory services. While the Company closely monitors business disruptors and seek to adapt to changing technologies, matching the pace of innovation exhibited by new and differently situated competitors may require the Company and policy-makers to adapt at a greater pace. Because the financial services industry is experiencing rapid changes in technology, the Company's future success will depend in part on its ability to address its clients' needs by using technology. Client loyalty can be influenced by a competitor's new products, especially offerings that could provide cost savings or a higher return to the client.
Debt & Financing - Risk 10
Potential losses incurred in connection with possible repurchases and indemnification payments related to mortgages that the Company has sold into the secondary market may require the Company to increase its financial statement reserves in the future.The Company engages in the origination and sale of residential real estate loans into the secondary market. In connection with such sales, the Company makes certain representations and warranties, which, if breached, may require the Company to repurchase such loans or indemnify the purchasers of such loans for actual losses incurred in respect of such loans. These representations and warranties vary based on the nature of the transaction and the purchaser's or insurer's requirements but generally pertain to the ownership of the mortgage loan, the real property securing the loan and compliance with applicable laws and applicable lender and government-sponsored entity underwriting guidelines in connection with the origination of the loan. While the Company believes its mortgage lending practices and standards to be adequate, the Company may receive repurchase or indemnification requests in the future, which could be material in volume. If that were to happen, the Company could incur losses in connection with loan repurchases and indemnification claims, and any such losses might exceed the Company's financial statement reserves, requiring the Company to increase such reserves. In that event, any losses the Company might have to recognize and any increases the Company might have to make to the Company's reserves could have a material adverse effect on the Company's business, financial position, results of operations and growth prospects.
Debt & Financing - Risk 11
A transition away from LIBOR as a reference rate for financial contracts could negatively affect the Company's income and expenses and the value of various financial contracts.LIBOR represented the interest rate at which banks offer to lend funds to one another in the international interbank market for short-term loans. On July 27, 2017, the U.K. Financial Conduct Authority announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR rates after 2021. U.S. Regulators issued guidance to urge market participants to address their LIBOR exposures and transition to robust and sustainable alternative rates and the Alternative Reference Rate Committee proposed that SOFR is the rate that represents best practice as the alternative to U.S. dollar-LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR, but has also advised participants to conduct a comprehensive evaluation of any alternative reference rates being considered for use. Contracts linked to LIBOR are vast in number and value, are intertwined with numerous financial products and services, and have diverse parties.
The end date for LIBOR was June 30, 2023. The Company actively worked to plan for the transition away from LIBOR, but the transition is both complex and challenging and the downstream effect of unwinding or transitioning such contracts may yet cause instability and negatively impact on financial markets and individual institutions. If the Company or other market participants have failed to implement alternative rates other than LIBOR, it could have an adverse effect on the Company and the financial system as a whole.
Debt & Financing - Risk 12
If the Company is unable to continue to originate residential real estate loans and sell them into the secondary market for a profit, the Company's noninterest income could decrease.The Company derives a portion of its noninterest income from the origination of residential real estate loans and the subsequent sale of such loans into the secondary market. If the Company is unable to continue to originate and sell residential real estate loans at historical or greater levels, the Company's residential real estate loan volume would decrease, which could decrease the Company's earnings. A rising interest rate environment, general economic conditions, market volatility or other factors beyond the Company's control could adversely affect the Company's ability to originate residential real estate loans. Mortgage banking income is highly influenced by the level and direction of mortgage interest rates and real estate and refinancing activity. In a lower interest rate environment, the demand for mortgage loans and refinancing activity will tend to increase. This has the effect of increasing fee income but could adversely impact the estimated fair value of the Company's mortgage servicing rights as the rate of loan prepayments increase. In a higher interest rate environment, the demand for mortgage loans and refinancing activity will generally be lower. This has the effect of decreasing fee income opportunities. As a result of the current rising interest rate environment, the Company saw continued lower demand for mortgage loans and refinancing activity in 2023. In 2023, the Company originated $364.1 million of mortgage loans, compared to $812.3 million in 2022. The Company expects this trend to continue in 2024.
The financial services industry is experiencing an increase in regulatory and compliance requirements related to mortgage loan originations necessitating technology upgrades and other changes. If new regulations continue to increase and the Company is unable to make technology upgrades, the Company's ability to originate mortgage loans will be reduced or eliminated. Additionally, the Company sells a large portion of its residential real estate loans to third party investors, and rising interest rates could negatively affect the Company's ability to generate suitable profits on the sale of such loans. If interest rates increase after the Company originates the loans, the Company's ability to market those loans is impaired as the profitability on the loans decreases. These fluctuations can have an adverse effect on the revenue the Company generates from residential real estate loans and in certain instances, could result in a loss on the sale of the loans.
In addition, a prolonged period of illiquidity in the secondary mortgage market, coupled with an increase in interest rates, could reduce the demand for residential mortgage loans and increase investor yield requirements for those loans. As a result, the Company may be at higher risk of retaining a larger portion of mortgage loans than in other environments until they are sold to investors. Any reduction of loan production volumes could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Debt & Financing - Risk 13
The Company's exposure to home equity lines of credit may increase the potential for loss.The Company's mortgage loan portfolio consists, in part, of home equity lines of credit. A large portion of home equity lines of credit are originated in conjunction with the origination of first mortgage loans eligible for sale in the secondary market, which the Company typically does not service if the loan is sold. By not servicing the first mortgage loans, the Company is unable to track the delinquency status which may indicate whether such loans are at risk of foreclosure by others. In addition, home equity lines of credit are initially offered as "revolving" lines of credit whereby the borrowers are only required to make scheduled interest payments during the initial terms of the loans, which is generally five or ten years. Thereafter, the borrowers no longer have the ability to make principal draws from the lines and the loans convert to a fully-amortizing basis, requiring scheduled principal and interest payments sufficient to repay the loans within a certain period of time, which is generally 15 or 20 years. The conversion of a home equity line of credit to a fully amortizing basis presents an increased level of default risk to the Company since the borrower no longer has the ability to make principal draws on the line, and the amount of the required monthly payment could substantially increase to provide for scheduled repayment of principal and interest. As of December 31, 2023, the unfunded commitment related to home equity lines of credit was $216.1 million.
Debt & Financing - Risk 14
The small to midsized businesses that the Company lends to may have fewer resources to weather adverse business developments, which may impair their ability to repay their loans.The Company lends to small to midsized businesses, which generally have fewer financial resources in terms of capital or borrowing capacity than larger entities, frequently have smaller market share than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial volatility in operating results, any of which may impair their ability to repay their loans. In addition, the success of a small and midsized business often depends on the management talents and efforts of a small number of people, and the death, disability or resignation of one or more of these people could have a material adverse impact on the business and its ability to repay its loan. If general economic conditions negatively impact the markets in which the Company operates and small to midsized businesses are adversely affected or the Company's borrowers are otherwise affected by adverse business developments, the Company's business, financial condition, results of operations and growth prospects may be materially adversely affected.
Debt & Financing - Risk 15
The Company's high concentration of large loans to certain borrowers may increase the Company's credit risk.The Company has developed relationships with certain individuals and businesses that have resulted in a concentration of large loans to a small number of borrowers. As of December 31, 2023, the Company's 10 largest borrowing relationships accounted for approximately 6.1% of the total loan portfolio. The Company has established an informal, internal limit on loans to one borrower, principal or guarantor, but the Company may, under certain circumstances, consider going above this internal limit in situations where management's understanding of the industry, the borrower's business and the credit quality of the borrower are commensurate with the increased size of the loan. Along with other risks inherent in these loans, such as the deterioration of the underlying businesses or property securing these loans, this high concentration of borrowers presents a risk to the Company's lending operations. If any one of these borrowers becomes unable to repay its loan obligations as a result of business, economic or market conditions, or personal circumstances, such as divorce or death, the Company's nonaccruing loans and the Company's provision for loan losses could increase significantly, which could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Debt & Financing - Risk 16
The Company's loan portfolio has a large concentration of commercial real estate loans, which involve risks specific to real estate values and the health of the real estate market generally.As of December 31, 2023, the Company had $1.3 billion of commercial real estate loans, consisting of $569.4 million of non-owner occupied loans, $271.6 million of owner occupied loans, $245.1 million of loans secured by multifamily residential properties, $124.0 million of construction and land development loans and $40.1 million of loans secured by farmland. Commercial real estate loans represented 45.3% of the Company's total loan portfolio and 353.4% of the Bank's total capital at December 31, 2023. The market value of real estate can fluctuate significantly in a short period of time as a result of interest rates and market conditions in the area in which the real estate is located and some of these values have been negatively affected by the recent rise in prevailing interest rates. Adverse developments affecting real estate values in the Company's market areas could increase the credit risk associated with the Company's loan portfolio. Additionally, the repayment of commercial real estate loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events, including decreases in office occupancy due to the shift to remote working environments following the COVID-19 pandemic, or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties. If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then the Company may not be able to realize the full value of the collateral that the Company anticipated at the time of originating the loan, which could force the Company to take charge-offs or require the Company to increase the Company's provision for loan losses, which could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Debt & Financing - Risk 17
Many of the Company's loans are to commercial borrowers, which have a higher degree of risk than other types of loans.Commercial and industrial loans represented 21.7% of the Company's total loan portfolio at December 31, 2023. These loans are often larger and involve greater risks than other types of lending. Because payments on such loans are often dependent on the successful operation of the business involved, repayment of such loans is often more sensitive than other types of loans to the general business climate and economy. Accordingly, a challenging business and economic environment generally, or in certain industries, may increase the Company's risk related to commercial loans. In the current economic environment, the cumulative effects of rising inflation, labor shortages and supply chain constraints and the threat of a recession may adversely affect commercial and industrial loans, especially if general economic conditions worsen. Unlike residential mortgage loans, which generally are made on the basis of the borrowers' ability to make repayment from their employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial loans typically are made on the basis of the borrowers' ability to make repayment from the cash flow of the commercial venture. The Company's commercial and industrial loans are primarily made based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. Most often, this collateral consists of accounts receivable, inventory and equipment. Inventory and equipment may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. If the cash flow from business operations is reduced, the borrower's ability to repay the loan may be impaired. Due to the larger average size of each commercial loan as compared with other loans such as residential loans, as well as collateral that is generally less readily-marketable, losses incurred on a small number of commercial loans could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Debt & Financing - Risk 18
Because a significant portion of the Company's loan portfolio is comprised of real estate loans, negative changes in the economy affecting real estate values and liquidity, as well as environmental factors, could impair the value of collateral securing the Company's real estate loans and result in loan and other losses.At December 31, 2023, approximately 77.5% of the Company's total loan portfolio was comprised of loans with real estate as a primary component of collateral. The repayment of such loans is highly dependent on the ability of the borrowers to meet their loan repayment obligations to us, which can be adversely affected by economic downturns that can lead to (i) declines in the rents or decreases in occupancy and, therefore, in the cash flows generated by those real properties on which the borrowers depend to fund their loan payments to us, (ii) decreases in the values of those real properties, which make it more difficult for the borrowers to sell those real properties for amounts sufficient to repay their loans in full, and (iii) job losses of residential home buyers, which makes it more difficult for these borrowers to fund their loan payments. As a result, adverse developments affecting real estate values in the Company's market areas could increase the credit risk associated with the Company's real estate loan portfolio. The market value of real estate can fluctuate significantly in a short period of time as a result of interest rates and market conditions in the area in which the real estate is located and some of these values have been negatively affected by the recent rise in prevailing interest rates. Adverse changes affecting real estate values, including decreases in office occupancy due to the shift to remote working environments following the COVID-19 pandemic, and the liquidity of real estate in one or more of the Company's markets could increase the credit risk associated with the Company's loan portfolio, significantly impair the value of property pledged as collateral on loans and affect the Company's ability to sell the collateral upon foreclosure without a loss or additional losses or the Company's ability to sell those loans on the secondary market. Such declines and losses would have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects. If real estate values decline, it is also more likely that the Company would be required to increase the Company's allowance for credit losses, which would have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects. In addition, adverse weather events, including tornados, wildfires, flooding, and mudslides, can cause damage to the property pledged as collateral on loans, which could result in additional losses upon a foreclosure.
In addition, if hazardous or toxic substances are found on properties pledged as collateral, the value of the real estate could be impaired. If the Company forecloses on and takes title to such properties, the Company may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Company to incur substantial expenses to address unknown liabilities and may materially reduce the affected property's value or limit the Company's ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Company's exposure to environmental liability. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Debt & Financing - Risk 19
The Company's concentration of one-to-four family residential mortgage loans may result in lower yields and profitability.One-to-four family residential mortgage loans comprised $726.9 million and $679.6 million, or 26.3% and 27.8%, of the Company's loan portfolio at December 31, 2023 and 2022, respectively. These loans are secured primarily by properties located in the states of Minnesota, North Dakota and Arizona. These loans generally have lower yields relative to other loan categories within the Company's loan portfolio. While these loans may possess higher yields than investment securities, their repayment characteristics are not as well defined, and they generally possess a higher degree of interest rate risk versus other loans and investment securities within the Company's portfolio. This increased interest rate risk is due to the repayment and prepayment options inherent in residential mortgage loans which are exercised by borrowers based upon the overall level of interest rates. These residential mortgage loans are generally made on the basis of the borrower's ability to make repayments from his or her employment and the value of the property securing the loan. Thus, as a result, repayment of these loans is also subject to general economic and employment conditions within the communities and surrounding areas where the property is located.
A decline in residential real estate market prices or home sales has the potential to adversely affect the Company's one-to-four family residential mortgage portfolio in several ways, such as a decrease in collateral values and an increase in non-performing loans, each of which could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Debt & Financing - Risk 20
The Company's allowance for credit losses may prove to be insufficient to absorb potential losses in its loan portfolio.The Company establishes and maintains its allowance for credit losses at a level that management considers adequate to absorb current expected credit losses based on an analysis of the Company's loan portfolio and current market environment. The allowance for credit losses represents the Company's estimate of expected losses in the portfolio at each balance sheet date and is based upon relevant information available at such time. The allowance contains provisions for expected losses that have been identified relating to specific borrowing relationships, as well as expected losses inherent in the loan portfolio that are not specifically identified. Additions to the allowance for credit losses, which are charged to earnings through the provision for credit losses, are determined based on a variety of factors, including an analysis of the loan portfolio, historical loss experience and an evaluation of current economic conditions in the Company's market area. The actual amount of credit losses is affected by, among other things, changes in economic, operating, and other conditions within the Company's markets, which may be beyond the Company's control, and such losses may exceed current estimates.
As of December 31, 2023, the Company's allowance for credit losses as a percentage of total loans was 1.30%, and as a percentage of total nonperforming loans was 410.3%. Although management believes that the allowance for credit losses was adequate on such date to absorb probable losses on existing loans that may become uncollectible, losses in excess of the existing allowance will reduce net income and could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects. The Company may also be required to take additional provisions for loan losses in the future to further supplement the allowance for credit losses, either due to management's assessment that the allowance is inadequate or as required by the Company's banking regulators. The Company's banking regulators periodically review the Company's allowance for credit losses and the value attributed to nonaccrual loans or to real estate acquired through foreclosure and may require the Company to adjust its determination of the value for these items. These adjustments may have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Debt & Financing - Risk 21
The Company's business depends on its ability to manage credit risk.As a bank, the Company's business requires it to manage credit risk; however, default risk may arise from events or circumstances that are difficult to detect, such as fraud, or difficult to predict, such as catastrophic events affecting certain industries. As a lender, the Company is exposed to the risk that its borrowers will be unable to repay their loans according to their terms, and that the collateral securing repayment of their loans, if any, may not be sufficient to ensure repayment. In addition, there are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, proper loan underwriting, changes in economic and industry conditions, and inherent in dealing with individual borrowers, including the risk that a borrower may not provide information to the Company about its business in a timely manner, or may present inaccurate or incomplete information to the Company, as well as risks relating to the value of collateral. To manage credit risk, the Company must, among other actions, maintain disciplined and prudent underwriting standards and ensure that the Company's bankers follow those standards. The weakening of these standards for any reason, such as an attempt to attract higher yielding loans, a lack of discipline or diligence by the Company's employees in underwriting and monitoring loans, or the Company's inability to adequately adapt policies and procedures to changes in economic, or any other conditions affecting borrowers and the quality of the Company's loan portfolio, may result in loan defaults, foreclosures, and charge-offs and may necessitate that the Company significantly increases the allowance for credit losses, each of which could adversely affect net income. As a result, the Company's inability to successfully manage credit risk could have a material adverse effect on the Company's business, financial condition, results of operations, and growth prospects.
Debt & Financing - Risk 22
The Company's business is subject to interest rate risk, and fluctuations in interest rates may adversely affect the Company's earnings.Fluctuations in interest rates may negatively affect the Company's business and may weaken demand for some of the Company's products. The Company's earnings and cash flows are dependent, in part, on net interest income, which is the difference between the interest income that the Company earns on interest earning assets, such as loans and investment securities, and the interest expense that the Company pays on interest-bearing liabilities, such as deposits and borrowings. Changes in interest rates might also impact the values of equity and debt securities under management and administration by the retirement and benefit services and wealth management businesses which may have a negative impact on the Company's fee income. Additionally, changes in interest rates also affect the Company's ability to fund operations with client deposits and the fair value of securities in the Company's investment portfolio. Therefore, any change in general market interest rates, including changes in federal fiscal and monetary policies, could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
It is currently expected that during 2024, and perhaps beyond, the Federal Open Market Committee of the Federal Reserve, or FOMC, will continue to monitor interest rates, in part to reduce the rate of inflation to its preferred level. In 2023, the FOMC increased at various dates throughout the year the target range for the federal funds rate from 4.25% to 4.50% to a range of 5.25% to 5.50%. All of these increases were expressly made in response to inflationary pressures. If the FOMC further increases the targeted federal funds rates, overall interest rates likely will rise, which may negatively impact the entire national economy. In addition, the Company's net interest income could be adversely affected if the rates the Company pays on deposits and borrowings increase more rapidly than the rates the Company earns on loans and other assets. Rising interest rates also may reduce the demand for loans and the value of fixed-rate investment securities. These effects from interest rate changes or from other sustained economic stress or a recession, among other matters, could have a material adverse effect on the Company's business, financial condition, liquidity, and results of operations.
The Company's interest earning assets and interest-bearing liabilities may react in different degrees to changes in market interest rates. Interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market interest rates, while rates on other types of assets and liabilities may lag behind. The result of these changes to rates may cause differing spreads on interest earning assets and interest-bearing liabilities. The Company cannot control or accurately predict changes in market rates of interest. As a result of the recent interest rate increases, the Company has experienced net interest margin compression as the Company's interest-earning assets have repriced slower than the Company's interest-bearing liabilities, which has had a material adverse effect on the Company's net interest income and results of operations.
In addition, the Company could be prevented from increasing the interest rates charged on loans or from maintaining the interest rates offered on deposits and money market savings accounts due to "price" competition from other banks and financial institutions with which the Company competes. As of December 31, 2023, the Company had $728.1 million of non-maturity, noninterest bearing deposit accounts and $2.0 billion of non-maturity interest bearing deposit accounts. Interest rates for interest-bearing accounts have, throughout 2023, increased in response to a series of increases made by the Federal Reserve in the targeted fed funds rate and market competition. The Company does not know what market rates will be throughout 2024. In 2023, the Company has offered higher interest rates to maintain current clients or attract new clients, and as a result, interest expense has increased in recent periods and may increase further, perhaps materially. If the Company fails to offer interest at a sufficient level to keep these non-maturity deposits, core deposits may be reduced, which would require the Company to obtain funding in other ways or risk slowing future asset growth.
Corporate Activity and Growth5 | 5.9%
Corporate Activity and Growth - Risk 1
If the Company pursues additional strategic acquisitions, it may expose the Company to financial, execution and operational risks that could have a material adverse effect on the Company's business, financial position, results of operations and growth prospects.Corporate Activity and Growth - Risk 2
In addition to the Company's organic growth strategy, it intends to expand business by acquiring other banks and financial services companies, but may not be successful in doing so, either because of an inability to find suitable acquisition candidates, constrained capital resources or otherwise.While a key element of the Company's business strategy is to grow the Company's banking franchise and increase the Company's market share through organic growth, the Company intends to take advantage of opportunities to acquire other banks and financial services companies, including wealth management and retirement administration businesses, as such opportunities present themselves. For example, in the third quarter of 2022, the Company completed the acquisition of MPB BHC, Inc., holding company for Metro Phoenix Bank in Phoenix, Arizona. Although the Company intends to continue to grow its business through organic growth and strategic acquisitions, because certain of the Company's market areas are comprised of mature, rural communities with limited population growth, the Company anticipates that much of its future growth will be dependent on the Company's ability to successfully implement the Company's acquisition growth strategy. However, the Company may not be able to identify suitable acquisition targets, or may not succeed in seizing such opportunities when they arise or in integrating any such banks or financial service companies within the Company's existing business framework following acquisition. In addition, even if suitable targets are identified, the Company expects to compete for such businesses with other potential bidders, many of which may have greater financial resources than the Company, which may adversely affect the Company's ability to make acquisitions at attractive prices. The Company's ability to execute on acquisition opportunities may require the Company to raise additional capital and to increase the Company's capital position to support the growth of the Company's franchise. It will also depend on market conditions over which the Company has no control. Moreover, certain acquisitions may require the approval of the Company's bank regulators, and the Company may not be able to obtain such approvals on acceptable terms, if at all.
Corporate Activity and Growth - Risk 3
The Company may not be successful in implementing the Company's organic growth strategy, which could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.Part of the Company's business strategy is to focus on organic growth, which includes leveraging the Company's business lines across the Company's entire client base, enhancing brand awareness and building the Company's infrastructure. The success of the Company's organic growth strategy depends on the Company's ability to increase loans, deposits, AUM and AUA at acceptable risk levels without incurring offsetting increases in noninterest expense. The Company may not be successful in generating organic growth if the Company fails to effectively execute the Company's integrated One Alerus strategy, or as a result of other factors, including delays in introducing and implementing new products and services and other impediments resulting from regulatory oversight or lack of qualified personnel at the Company's office locations. In addition, the success of the Company's organic growth strategy will depend on maintaining sufficient regulatory capital levels and on favorable economic conditions in the Company's primary market areas. Failure to adequately manage the risks associated with the Company's anticipated organic growth could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Corporate Activity and Growth - Risk 4
The Company's risk management framework may not be effective in mitigating risks or losses to the Company.The Company's risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which the Company is subject, including, among others, credit, market, liquidity, interest rate and compliance. The Company's framework also includes financial or other modeling methodologies that involve management assumptions and judgment. The Company's risk management framework may not be effective under all circumstances and it may not adequately mitigate any risk or loss to us. If the Company's framework is not effective, it could suffer unexpected losses and the Company's business, financial condition, results of operations and growth prospects could be materially and adversely affected. The Company may also be subject to potentially adverse regulatory consequences.
Corporate Activity and Growth - Risk 5
The Company May Fail to Realize the Anticipated Benefits of the Merger.Added
The merger of HMNF with and into the Company closed on October 9, 2024. The success of the merger, including anticipated benefits and cost savings, will depend on, among other things, the Company's ability to combine the businesses of the Company and HMNF in a manner that permits growth opportunities, including, among other things, enhanced revenues and revenue synergies, an expanded market reach and operating efficiencies, and does not materially disrupt the existing customer relationships of the Company or HMNF nor result in decreased revenues due to any loss of customers. If the Company is not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected. Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected revenues and diversion of management's time and energy and could have an adverse effect on the Company's business, financial condition, operating results, prospects and stock price as the resulting company of the merger.
Legal & Regulatory
Total Risks: 14/85 (16%)Below Sector Average
Regulation8 | 9.4%
Regulation - Risk 1
The California Consumer Privacy Act of 2018 or other such laws could result in increased operating expenses as well as additional exposure to the risk of litigation by or on behalf of customers.Regulation - Risk 2
The level of the Company's commercial real estate portfolio may subject the Company to heightened regulatory scrutiny.The federal banking regulators have issued the Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance, or CRE Guidance, which provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300% of capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital. The CRE Guidance does not limit the Bank's levels of commercial real estate lending activities, but rather, guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. On December 18, 2015, the federal banking agencies issued a statement to reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards. The federal bank agencies reminded FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor, and manage the risks arising from CRE lending. In addition, FDIC-insured institutions must maintain capital commensurate with the level and nature of their CRE concentration risk.
As of December 31, 2023, the Bank did not exceed these guidelines.
Regulation - Risk 3
New and future rulemaking by the CFPB and other regulators, as well as enforcement of existing consumer protection laws, may have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.The CFPB has the authority to implement and enforce a variety of existing federal consumer protection statutes and to issue new regulations but, with respect to institutions of the Company's size, does not have primary examination and enforcement authority with respect to such laws and regulations. The authority to examine depository institutions with $10.0 billion or less in assets, like us, for compliance with federal consumer laws remains largely with the Company's primary federal regulator, the OCC. However, the CFPB may participate in examinations of smaller institutions on a "sampling basis" and may refer potential enforcement actions against such institutions to their primary regulators. In some cases, regulators such as the Federal Trade Commission and the Department of Justice also retain certain rulemaking or enforcement authority, and the Company also remains subject to certain state consumer protection laws. As an independent bureau within the Federal Reserve, the CFPB may impose requirements more severe than the previous bank regulatory agencies. The CFPB has placed significant emphasis on consumer complaint management and has established a public consumer complaint database to encourage consumers to file complaints they may have against financial institutions. The Company is expected to monitor and respond to these complaints, including those that the Company deems frivolous, and doing so may require management to reallocate resources away from more profitable endeavors.
Regulation - Risk 4
The Company's retirement and benefit services and wealth management businesses are highly regulated, and the regulators have the ability to limit or restrict the Company's activities and impose fines or suspensions on the conduct of the Company's business.The Company's retirement and benefit services and wealth management businesses are highly regulated, primarily at the federal level. The failure of any of the Company's businesses that provide investment management or wealth management and trust services to comply with applicable laws or regulations could result in fines, suspensions of individual employees or other sanctions. The Company is also subject to the provisions and regulations of the Employee Retirement Income Security Act of 1974, or ERISA, to the extent that the Company acts as a "fiduciary" under ERISA with respect to certain of the Company's clients. ERISA and the applicable provisions of the federal tax laws impose a number of duties on persons who are fiduciaries under ERISA and prohibit certain transactions involving the assets of each ERISA plan which is a client, as well as certain transactions by the fiduciaries (and certain other related parties) to such plans. Changes in these laws or regulations could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Regulation - Risk 5
Noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations could result in fines or sanctions against the Company.The Bank Secrecy Act and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and to file reports such as suspicious activity and currency transaction reports. The Company is required to comply with these and other anti-money laundering requirements. The federal banking agencies and Financial Crimes Enforcement Network are authorized to impose significant civil money penalties for violations of those requirements and have recently engaged in coordinated enforcement efforts against banks and other financial services providers with the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. The Company is also subject to increased scrutiny of compliance with the rules enforced by the OFAC. If the Company's policies, procedures and systems are deemed deficient or the policies, procedures and systems of any financial institution the Company acquires in the future are deemed deficient, the Company would be subject to liability, including fines and regulatory actions, which may include restrictions on the Company's ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of the Company's business plan, including any acquisitions.
Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Regulation - Risk 6
The Company is subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.The CRA requires the Bank, consistent with safe and sound operations, to ascertain and meet the credit needs of its entire community, including low and moderate-income areas. The Company's failure to comply with the CRA could, among other things, result in the denial or delay of certain corporate applications filed by us, including applications for branch openings or relocations and applications to acquire, merge or consolidate with another banking institution or holding company. In addition, the CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations prohibit discriminatory lending practices by financial institutions. The U.S. Department of Justice, federal banking agencies and other federal agencies are responsible for enforcing these laws and regulations. A successful challenge to an institution's compliance with fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion and restrictions on entering new business lines. Private parties may also challenge an institution's performance under fair lending laws in private class action litigation. In addition, new regulations, increased regulatory reviews or changes in the structure of the secondary mortgage markets which the Company utilizes to sell mortgage loans may be introduced and may increase costs and make it more difficult to operate a residential mortgage origination business. Any of the actions described above could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Regulation - Risk 7
Federal regulators periodically examine the Company's business, and it may be required to remediate adverse examination findings.The Federal Reserve and the OCC periodically examine the Company, including its operations and its compliance with laws and regulations. If, as a result of an examination, a banking agency were to determine that the Company's financial condition, capital resources, asset quality, asset concentrations, earnings prospects, management, liquidity, sensitivity to market risk or other aspects of any of the Company's operations had become unsatisfactory, or that the Company was in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate. These actions include the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in the Company's capital, to restrict the Company's growth, to assess civil money penalties, to fine or remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate the Company's deposit insurance and place the Company into receivership or conservatorship. Any regulatory action against the Company could have a material adverse effect on its business, financial condition, results of operations and growth prospects.
Regulation - Risk 8
The Company is subject to extensive regulation, and the regulatory framework that applies to the Company, together with any future legislative or regulatory changes, may significantly affect its operations.The banking industry is extensively regulated and supervised under both federal and state laws and regulations that are intended primarily for the protection of depositors, clients, federal deposit insurance funds and the banking system as a whole, not for the protection of the Company's business or stockholders. The Company is subject to supervision and regulation by the Federal Reserve, and the Bank is subject to supervision and regulation by the OCC and the FDIC. The laws and regulations applicable to the Company govern a variety of matters, including permissible types, amounts and terms of loans and investments the Company may make, the maximum interest rate that may be charged, the amount of reserves the Company must hold against deposits the Company takes, the types of deposits the Company may accept, maintenance of adequate capital and liquidity, changes in the control of the Company and its Bank, restrictions on dividends and establishment of new offices. The Company must obtain approval from its regulators before engaging in certain activities, and there is the risk that such approvals may not be obtained, either in a timely manner or at all. The Company's regulators also have the ability to compel it to take certain actions, or restrict it from taking certain actions entirely, such as actions that the Company's regulators deem to constitute an unsafe or unsound banking practice. The Company's failure to comply with any applicable laws or regulations, or regulatory policies and interpretations of such laws and regulations, could result in sanctions by regulatory agencies, civil money penalties or damage to the Company's reputation, all of which could have a material adverse effect on its business, financial condition, results of operations and growth prospects.
While the Company endeavors to maintain safe banking practices and controls beyond the regulatory requirements applicable to the Company, its internal controls may not match those of larger banking institutions that are subject to increased regulatory oversight.
Financial institutions generally have also been subjected to increased scrutiny from regulatory authorities, including in the wake of the failures of Silicon Valley Bank, Signature Bank and First Republic Bank in 2023. This increased regulatory burden has resulted, and may continue to result in, increased costs of doing business, and may in the future, result in decreased revenues and net income, reduce the Company's ability to compete effectively, to attract and retain clients, or make it less attractive for the Company to continue providing certain products and services. Any future changes in federal and state laws and regulations, as well as the interpretation and implementation of such laws and regulations, could affect the Company in substantial and unpredictable ways, including those listed above or other ways that could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects. For example, in December 2019, the U.S. Congress enacted the Setting Every Community up for Retirement Enhancement, or SECURE Act. The SECURE Act made significant changes to provisions of existing law governing retirement plans and IRAs. Many of the provisions of the SECURE Act were effective on January 1, 2020, while other provisions are effective on later dates, including some that are not effective until action is taken to modify underlying retirement plan documents. In addition, in December 2022, the U.S. Congress enacted the SECURE 2.0 Act of 2022, or SECURE 2.0, which built some of the provisions of the SECURE Act and made additional significant changes to provisions of existing law governing retirement plans and IRAs. Many of the provisions of SECURE 2.0 were effective immediately upon passage of SECURE 2.0 while other provisions are effective on later dates. Some of the changes in law made by the SECURE Act and SECURE 2.0 are complex and unclear in application. The Company cannot predict what impact the SECURE Act or SECURE 2.0 will ultimately have on the Company's business.
Litigation & Legal Liabilities3 | 3.5%
Litigation & Legal Liabilities - Risk 1
The Company is currently subject to and may continue to be subject to claims and litigation relating to the Company's fiduciary responsibilities.Litigation & Legal Liabilities - Risk 2
Litigation and regulatory actions, including possible enforcement actions, could subject the Company to significant fines, penalties, judgments or other requirements resulting in increased expenses or restrictions on the Company's business activities.The Company's business is subject to increased litigation and regulatory risks because of a number of factors, including the highly regulated nature of the financial services industry and the focus of state and federal prosecutors on banks and the financial services industry generally. This focus has only intensified since the financial crisis, with regulators and prosecutors focusing on a variety of financial institution practices and requirements, including foreclosure practices, compliance with applicable consumer protection laws, classification of "held for sale" assets and compliance with anti-money laundering statutes, the Bank Secrecy Act and sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury, or OFAC.
In the normal course of business, from time to time, the Company has in the past and may in the future be named as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with the Company's current or prior business activities. Legal actions could include claims for substantial compensatory or punitive damages or claims for indeterminate amounts of damages. The Company may also, from time to time, be the subject of subpoenas, requests for information, reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding the Company's current or prior business activities. Any such legal or regulatory actions may subject the Company to substantial compensatory or punitive damages, significant fines, penalties, obligations to change the Company's business practices or other requirements resulting in increased expenses, diminished income and damage to the Company's reputation. The Company's involvement in any such matters, whether tangential or otherwise and even if the matters are ultimately determined in the Company's favor, could also cause significant harm to the Company's reputation and divert management attention from the operation of the Company's business. Further, any settlement, consent order or adverse judgment in connection with any formal or informal proceeding or investigation by government agencies may result in litigation, investigations or proceedings as other litigants and government agencies begin independent reviews of the same activities. As a result, the outcome of legal and regulatory actions could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Moreover, U.S. authorities have been increasingly focused on "conduct risk," a term that is used to describe the risks associated with behavior by employees and agents, including third-party vendors, that could harm clients, consumers, investors or the markets, such as failures to safeguard consumers' and investors' personal information, failures to identify and manage conflicts of interest and improperly creating, selling and marketing products and services. In addition to increasing compliance risks, this focus on conduct risk could lead to more regulatory or other enforcement proceedings and litigation, including for practices which historically were acceptable but are now receiving greater scrutiny. Further, while the Company takes numerous steps to prevent and detect conduct by employees and agents that could potentially harm clients, investors or the markets, such behavior may not always be deterred or prevented. Banking regulators have also focused on the overall culture of financial services firms. In addition to regulatory restrictions or structural changes that could result from perceived deficiencies in the Company's culture, such focus could also lead to additional regulatory proceedings.
Litigation & Legal Liabilities - Risk 3
Litigation May Be Filed Against the Company (directly or as successor by merger to HMNF) (or the Company's or HMNF's Boards of Directors) that Could Result in the Payment of Damages Following Consummation of the Merger.Added
It is possible that, in connection with the merger of HMNF with and into the Company, stockholders may file putative class action lawsuits against the Company directly or against the Company as successor by merger to HMNF (or the Company's or HMNF's boards of directors). One purported stockholders of the Company, and eight purported stockholders of HMNF, sent demand letters to the companies prior to the closing of the merger, alleging that the joint proxy statement/prospectus filed by the Company omitted certain material information regarding the merger and threatening litigation. Although the transaction has closed, these stockholders could still pursue litigation against the Company directly against the Company as successor by merger to HMNF to seek financial damages. The outcome of any such litigation is uncertain. The defense or settlement of any lawsuit or claim that results from these lawsuits, including any cost associated with the indemnification of directors and officers of each company, may adversely affect the combined company's business, financial condition, results of operations and cash flows and the market price of the stock of the Company.
Taxation & Government Incentives1 | 1.2%
Taxation & Government Incentives - Risk 1
Changes in tax laws and regulations, or changes in the interpretation of existing tax laws and regulations, may have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.Environmental / Social2 | 2.4%
Environmental / Social - Risk 1
Regulations relating to privacy, information security and data protection could increase the Company's costs, affect or limit how the Company collects and use personal information and adversely affect its business opportunities.Environmental / Social - Risk 2
Climate change and related legislative and regulatory initiatives may result in operational changes and expenditures that could significantly impact the Company's business.The current and anticipated effects of climate change are creating an increasing level of concern for the state of the global environment. As a result, political and social attention to the issue of climate change has increased. In recent years, governments across the world have entered into international agreements to attempt to reduce global temperatures, in part by limiting greenhouse gas emissions. The U.S. Congress, state legislatures and federal and state regulatory agencies have continued to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change. These agreements and measures may result in the imposition of taxes and fees, the required purchase of emission credits, and the implementation of significant operational changes, each of which may require the Company to expend significant capital and incur compliance, operating, maintenance, and remediation costs. Consumers and businesses may also change their behavior on their own as a result of these concerns. The impact on the Company's customers will likely vary depending on their specific attributes, including reliance on, or role in, carbon intensive activities. The Company's efforts to take these risks into account in making lending and other decisions, including by increasing the Company's business with climate-friendly companies, may not be effective in protecting the Company from the negative impact of new laws and regulations or changes in consumer or business behavior.
Given the lack of empirical data on the credit and other financial risks posed by climate change, it is difficult to predict how climate change may impact the Company's financial condition and operations; however, as a banking organization, the physical effects of climate change may present certain unique risks. For example, weather disasters, shifts in local climates, and other disruptions related to climate change may adversely affect the value of real properties securing the Company's loans, which could diminish the value of the Company's loan portfolio. Such events may also cause reductions in regional and local economic activity that may have an adverse effect on the Company's customers, which could limit the Company's ability to raise and invest capital in these areas and communities.
Macro & Political
Total Risks: 9/85 (11%)Above Sector Average
Economy & Political Environment6 | 7.1%
Economy & Political Environment - Risk 1
The Company's business and operations may be adversely affected in numerous and complex ways by weak economic conditions and global trade.Economy & Political Environment - Risk 2
Noninterest income represents a significant portion of the Company's total revenue and may be negatively impacted by changes in economic or market conditions and competition.A significant portion of the Company's revenue results from fee-based services provided by the retirement and benefit services business. This contrasts with many other community and regional banks that rely more heavily on interest-based sources of revenue, such as loans and investment securities. For the year ended December 31, 2023, noninterest income represented approximately 47.7% of the Company's total revenue, which includes net interest income and noninterest income, a significant portion of which is derived from the Company's retirement and benefit services business. This fee income business presents special risks not borne by other institutions that focus exclusively on banking. The level of these fees is influenced by several factors, including the number of plans and participants the Company provides retirement, advisory and other services for, the level of transactions within the plans, and the asset values of the plans whose fees are earned based on the level of assets in the plans. If the Company is unable to maintain the Company's number of plans, participants and AUA and AUM at historical or greater levels, the Company's fee income derived from this business may decline. For example, in a typical year the Company expects to experience outflows in AUA and AUM due to withdrawals, client turnover, plan terminations, mergers and acquisition activity. In 2023, the Company experienced outflows of $4.8 billion in the Company's retirement and benefit services division partially offset by inflows of $4.5 billion.
In addition, economic, market or other factors that reduce the level or rates of savings in or with the Company's clients, either through reductions in financial asset valuations or through changes in investor preferences, could materially reduce the Company's fee revenue. The financial markets and businesses operating in the securities industry are highly volatile (meaning that performance results can vary greatly within short periods of time) and are directly affected by, among other factors, domestic and foreign economic conditions and general trends in business and finance, all of which are beyond the Company's control. the Company cannot assure you that broad market performance will be favorable in the future. Declines in the financial markets or a lack of sustained growth may result in a corresponding decline in the Company's performance and may adversely affect the value of the assets that the Company manages. A general economic slowdown could decrease the value of the AUA and AUM in the Company's retirement and benefit services and wealth management businesses and result in clients potentially seeking alternative investment opportunities with other providers, which could result in lower fee income to the Company.
Even when economic and market conditions are generally favorable, the Company's investment performance may be adversely affected by the investment style of the Company's asset managers and the particular investments that they make. To the extent the Company's future investment performance is perceived to be poor in either relative or absolute terms, the revenues and profitability of the Company's wealth management business will likely be reduced and the Company's ability to attract new clients will likely be impaired. In addition, the Company's management contracts generally provide for fee payments for wealth management and trust services based on the market value of AUM. Because most contracts provide for a fee based on market values of securities, fluctuations in the underlying securities values may have a material adverse effect on the Company's revenue. Fee compression due to competitive pressures has resulted in and continues to result in significant pressure to reduce the fees the Company charges for the Company's services in both the retirement and benefit services and wealth management businesses.
Economy & Political Environment - Risk 3
Continued elevated levels of inflation could adversely impact the Company's business, financial condition, results of operations and growth prospects.The United States has recently experienced elevated levels of inflation, with the consumer price index climbing approximately 3.4% in 2023. Continued elevated levels of inflation could have complex effects on the Company's business, results of operations and financial condition, some of which could be materially adverse. For example, while the Company generally expects any inflation-related increases in the Company's interest expense to be offset by increases in interest income, inflation-driven increases in the Company's levels of noninterest expense could negatively impact results of operations. Continued elevated levels of inflation could also cause increased volatility and uncertainty in the business environment, which could adversely affect loan demand and the Company's clients' ability to repay indebtedness. It is possible that governmental responses to the current inflation environment, such as changes to monetary and fiscal policy that are too strict, or the imposition or threatened imposition of price controls, could adversely affect the Company's business. The duration and severity of the current inflationary period cannot be estimated with precision.
Economy & Political Environment - Risk 4
A decline in the business and economic conditions in the Company's market areas could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.The Company's business activities and credit exposure, including real estate collateral for many of its loans, are concentrated in North Dakota, Minnesota and Arizona, although the Company also pursues business opportunities nationally. As of December 31, 2023, 89.4% of the loans in the Company's loan portfolio were made to borrowers who live in or conduct business in those states. This concentration imposes risks from lack of geographic diversification. Weak economic conditions in North Dakota, Minnesota or Arizona may affect the Company's business, financial condition, results of operations and growth prospects, where adverse economic developments, among other things, could affect the volume of loan originations, increase the level of nonperforming assets, increase the rate of foreclosure losses on loans and reduce the value of the Company's loans and loan servicing portfolio. Weak economic conditions are characterized by, among other indicators, state and local government deficits, deflation, elevated levels of unemployment, fluctuations in debt and equity capital markets, increased delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate price declines and lower home sales and commercial activity. Any regional or local economic downturn that affects North Dakota, Minnesota or Arizona or existing or prospective borrowers or property values in such areas may affect the Company and the Company's profitability more significantly and more adversely than the Company's competitors whose operations are less geographically concentrated. Further, a general economic slowdown could decrease the value of the assets under administration, or AUA, and assets under management, or AUM, of the Company's retirement and benefit services and wealth management businesses resulting in lower fee income, and clients could potentially seek alternative investment opportunities with other providers, which could also result in lower fee income to us. The Company's business is also significantly affected by monetary, trade and other regulatory policies of the U.S. federal government, its agencies and government-sponsored entities. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond the Company's control, are difficult to predict and could have a material adverse effect on the Company's business, financial position, results of operations and growth prospects.
Economy & Political Environment - Risk 5
There is uncertainty surrounding potential legal, regulatory and policy changes by new presidential administrations in the United States that may directly affect financial institutions and the global economy.2024 is a presidential election year. Changes in federal policy and at regulatory agencies occur over time through policy and personnel changes following elections, which lead to changes involving the level of oversight and focus on the financial services industry. The nature, timing and economic and political effects of potential changes to the current legal and regulatory framework affecting financial institutions remain highly uncertain. Uncertainty surrounding future changes may adversely affect our operating environment and therefore our business, financial condition, results of operations and growth prospects.
Economy & Political Environment - Risk 6
Monetary policies of the Federal Reserve could adversely affect the Company's financial condition and results of operations.In the current environment, economic and business conditions are significantly affected by U.S. monetary policy, particularly the actions of the Federal Reserve in its effort to fight elevated levels of inflation. The Federal Reserve is mandated to pursue the goals of maximum employment and price stability and, throughout 2022 and 2023, made a series of significant increases to the target Federal Funds rate as part of an effort to combat elevated levels of inflation affecting the U.S. economy. This has helped drive a significant increase in prevailing interest rates, however it has had a negative effect on the Company's net interest income and has harmed the value of the Company's securities portfolio, which had $98.0 million in unrealized losses in available-for-sale investment securities at December 31, 2023. This decline in value has negatively affected the Company's tangible book value. Higher interest rates can also negatively affect the Company's customers' businesses and financial condition, and the value of collateral securing loans in the Company's portfolio.
Given the complex factors affecting the strength of the U.S. economy, including uncertainties regarding the persistence of inflation, geopolitical developments such as the ongoing conflicts between Israel and Palestine and between Russia and Ukraine and resulting disruptions in the global energy market, and tight labor market conditions and supply chain issues, there is a meaningful risk that the Federal Reserve and other central banks may raise interest rates too much, thereby limiting economic growth and potentially causing an economic recession or other political instability. As noted above, this could decrease loan demand, harm the credit characteristics of the Company's existing loan portfolio and decrease the value of collateral securing loans in the portfolio.
Natural and Human Disruptions1 | 1.2%
Natural and Human Disruptions - Risk 1
Severe weather, natural disasters, pandemics, acts of war or terrorism or other adverse external events could significantly impact the Company's business.Capital Markets2 | 2.4%
Capital Markets - Risk 1
Liquidity risks could affect the Company's operations and jeopardize its business, financial condition, results of operations and growth prospects.Capital Markets - Risk 2
Real estate market volatility and future changes in the Company's disposition strategies could result in net proceeds that differ significantly from the Company's foreclosed asset fair value appraisals.As of December 31, 2023, the Company had no foreclosed assets, which typically consist of properties that the Company obtains through foreclosure. Assets acquired through loan foreclosure are included in other assets and are initially recorded at estimated fair value less estimated selling costs. The estimated fair value of foreclosed assets is evaluated regularly and any decreases in value along with holding costs, such as taxes, insurance and utilities, are reported in noninterest expense.
In response to market conditions and other economic factors, the Company may utilize alternative sale strategies other than orderly disposition as part of the Company's foreclosed asset disposition strategy, such as immediate liquidation sales. In this event, as a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from such sales transactions could differ significantly from appraisals, comparable sales and other estimates used to determine the fair value of the Company's foreclosed assets.
Production
Total Risks: 8/85 (9%)Below Sector Average
Manufacturing1 | 1.2%
Manufacturing - Risk 1
The Company is subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.Employment / Personnel5 | 5.9%
Employment / Personnel - Risk 1
Labor shortages and a failure to attract and retain qualified employees could negatively impact the Company's business, financial condition, results of operations and growth prospects.Employment / Personnel - Risk 2
The Company's retirement and benefit services business relies on acquisitions to maintain and grow the Company's AUA and AUM.In 2023, the Company's retirement and benefit services business experienced outflows of AUA and AUM of $4.8 billion, due to withdrawals, client turnover, plan terminations, and mergers and acquisition activity. the Company believes this level of runoff is typical in the industry. To maintain and grow this business, the Company believes it needs to be an active acquirer and seek to complete acquisitions of retirement administration providers if the Company is able to find quality acquisition opportunities. If the Company is unable to source a pipeline of potential acquisitions of companies that it determines are a good strategic fit for the Company, the Company's retirement and benefit services business may fail to grow or even shrink, which could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Employment / Personnel - Risk 3
The Company's ability to retain and recruit employees is critical to the success of its business strategy and any failure to do so could impair the Company's customer relationships and adversely affect its business, financial condition, results of operations and growth prospects.The Company's ability to retain and grow its loans, deposits and fee income depends upon the business generation capabilities, reputation and relationship management skills of the Company's employees. If the Company loses the services of any of its employees, including successful employees employed by banks or other businesses that the Company may acquire, to a new or existing competitor or otherwise, the Company may not be able to retain valuable relationships and some of its customers could choose to use the services of a competitor instead of the Company's services.
The Company's success and growth strategy also depends on its continued ability to attract and retain experienced employees for all of the Company's business lines. The Company may face difficulties in recruiting and retaining personnel of its desired caliber, including as a result of competition from other financial institutions. Competition for high quality personnel is strong and the Company may not be successful in attracting or retaining the personnel it requires. In particular, many of the Company's competitors are significantly larger with greater financial resources and may be able to offer more attractive compensation packages and broader career opportunities. Additionally, the Company may incur significant expenses and expend significant time and resources on training, integration, and business development before the Company is able to determine whether a new employee will be profitable or effective in their role. If the Company is unable to attract and retain a successful customer development and management team or if the Company's customer development and management team fails to meet its expectations in terms of customer relationships and profitability, the Company may be unable to execute its business strategy and its business, financial condition, results of operations and growth prospects may be negatively affected.
Employment / Personnel - Risk 4
The Company is highly dependent on its executive management team, and the loss of any of the Company's senior executive officers or other key employees, or the Company's inability to attract and retain qualified personnel, could harm the Company's ability to implement its strategic plan and impair the Company's relationships with clients.The Company's success is dependent, to a large degree, upon the continued service and skills of the Company's executive management team, which consists of Katie Lorenson, President and Chief Executive Officer; Alan Villalon, Chief Financial Officer; Jim Collins, Chief Banking and Revenue Officer; Missy Keney, Chief Engagement Officer; Jon Hendry, Chief Technology Officer; Karin Taylor, Chief Risk and Operations Officer; and Forrest Wilson, Chief Retirement Services Officer. The Company's business and growth strategies are built primarily upon its ability to retain employees with experience and business relationships within the Company's market areas. The loss of any of the members of the Company's executive management team or any of the Company's other key personnel, including client advisors, could have an adverse impact on the Company's business and growth because of their skills, years of industry experience, knowledge of the Company's market areas, the difficulty of finding qualified replacement personnel and any difficulties associated with transitioning of responsibilities to any new members of the executive management team. As such, the Company needs to continue to attract and retain key personnel and to recruit qualified individuals who fit the Company's culture to succeed existing key personnel and ensure the continued growth and successful operation of the Company's business. Leadership changes may occur from time to time, and the Company cannot predict whether significant retirements or resignations will occur or whether the Company will be able to recruit additional qualified personnel.
Competition for senior executives and skilled personnel in the financial services industry is intense, which means the cost of hiring, incentivizing and retaining skilled personnel may continue to increase. In addition, the Company's ability to effectively compete for senior executives and other qualified personnel by offering competitive compensation and benefit arrangements may be restricted by our financial condition, and by applicable banking laws and regulations. The loss of the services of any senior executive or other key personnel, the inability to recruit and retain qualified personnel in the future or the failure to develop and implement a viable succession plan could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Employment / Personnel - Risk 5
The Company receives substantial deposits and AUM as a result of referrals by professionals, such as attorneys, accountants, and doctors, and such referrals are dependent upon the continued positive interaction with and financial health of those referral sources.Many of the Company's deposit clients and clients of the Company's wealth management business are individuals involved in professional vocations, such as lawyers, accountants, and doctors. These clients are a significant source of referrals for new clients in both the deposit and wealth management areas. If the Company fails to adequately serve these professional clients with its deposit services, lending, wealth management products and other services, this source of referrals may diminish, which could have a negative impact on the Company's financial results. Further, if the economy in the geographic areas that the Company serves is negatively impacted, the amount of deposits and services that these professional individuals will utilize and the number of referrals that they will make may decrease, which may have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Supply Chain1 | 1.2%
Supply Chain - Risk 1
The Company's use of third-party vendors and its other ongoing third-party business relationships is subject to increasing regulatory requirements and attention.Costs1 | 1.2%
Costs - Risk 1
Construction and land development loans are based upon estimates of costs and values associated with the complete project. These estimates may be inaccurate, and the Company may be exposed to significant losses on loans for these projects.Tech & Innovation
Total Risks: 6/85 (7%)Below Sector Average
Innovation / R&D1 | 1.2%
Innovation / R&D - Risk 1
New lines of business, products, product enhancements or services may subject the Company to additional risks.Cyber Security1 | 1.2%
Cyber Security - Risk 1
The occurrence of fraudulent activity, breaches or failures of the Company's information security controls or cybersecurity related incidents could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.Technology4 | 4.7%
Technology - Risk 1
The Company depends on the accuracy and completeness of information about clients and counterparties.Technology - Risk 2
The Company depends on information technology and telecommunications systems, and any systems failures, interruptions or data breaches involving these systems could adversely affect the Company's operations and financial condition.The Company's business is highly dependent on the successful and uninterrupted functioning of its information technology and telecommunications systems, third party servicers, accounting systems, mobile and online banking platforms and financial intermediaries. The risks resulting from use of these systems result from a variety of factors, both internal and external. The Company is vulnerable to the impact of failures of its systems to operate as needed or intended. Such failures could include those resulting from human error, unexpected transaction volumes, intentional attacks or overall design or performance issues.
The Company outsources to third parties many of its major systems, such as data processing and mobile and online banking. In addition, the Company partners with a leading financial technology company to create an online account portal that integrates the Company's diverse product applications into a user-friendly experience for the Company's consumer clients. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt the Company's operations. Because the Company's information technology and telecommunications systems interface with and depend on third party systems, the Company could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. A system failure or service denial could result in a deterioration of the Company's ability to process loans or gather deposits and provide customer service, compromise the Company's ability to operate effectively, result in potential noncompliance with applicable laws or regulations, damage the Company's reputation, result in a loss of client business or subject the Company to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on business, financial condition, results of operations and growth prospects. In addition, failures of third parties to comply with applicable laws and regulations, or fraud or misconduct on the part of employees of any of these third parties, could disrupt the Company's operations or adversely affect its reputation.
It may be difficult for the Company to replace some of its third-party vendors, particularly vendors providing the Company's core banking and information services, in a timely manner if they are unwilling or unable to provide the Company with these services in the future for any reason and even if the Company is able to replace them, it may be at higher cost or result in the loss of clients. Any such events could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
The Company's operations rely heavily on the secure processing, storage and transmission of information and the monitoring of a large number of transactions on a minute-by-minute basis, and even a short interruption in service could have significant consequences. The Company also interacts with and relies on retailers, for whom the Company processes transactions, as well as financial counterparties and regulators. Each of these third parties may be targets of the same types of fraudulent activity, computer break-ins and other cybersecurity breaches described above, including those employing artificial intelligence, and the cybersecurity measures that they maintain to mitigate the risk of such activity may be different than the Company's own and may be inadequate.
Because financial entities and technology systems are becoming more interdependent and complex, a cyber incident, information breach or loss, or technology failure that compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including ourselves. As a result of the foregoing, the Company's ability to conduct business may be adversely affected by any significant disruptions to the Company or to third parties with whom the Company interacts.
Technology - Risk 3
Issues with the use of artificial intelligence in our marketplace may result in reputational harm or liability, or could otherwise adversely affect the Company's business.Artificial intelligence, including generative artificial intelligence, is or may be enabled by or integrated into the Company's products or those developed by its third party partners. As with many developing technologies, artificial intelligence presents risks and challenges that could affect its further development, adoption, and use, and therefore our business. Artificial intelligence algorithms may be flawed, for example datasets may contain biased information or otherwise be insufficient, and inappropriate or controversial data practices could impair the acceptance of artificial intelligence solutions and result in burdensome new regulations. If the analyses of those products incorporating artificial intelligence assist in producing for the Company or its third party partners are deficient, biased or inaccurate, the Company could be subject to competitive harm, potential legal liability and brand or reputational harm. The use of artificial intelligence may also present ethical issues. If the Company or its third party partners offer artificial intelligence enabled products that are controversial because of their purported or real impact on human rights, privacy, or other issues, the Company may experience competitive harm, potential legal liability and brand or reputational harm. In addition, the Company expects that governments will continue to assess and implement new laws and regulations concerning the use of artificial intelligence, which may affect or impair the usability or efficiency of products and services and those developed by the Company's third party partners.
Technology - Risk 4
The Company has a continuing need for technological change, and it may not have the resources to effectively implement new technology or it may experience operational challenges when implementing new technology.The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving clients, the effective use of technology increases efficiency and enables financial institutions to reduce costs. The Company's future success will depend in part upon its, and its third party partners', ability to address the needs of the Company's clients by using technology to provide products and services that will satisfy client demands for convenience as well as to create additional efficiencies in operations. The widespread adoption of new technologies, including mobile banking services, artificial intelligence, cryptocurrencies and payment systems, could require the Company in the future to make substantial expenditures to modify or adapt the Company's existing products and services as it grows and develops new products to satisfy the Company's customers' expectations, remain competitive and comply with regulatory guidance. The Company may experience operational challenges as it implements these new technology enhancements, which could result in the Company not fully realizing the anticipated benefits from such new technology or require the Company to incur significant costs to remedy any such challenges in a timely manner.
Many of the Company's larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that the Company will be able to offer, which would put the Company at a competitive disadvantage. Accordingly, a risk exists that the Company will not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to the Company's clients.
In addition, the implementation of technological changes and upgrades to maintain current systems and integrate new ones may also cause service interruptions, transaction processing errors and system conversion delays and may cause the Company to fail to comply with applicable laws. The Company expects that new technologies and business processes applicable to the financial services industry will continue to emerge, and these new technologies and business processes may be better than those the Company currently uses. Because the pace of technological change is high and the Company's industry is intensely competitive, it may not be able to sustain the Company's investment in new technology as critical systems and applications become obsolete or as better ones become available. A failure to successfully keep pace with technological change affecting the financial services industry and failure to avoid interruptions, errors and delays could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects.
Ability to Sell
Total Risks: 2/85 (2%)Below Sector Average
Competition1 | 1.2%
Competition - Risk 1
The Company faces intense competition from other banks and financial services companies that could hurt its business.Brand / Reputation1 | 1.2%
Brand / Reputation - Risk 1
The Company's ability to maintain its reputation is critical to the success of the Company's business, and the failure to do so may materially adversely affect its business and the value of the Company's stock.See a full breakdown of risk according to category and subcategory. The list starts with the category with the most risk. Click on subcategories to read relevant extracts from the most recent report.
FAQ
What are “Risk Factors”?
Risk factors are any situations or occurrences that could make investing in a company risky.
The Securities and Exchange Commission (SEC) requires that publicly traded companies disclose their most significant risk factors. This is so that potential investors can consider any risks before they make an investment.
They also offer companies protection, as a company can use risk factors as liability protection. This could happen if a company underperforms and investors take legal action as a result.
It is worth noting that smaller companies, that is those with a public float of under $75 million on the last business day, do not have to include risk factors in their 10-K and 10-Q forms, although some may choose to do so.
How do companies disclose their risk factors?
Publicly traded companies initially disclose their risk factors to the SEC through their S-1 filings as part of the IPO process.
Additionally, companies must provide a complete list of risk factors in their Annual Reports (Form 10-K) or (Form 20-F) for “foreign private issuers”.
Quarterly Reports also include a section on risk factors (Form 10-Q) where companies are only required to update any changes since the previous report.
According to the SEC, risk factors should be reported concisely, logically and in “plain English” so investors can understand them.
How can I use TipRanks risk factors in my stock research?
Use the Risk Factors tab to get data about the risk factors of any company in which you are considering investing.
You can easily see the most significant risks a company is facing. Additionally, you can find out which risk factors a company has added, removed or adjusted since its previous disclosure. You can also see how a company’s risk factors compare to others in its sector.
Without reading company reports or participating in conference calls, you would most likely not have access to this sort of information, which is usually not included in press releases or other public announcements.
A simplified analysis of risk factors is unique to TipRanks.
What are all the risk factor categories?
TipRanks has identified 6 major categories of risk factors and a number of subcategories for each. You can see how these categories are broken down in the list below.
1. Financial & Corporate
- Accounting & Financial Operations - risks related to accounting loss, value of intangible assets, financial statements, value of intangible assets, financial reporting, estimates, guidance, company profitability, dividends, fluctuating results.
- Share Price & Shareholder Rights – risks related to things that impact share prices and the rights of shareholders, including analyst ratings, major shareholder activity, trade volatility, liquidity of shares, anti-takeover provisions, international listing, dual listing.
- Debt & Financing – risks related to debt, funding, financing and interest rates, financial investments.
- Corporate Activity and Growth – risks related to restructuring, M&As, joint ventures, execution of corporate strategy, strategic alliances.
2. Legal & Regulatory
- Litigation and Legal Liabilities – risks related to litigation/ lawsuits against the company.
- Regulation – risks related to compliance, GDPR, and new legislation.
- Environmental / Social – risks related to environmental regulation and to data privacy.
- Taxation & Government Incentives – risks related to taxation and changes in government incentives.
3. Production
- Costs – risks related to costs of production including commodity prices, future contracts, inventory.
- Supply Chain – risks related to the company’s suppliers.
- Manufacturing – risks related to the company’s manufacturing process including product quality and product recalls.
- Human Capital – risks related to recruitment, training and retention of key employees, employee relationships & unions labor disputes, pension, and post retirement benefits, medical, health and welfare benefits, employee misconduct, employee litigation.
4. Technology & Innovation
- Innovation / R&D – risks related to innovation and new product development.
- Technology – risks related to the company’s reliance on technology.
- Cyber Security – risks related to securing the company’s digital assets and from cyber attacks.
- Trade Secrets & Patents – risks related to the company’s ability to protect its intellectual property and to infringement claims against the company as well as piracy and unlicensed copying.
5. Ability to Sell
- Demand – risks related to the demand of the company’s goods and services including seasonality, reliance on key customers.
- Competition – risks related to the company’s competition including substitutes.
- Sales & Marketing – risks related to sales, marketing, and distribution channels, pricing, and market penetration.
- Brand & Reputation – risks related to the company’s brand and reputation.
6. Macro & Political
- Economy & Political Environment – risks related to changes in economic and political conditions.
- Natural and Human Disruptions – risks related to catastrophes, floods, storms, terror, earthquakes, coronavirus pandemic/COVID-19.
- International Operations – risks related to the global nature of the company.
- Capital Markets – risks related to exchange rates and trade, cryptocurrency.