Credit Risk and Loan Management - The company's 10 largest borrowing relationships accounted for approximately 8.8% of total loans as of December 31, 2024, indicating a concentration of credit risk [53]. - The company requires collateral for commercial loans, which may include real estate, accounts receivable, inventory, and equipment, to mitigate credit risk [55]. - The bank's commercial lines of credit are generally revolving and require close monitoring to protect against increasing loan volumes and diminishing collateral values [60]. - The company faces risks related to credit quality, particularly with loans to small to medium-sized businesses, which may be more vulnerable to economic pressures [142]. - The company may need to increase its provision for credit losses based on regulatory reviews, which could adversely affect its financial condition [146]. - The company faces increased credit risk due to a significant portion of loans being secured by real estate, which may lead to higher levels of non-performing loans during economic downturns [150]. - The company had 10 billion, leading to additional compliance costs [203]. Investment and Asset Management - The bank's investment policy allows for investments in U.S. government debt securities, mortgage-backed securities, and investment-grade state and municipal obligations [66]. - The company actively monitors its investment portfolio to identify material changes and reviews available-for-sale securities for credit loss allowances at least quarterly [70]. - As of December 31, 2024, the allowance for credit losses was 19.6 million as of December 31, 2024 [225]. - Payments on junior subordinated debentures must be made before any dividends can be paid on common stock, affecting the priority of common stockholders [226]. Employee and Operational Management - As of December 31, 2024, the company employed 815 full-time equivalent employees, emphasizing a diverse workforce as a competitive advantage [74]. - The company emphasizes employee wellness and safety, offering a comprehensive benefits package and policies supporting remote work and educational assistance [78]. - The company relies on its management team and key employees for continued growth, with potential adverse effects if key personnel are lost [177]. - The company may incur significant costs to attract and retain qualified employees in a competitive market [178]. - The company faces operational risks related to its technological infrastructure, including potential cyber-attacks and system failures [186]. - The company is under continuous threat of cyber-attacks, which could result in reputational damage and operational disruptions [192]. - The company relies on third parties for key components of its business infrastructure, and any failure could disrupt operations [193]. Market and Economic Risks - The Company operates in a highly competitive market, which may impact its profitability and ability to execute its strategy [138]. - The Federal Reserve's monetary policies have historically affected the Company's operating results and are expected to continue doing so in the future [130]. - Economic and consumer trends, including global events and market volatility, could adversely impact the company's financial performance [200]. - The company is exposed to risks associated with climate change, which could affect its financial performance and operational stability [140]. - The company is subject to physical and financial risks associated with climate change, which could affect the value of real estate collateral and increase delinquency rates [185]. Interest Rate Risk Management - The company actively monitors and manages its interest rate risk exposure, reporting findings to the ALCO and the Board at least quarterly [395]. - The company's primary objective in managing interest rate risk is to minimize adverse impacts on net interest income and capital while maximizing yield-cost spread [396]. - Interest rate risk arises from timing differences in repricing and maturities of interest-earning assets and interest-bearing liabilities, as well as changes in the yield curve [398]. - The company uses interest rate sensitivity analysis, market value of portfolio equity analysis, and interest rate simulations to manage interest rate risk [403]. - As of December 31, 2024, a 200 basis point increase in interest rates is projected to decrease earnings by 2.1% [407]. - The economic value of equity analysis indicates that a 200 basis point increase in interest rates would decrease EVE by 8.7% as of December 31, 2024 [408]. - The ALCO is responsible for managing the company's interest rate sensitivity position, ensuring compliance with established limits [403]. - The company may hedge its interest rate risk position, but does not guarantee the success of these hedging attempts [400]. Compliance and Legal Risks - The Bank is subject to several federal laws designed to combat money laundering, including the BSA and the USA PATRIOT Act, requiring it to have policies and procedures to detect and report suspicious activities [118][119]. - The Bank actively checks high-risk OFAC areas, such as new accounts and wire transfers, to ensure compliance with regulations against transactions with designated individuals and organizations [120]. - The Company is subject to various legislative and regulatory initiatives that could significantly impact its operating environment and financial condition [129]. - Noncompliance with anti-money laundering regulations could result in significant penalties and reputational damage [210]. - The company must comply with privacy laws regarding the protection of personal information, with potential legal repercussions for violations [211]. Strategic Growth and Acquisitions - The company's strategy focuses on organic growth supplemented by select acquisitions, with success dependent on generating loans and deposits of acceptable risk and expense [170]. - Risks associated with acquisitions include the time and expense of identifying targets, exposure to unknown liabilities, and integration challenges [172]. - The company may issue additional equity securities, which could dilute existing shareholders and adversely affect the market price of its common stock [223]. - The company is classified as an "emerging growth company," allowing it to take advantage of reduced disclosure requirements, which may affect the attractiveness of its common stock to investors [219]. - The company faces evolving scrutiny regarding Environmental, Social, and Governance (ESG) practices, which may impose additional costs and risks [217].
Burke & Herbert Financial Services (BHRB) - 2024 Q4 - Annual Report