What changed in this filing

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Item 1. Business

2021-03-09 compared with 2020-03-06 · 1825 added, 737 removed, 106 unchanged (96% of the section changed)

National Bancorporation, Inc.

(the Company) is a bank holding company registered with the Board of Governors of the Federal Reserve System (the Federal Reserve) under the Bank Holding Company Act of 1956, as amended (the

The Company was incorporated in Delaware in 1990, and in 1994 it succeeded its Alabama predecessor as the bank holding company controlling AuburnBank, an Alabama state member bank with its principal office in Auburn, Alabama

(the Bank).

Auburn National Bancorporation, Inc.

(the “Company”) is a bank holding

company registered with the Board of Governors

of the Federal Reserve System (the “Federal Reserve”) under

the Bank Holding Company Act of 1956, as amended (the

The Company was incorporated in Delaware in 1990, and

in 1994 it succeeded its Alabama predecessor as

the bank holding company controlling AuburnBank, an Alabama state

member bank with its principal office in Auburn,

Alabama (the “Bank”).

The Company and its predecessor have controlled the Bank since

As a bank holding company, the Company may diversify into a broader range of financial services and other business activities than currently are permitted

to the Bank under applicable laws and regulations.

The holding company structure also provides greater financial and operating flexibility than is presently permitted to the Bank.

The Bank has operated continuously since 1907 and currently conducts its business primarily in East Alabama, including Lee County and surrounding areas.

Bank has been a member of the Federal Reserve System since April 1995.

The Banks primary regulators are the Federal Reserve and the Alabama Superintendent of Banks (the Alabama Superintendent).

The Bank has been a member of the

Federal Home Loan Bank of Atlanta (the FHLB) since 1991.

The Companys business is conducted primarily through the Bank and its subsidiaries.

Although it has no immediate plans to conduct any other business,

the Company may engage directly or indirectly in a number of activities that the Federal Reserve has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

The Companys principal executive offices are located at 100 N.

Gay Street, Auburn, Alabama 36830, and its telephone number at such address is (334) 821-9200.

The Company maintains an Internet website at www.auburnbank.com .

The Companys website and the information appearing on the website are not included or incorporated in, and are not

part of, this report.

The Company files annual, quarterly and current reports, proxy statements, and other information with the SEC.

You may read and copy any document we file with the SEC at the SECs public reference room at 100 F Street,

N.E., Washington, DC 20549.

Please call the SEC at 1-800-SEC-0330 for more information on the operation of the public reference

The SEC maintains an Internet site at www.sec.gov that contains reports, proxy, and other information, where SEC filings are available to the public free of charge.

The Bank offers checking, savings, transaction deposit accounts and certificates of deposit, and is an active residential mortgage lender in its primary

service area.

The Banks primary service area includes the cities of Auburn and Opelika, Alabama and nearby surrounding areas in East Alabama, primarily in Lee County.

The Bank also offers commercial, financial, agricultural, real estate

construction and consumer loan products and other financial services.

The Bank is one of the largest providers of automated teller services in East Alabama and operates ATM machines in 13 locations in its primary service area.

The Bank offers Visa ®

Checkcards, which are debit cards with the Visa logo that work like checks but can be used anywhere Visa is accepted, including ATMs.

The Banks Visa Checkcards can be used

internationally through the Plus ®

The Bank offers online banking, bill payment and other electronic services through its Internet website, www.auburnbank.com .

Our online banking services, bill payment and electronic services are subject to certain cybersecurity risks.

See Risk Factors Our information

systems may experience interruptions and security breaches.

The banking business in East Alabama, including Lee County, is highly competitive with respect to loans, deposits, and other financial services.

dominated by a number of regional and national banks and bank holding companies that have substantially greater resources, and numerous offices and affiliates operating over wide geographic areas.

The Bank competes for deposits, loans and other

business with these banks, as well as with credit unions, mortgage companies, insurance companies, and other local and nonlocal financial institutions, including institutions offering services through the mail, by telephone and over the Internet.

more and different kinds of businesses enter the market for financial services, competition from nonbank financial institutions may be expected to intensify further.

Among the advantages that larger financial institutions have over the Bank are their ability to finance extensive advertising campaigns, to diversify their

funding sources, and to allocate and diversify their assets among loans and securities of the highest yield in locations with the greatest demand.

Many of the major commercial banks or their affiliates operating in the Banks service area offer

services which are not presently offered directly by the Bank and they typically have substantially higher lending limits than the Bank.

Banks also have

experienced significant competition for deposits from mutual funds, insurance companies and other investment companies and from money center banks offerings of high-yield investments and deposits.

Certain of these competitors are not subject

to the same regulatory restrictions as the Bank.

As a bank holding

company, the Company may diversify

into a broader range of financial services and other business activities

than currently

are permitted to the Bank under applicable laws and regulations.

The holding company structure also provides greater

financial and operating flexibility than is presently permitted

The Bank has operated continuously since 1907 and currently conducts

its business primarily in East Alabama, including

Lee County and surrounding areas.

The Bank has been a member of the Federal Reserve System since April

Bank’s primary regulators are

the Federal Reserve and the Alabama Superintendent of Banks (the

Superintendent”).

The Bank has been a member of the Federal Home Loan Bank of

Atlanta (the “FHLB”) since 1991.

The Company’s business is conducted

primarily through the Bank and its subsidiaries.

Although it has no immediate plans

to conduct any other business, the Company may engage directly

or indirectly in a number of activities that the Federal

Reserve has determined to be so closely related to banking or

managing or controlling banks as to be a proper incident

The Company’s principal executive

offices are located at 132 N.

Gay Street, Auburn, Alabama

36830, and its telephone

number at such address is (334) 821-9200.

The Company maintains an Internet website at

www.auburnbank.com

Company’s website and the information

appearing on the website are not included or incorporated

in, and are not part of,

The Company files annual, quarterly

and current reports, proxy statements, and other information with

may read and copy any document we file with the SEC at the SEC’s

public reference room at 100 F Street, N.E.,

Washington, DC 20549.

Please call the SEC at 1-800-SEC-0330 for more information on the operation

of the public

reference rooms.

The SEC maintains an Internet site at

that contains reports, proxy,

and other information,

where SEC filings are available to the public free of charge.

The Bank offers checking, savings, transaction deposit

accounts and certificates of deposit, and is an active residential

mortgage lender in its primary service area.

The Bank’s primary service area

includes the cities of Auburn and Opelika,

Alabama and nearby surrounding areas in East Alabama, primarily in

The Bank also offers commercial,

financial, agricultural, real estate construction and consumer

loan products and other financial services.

The Bank is one of

the largest providers of automated teller services in

East Alabama and operates ATM

machines in 13 locations in its

primary service area.

The Bank offers Visa

Checkcards, which are debit cards with the Visa

logo that work like checks

but can be used anywhere Visa

is accepted, including ATMs.

The Bank’s Visa

Checkcards can be used internationally

through the Plus

The Bank offers online banking, bill payment

and other electronic services through its Internet

www.auburnbank.com

Our online banking services, bill payment and electronic

services are subject to certain

cybersecurity risks.

See “Risk Factors – Our information systems may experience

interruptions and security breaches.”

The banking business in East Alabama, including Lee County,

is highly competitive with respect to loans, deposits, and

other financial services.

The area is dominated by a number of regional and national

banks and bank holding companies

that have substantially greater resources, and numerous offices

and affiliates operating over wide geographic areas.

Bank competes for deposits, loans and other business with these banks,

as well as with credit unions, mortgage companies,

insurance companies, and other local and nonlocal financial institutions,

including institutions offering services through

mail, by telephone and over the Internet.

As more and different kinds of businesses enter the market

for financial services,

competition from nonbank financial

institutions may be expected to intensify further.

Among the advantages that larger financial institutions have

over the Bank are their ability to finance extensive advertisin

campaigns, to diversify their funding sources, and to allocate

and diversify their assets among loans and securities of the

highest yield in locations with the greatest demand.

Many of the major commercial banks or their affiliates operating

Bank’s service area offer

services which are not presently offered directly

by the Bank and they typically have substantially

higher lending limits than the Bank.

Banks also have experienced significant competition for deposits from

mutual funds, insurance companies and other

investment companies and from money center banks’ offerings

of high-yield investments and deposits.

Certain of these

competitors are not subject to the same regulatory restrictions

Selected Economic Data

Lee Countys population was estimated to be 163,941 in 2018, and has increased approximately 16.9% from 2010 to 2018.

The largest employers in the area

are Auburn University, East Alabama Medical Center, a Wal-Mart Distribution Center, Mando America Corporation, and Briggs & Stratton.

Auto manufacturing and related suppliers are increasingly

important along Interstate Highway 85 to the east and west of Auburn.

Kia Motors has a large automobile factory in nearby West Point, Georgia, and Hyundai Motors has a large automobile factory in Montgomery, Alabama.

Between 2010 and 2018, the Auburn-Opelika MSA grew 16.9%, the second fastest growing MSA in Alabama.

Census Bureau estimates that the Auburn-Opelika

MSA population will grow 5.41% from 2020 to 2025.

During the same time, the U.S.

Census Bureau estimates that household income will increase 13.70%, to $66,363, which is approximately the same as the Birmingham-Hoover MSA.

Lee County’s population was estimated

to be 164,542 in 2019, and has increased approximately 17.3

from 2010 to 2019.

The largest employers in the area are Auburn University,

East Alabama Medical Center, a Wal

-Mart Distribution Center,

Mando America Corporation, and Briggs & Stratton.

Auto manufacturing and related suppliers are increasingly important

along Interstate Highway 85 to the east and west of Auburn.

Kia Motors has a large automobile factory in nearby West

Point, Georgia, and Hyundai Motors has a large

automobile factory in Montgomery,

Between 2010 and 2019, the Auburn-Opelika MSA grew 1

7.3%, the second fastest growing MSA in Alabama.

Census Bureau estimates that the Auburn-Opelika MSA population will

grow 5.41% from 2020 to 2025.

During the same

time, the U.S.

Census Bureau estimates that household income

will increase 13.70%, to $66,363, which is approximately

the same as the Birmingham-Hoover MSA.

Loans and Loan Concentrations

The Bank makes loans for

commercial, financial and agricultural purposes, as well as for real estate mortgages, real estate acquisition, construction and development and consumer purposes.

While there are certain risks unique to each type of lending, management believes

that there is more risk associated with commercial, real estate acquisition, construction and development, agricultural and consumer lending than with residential real estate mortgage loans.

To help manage these risks, the Bank has established

underwriting standards used in evaluating each extension of credit on an individual basis, which are substantially similar for each type of loan.

These standards include a review of the economic conditions affecting the borrower, the borrowers

financial strength and capacity to repay the debt, the underlying collateral and the borrowers past credit performance.

We apply these standards at the time a loan is made and monitor them periodically throughout the life of the loan.

Lending Practices for a discussion of regulatory guidance on commercial real estate lending.

The Bank has loans outstanding to borrowers in all industries within our primary service area.

economic or other conditions affecting these industries would also likely have an adverse effect on the local workforce, other local businesses, and individuals in the community that have entered into loans with the Bank.

The Bank makes loans for commercial, financial and agricultural purposes,

as well as for real estate mortgages, real estate

acquisition, construction and development and consumer

While there are certain risks unique to each type of

lending, management believes that there is more risk associated

with commercial, real estate acquisition, construction and

development, agricultural and consumer lending than with residentia

real estate mortgage loans.

To help manage these

risks, the Bank has established underwriting standards used in

evaluating each extension of credit on an individual basis,

which are substantially similar for each type of loan.

These standards include a review of the economic conditions

affecting the borrower, the borrower’s

financial strength and capacity to repay the debt, the underlying collateral

borrower’s past credit performance.

We apply these standards

at the time a loan is made and monitor them periodically

throughout the life of the loan.

See “Lending Practices” for a discussion of regulatory guidance

on commercial real estate

The Bank has loans outstanding to borrowers in all industries

within our primary service area.

Any adverse economic or

other conditions affecting these industries would also

likely have an adverse effect on the local workforce,

businesses, and individuals in the community that have entered

into loans with the Bank.

For example, the auto

manufacturing business and its suppliers have positively affected our local economy, but automobile manufacturing is cyclical and adversely affected by increases in interest rates.

Decreases in automobile sales, including adverse changes due to

interest rate increases, could adversely affect nearby Kia and Hyundai automotive plants and their suppliers local spending and employment, and could adversely affect economic conditions in the markets we serve.

However, management believes

that due to the diversified mix of industries located within the Banks primary service area, adverse changes in one industry may not necessarily affect other area industries to the same degree or within the same time frame.

primary service area also is subject to both local and national economic conditions and fluctuations.

While most loans are made within our primary service area, some residential mortgage loans are originated outside the primary service area, and the

Bank from time to time has purchased loan participations from outside its primary service area.

At December 31, 2019, the Company and its subsidiaries had 163.5 full-time equivalent employees, including 39 officers.

manufacturing business and its suppliers have positively affected

our local economy, but automobile

manufacturing is

cyclical and adversely affected by increases in interest

Decreases in automobile sales, including adverse changes

to interest rate increases, and the economic effects of

the impact of COVID-19, including continuing supply chain

disruptions, could adversely affect nearby Kia and Hyundai

automotive plants and their suppliers' local spending and

employment, and could adversely affect economic conditions

in the markets we serve.

management believes that

due to the diversified mix of industries located within the Bank’s

primary service area, adverse changes in one industry may

not necessarily affect other area industries to the same degree

or within the same time frame.

The Bank’s primary service

area also is subject to both local and national economic conditions and

fluctuations.

While most loans are made within our

primary service area, some residential mortgage loans are originated

outside the primary service area, and the Bank from

time to time has purchased loan participations from outside its

primary service area.

At December 31, 2020,

the Company and its subsidiaries had 152 full-time equivalent employees,

including 36 officers.

response to the COVID-19 pandemic, our business continuity plan has

worked to provide essential banking services to our

communities and customers, while protecting our employees’ health.

As part of our efforts to exercise social distancing in

accordance with the guidelines of the Centers for Disease Control

and the Governor of the State of Alabama, starting March

23, 2020, we limited branch lobby service to appointment only while

continuing to operate our branch drive-thru facilities

On June 1, 2020, we re-opened some of our branch lobbies as permitted

by state public health guidelines.

continue to provide services through our online and other electronic

In addition, we established remote work

access to help employees stay at home where job duties permit.

Statistical Information

Certain statistical information

is included in response to Item 7 of this Annual Report on Form 10-K.

Certain statistical information is also included in response to Item 6, Item 7A and Item 8 of this Annual Report on

Certain statistical information is included in response to Item

7 of this Annual Report on Form 10-K.

Certain statistical

information is also included in response to Item 6, Item 7A and Item

8 of this Annual Report on Form 10-K.

SUPERVISION AND REGULATION

The Company and the Bank are extensively regulated under federal and state laws applicable to banks and bank holding companies.

The supervision, regulation

and examination of the Company and the Bank and their respective subsidiaries by the bank regulatory agencies are primarily intended to maintain the safety and soundness of depository institutions and the federal deposit insurance system, as well as

the protection of depositors, rather than holders of Company capital stock and other securities.

Any change in applicable law or regulation may have a material effect on the Companys business.

The following discussion is qualified in its

entirety by reference to the particular statutory and regulatory provisions referred to below.

The Company and the Bank are extensively regulated under federal

and state laws applicable to banks and bank holding

The supervision, regulation and examination of the Company and

the Bank and their respective subsidiaries by

the bank regulatory agencies are primarily intended to maintain

the safety and soundness of depository institutions and the

federal deposit insurance system, as well

as the protection of depositors, rather than holders of Company

capital stock and

other securities.

Any change in applicable law or regulation may have a material

effect on the Company’s

following discussion is qualified in its entirety by

reference to the particular laws and rules referred

Bank Holding Company Regulation

The Company, as a bank holding company, is subject to supervision, regulation and examination by the Federal Reserve under the BHC Act.

Bank holding companies

generally are limited to the business of banking, managing or controlling banks, and certain related activities.

The Company is required to file periodic reports and other information with the Federal Reserve.

The Federal Reserve examines the

Company and its subsidiaries.

The State of Alabama currently does not regulate bank holding companies.

The BHC Act requires prior Federal Reserve

approval for, among other things, the acquisition by a bank holding company of direct or indirect ownership or control of more than 5% of the voting shares or substantially all the assets of any bank, or for a merger or consolidation of a bank

holding company with another bank holding company.

The BHC Act generally prohibits a bank holding company from acquiring direct or indirect ownership or control of voting shares of any company that is not a bank or bank holding company and from

engaging directly or indirectly in any activity other than banking or managing or controlling banks or performing services for its authorized subsidiary.

A bank holding company may, however, engage in or acquire an interest in a company that engages

in activities that the Federal Reserve has determined by regulation or order to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

Bank holding companies that are and remain well-capitalized and well-managed, as

defined in Federal Reserve Regulation Y, and whose insured depository institution subsidiaries maintain satisfactory or better ratings under the Community Reinvestment Act of 1977 (the CRA), may elect to become

financial holding companies. Financial holding companies and their subsidiaries are permitted to acquire or engage in activities such as insurance underwriting, securities underwriting, travel agency activities, broad insurance agency

activities, merchant banking and other activities that the Federal Reserve determines to be financial in nature or complementary thereto.

In addition, under the BHC Acts merchant banking authority and Federal Reserve regulations, financial

holding companies are authorized to invest in companies that engage in activities that are not financial in nature, as long as the financial holding company makes its investment, subject to limitations, including a limited investment term, no day-to-day management, and no cross-marketing with any depositary institutions controlled by the financial holding company.

The Federal Reserve recommended repeal of the

merchant banking powers in its September 16, 2016 study pursuant to Section 620 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act).

The Company has not elected to become a financial

holding company, but it may elect to do so in the future.

Financial holding companies continue to be subject to Federal Reserve supervision, regulation

and examination, but the Gramm-Leach-Bliley Act of 1999 (the GLB Act) applies the concept of functional regulation to subsidiary activities.

For example, insurance activities would be subject to supervision and regulation by state

insurance authorities.

The BHC Act permits acquisitions of banks by bank holding companies, subject to various restrictions, including that the acquirer

is well capitalized and well managed.

Under the Alabama Banking Code, with the prior approval of the Alabama Superintendent, an Alabama bank may acquire and operate one or more banks in other states pursuant to a transaction

in which the Alabama bank is the surviving bank.

In addition, one or more Alabama banks may enter into a merger transaction with one or more out-of-state banks, and an out-of-state bank resulting from such transaction may continue to operate the acquired branches in Alabama.

The Dodd-Frank Act permits banks, including Alabama banks, to

The Company, as a bank holding company,

is subject to supervision, regulation and examination by the Federal

under the BHC Act.

Bank holding companies generally are limited to the business

of banking, managing or controlling

banks, and certain related activities.

The Company is required to file periodic reports and other information

Federal Reserve.

The Federal Reserve examines the Company and its subsidiaries.

The State of Alabama currently does

not regulate bank holding companies.

The BHC Act requires prior Federal Reserve approval for,

among other things, the acquisition by a bank holding company

of direct or indirect ownership or control of more than 5% of

the voting shares or substantially all the assets of any bank, or

for a merger or consolidation of a bank holding company

with another bank holding company.

The BHC Act generally

prohibits a bank holding company from acquiring direct or

indirect ownership or control of voting shares of any company

that is not a bank or bank holding company and from engaging directly

or indirectly in any activity other than banking or

managing or controlling banks or performing services for its authorized

A bank holding company may,

however, engage in or acquire an interest

in a company that engages in activities that the Federal Reserve has

by regulation or order to be so closely related to banking or managing

or controlling banks as to be a proper incident

On January 30, 2020, the Federal Reserve adopted

new rules, effective September 30, 2020 simplifying

determinations of control of banking organizations for

BHC Act purposes.

Bank holding companies that are and remain “well-capitalized”

and “well-managed,” as defined in Federal Reserve

Regulation Y,

and whose insured depository institution subsidiaries maintain “satisfactory”

or better ratings under the

Community Reinvestment Act of 1977 (the “CRA”), may elect

to become “financial holding companies.” Financial holding

companies and their subsidiaries are permitted to acquire or

engage in activities such as insurance underwriting, securities

underwriting, travel agency activities, broad insurance agency

activities, merchant banking and other activities that the

Federal Reserve determines to be financial in nature or complementary

In addition, under the BHC Act’s

banking authority and Federal Reserve regulations, financial holding

companies are authorized to invest in companies that

engage in activities that are not financial in nature, as long as

the financial holding company makes its investment, subject

to limitations, including a limited investment term, no day

-to-day management, and no cross-marketing with any depositary

institutions controlled by the financial holding company.

The Federal Reserve recommended repeal of

banking powers in its September 16, 2016 study pursuant to

Section 620 of the Dodd-Frank Wall

Street Reform and

Consumer Protection Act of 2010 (the “Dodd-Frank Act”).

The Company has not elected to become a financial holding

company, but it may elect to

do so in the future.

Financial holding companies continue to be subject to

Federal Reserve supervision, regulation and examination, but the

Gramm-Leach-Bliley Act of 1999 the “GLB Act”) applies the concept

of functional regulation to subsidiary activities.

example, insurance activities would be subject to supervision

and regulation by state insurance authorities.

The BHC Act permits acquisitions of banks by bank holding

companies, subject to various restrictions, including that the

acquirer is “well capitalized” and “well managed”.

Under the Alabama Banking Code, with the prior approval of the

Alabama Superintendent, an Alabama bank may acquire and

operate one or more banks in other states pursuant to a

transaction in which the Alabama bank is the surviving bank.

In addition, one or more Alabama banks may enter into a

merger transaction with one or more out-of-state banks,

and an out-of-state bank resulting from such transaction

continue to operate the acquired branches in Alabama.

The Dodd-Frank Act permits banks, including Alabama banks,

branch anywhere in the United States.

The Company is a legal entity separate and distinct from the Bank.

Various legal limitations restrict the Bank from

lending or otherwise supplying funds to the Company.

The Company and the Bank are subject to Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W thereunder.

Section 23A defines covered transactions,

which include extensions of credit, and limits a banks covered transactions with any affiliate to 10% of such banks capital and surplus.

All covered and exempt transactions between a bank and its affiliates must be on terms and

conditions consistent with safe and sound banking practices, and banks and their subsidiaries are prohibited from purchasing low-quality assets from the banks affiliates.

Finally, Section 23A

requires that all of a banks extensions of credit to its affiliates be appropriately secured by permissible collateral, generally United States government or agency securities.

Section 23B of the Federal Reserve Act generally requires

covered and other transactions among affiliates to be on terms and under circumstances, including credit standards, that are substantially the same as or at least as favorable to the bank or its subsidiary as those prevailing at the time for similar

transactions with unaffiliated companies.

Federal Reserve policy and the Federal Deposit Insurance Act, as amended by the Dodd-Frank Act, require a bank

holding company to act as a source of financial and managerial strength to its FDIC-insured bank subsidiaries and to take measures to preserve and protect such bank subsidiaries in situations where additional investments in a bank subsidiary may not

legal limitations restrict the Bank from lending

or otherwise supplying funds to the Company.

The Company and the Bank are subject to Sections 23A and

Federal Reserve Act and Federal Reserve Regulation W thereunder.

Section 23A defines “covered transactions,” which

include extensions of credit, and limits a bank’s

covered transactions with any affiliate to 10%

of such bank’s capital and

All covered and exempt transactions between a bank and its affiliates

must be on terms and conditions consistent

with safe and sound banking practices, and banks and their subsidiaries

are prohibited from purchasing low-quality assets

from the bank’s affiliates.

Finally, Sectio

23A requires that all of a bank’s extensions

of credit to its affiliates be

appropriately secured by permissible collateral, generally United

States government or agency securities.

Section 23B of

the Federal Reserve Act generally requires covered and other

transactions among affiliates to be on terms and under

circumstances, including credit standards, that are substantially the

same as or at least as favorable to the bank or its

subsidiary as those prevailing at the time for similar transactions with

unaffiliated companies.

Federal Reserve policy and the Federal Deposit Insurance Act,

as amended by the Dodd-Frank Act, require a bank holding

company to act as a source of financial

and managerial strength to its FDIC-insured bank subsidiaries

and to take measures

to preserve and protect such bank subsidiaries in situations where additional

investments in a bank subsidiary may not

otherwise be warranted.

In the event an FDIC-insured subsidiary becomes subject to a capital restoration plan with its regulators, the parent bank holding company is required to guarantee performance of such plan up to 5% of the banks assets,

and such guarantee is given priority in bankruptcy of the bank holding company.

In addition, where a bank holding company has more than one bank or thrift subsidiary, each of the bank holding companys subsidiary depository institutions may be

responsible for any losses to the FDICs Deposit Insurance Fund (DIF), if an affiliated depository institution fails.

As a result, a bank holding company may be required to loan money to a bank subsidiary in the form of subordinate

capital notes or other instruments which qualify as capital under bank regulatory rules.

However, any loans from the holding company to such subsidiary banks likely will be unsecured and subordinated to such banks depositors and to other

In the event an FDIC-insured

subsidiary becomes subject to a capital restoration plan with

regulators, the parent bank holding company is required to

guarantee performance of such plan up to 5% of the bank’s

assets, and such guarantee is given priority in bankruptcy of the

bank holding company.

In addition, where a bank holding

company has more than one bank or thrift subsidiary,

each of the bank holding company’s

subsidiary depository institutions

may be responsible for any losses to the FDIC’s

Deposit Insurance Fund (“DIF”), if an affiliated

depository institution fails.

As a result, a bank holding company may be required to loan money to

a bank subsidiary in the form of subordinate capital

notes or other instruments which qualify as capital under bank

regulatory rules.

However, any loans from the holding

company to such subsidiary banks likely will be unsecured

and subordinated to such bank’s depositors

creditors of the bank.

See “Capital.”

As a result of legislation in 2014 and 2018, the Federal Reserve has revised its Small Bank Holding

Company Policy Statement (the Small BHC Policy) to expand it to include thrift holding companies and increase the size of small for qualifying bank and thrift holding companies from $500 million to up to $3 billion

of pro forma consolidated assets.

The Federal Reserve confirmed in 2018 that the Company is eligible for treatment as a small banking holding company

As a result of legislation in 2014 and 2018, the Federal

Reserve has revised its Small Bank Holding Company Policy

Statement (the “Small BHC Policy”) to expand it to include thrift holding

companies and increase the size of “small” for

qualifying bank and thrift holding companies from $500 million

to up to $3 billion of pro forma consolidated assets.

The Federal Reserve confirmed in 2018 that the Company is

eligible for treatment as a small banking holding company

under the Small BHC Policy.

As a result, unless and until the Company fails to qualify under the Small BHC Policy, the Companys capital adequacy will continue to be evaluated on a bank only basis.

As a result, unless and until the Company fails to qualify under

the Small BHC Policy, the

Company’s capital adequacy will

continue to be evaluated on a bank only basis.

See “Capital.”

1 unchanged sentence

The Bank is a state bank that is a member of the Federal Reserve.

It is subject to supervision, regulation and examination by the Federal Reserve and the

Alabama Superintendent, which monitor all areas of the Banks operations, including loans, reserves, mortgages, issuances and redemption of capital securities, payment of dividends, establishment of branches, capital adequacy and compliance

The Bank is a member of the FDIC and, as such, its deposits are insured by the FDIC to the maximum extent provided by law, and is subject to various FDIC regulations.

See FDIC Insurance Assessments.

It is subject to supervision, regulation and examination

by the Federal Reserve and the Alabama Superintendent, which monitor

all areas of the Bank’s operations,

including loans,

reserves, mortgages, issuances and redemption of capital securities, payment

of dividends, establishment of

capital adequacy and compliance with laws.

The Bank is a member of the FDIC and, as such, its deposits are

the FDIC to the maximum extent provided by law,

and is subject to various FDIC regulations.

See “FDIC Insurance

Assessments.”

Alabama law permits statewide branching by banks.

The powers granted to Alabama-chartered banks by state law include certain provisions designed to provide

such banks competitive equality with national banks.

The Federal Reserve has adopted the Federal Financial Institutions Examination Councils

(FFIEC) rating system, which assigns each financial institution a confidential composite CAMELS rating based on an evaluation and rating of six essential components of an institutions financial condition and operations:

C apital A dequacy, A sset Q uality, M anagement, E arnings, L iquidity and S ensitivity to market risk, as well as the quality of risk management practices.

For most institutions, the FFIEC has

indicated that market risk primarily reflects exposures to changes in interest rates.

When regulators evaluate this component, consideration is expected to be given to:

managements ability to identify, measure, monitor and control market risk;

the institutions size;

The powers granted to Alabama-chartered banks by state law

certain provisions designed to provide such banks competitive

equality with national banks.

The Federal Reserve has adopted the Federal Financial Institutions Examination

Council’s (“FFIEC”) rating system,

assigns each financial institution a confidential composite “CAMELS”

rating based on an evaluation and rating of six

essential components of an institution’s

financial condition and operations:

Capital Adequacy, Asset

Quality, Management,

Earnings, Liquidity and Sensitivity to market risk, as well as the

quality of risk management practices.

institutions, the FFIEC has indicated that market risk primarily reflects

exposures to changes in interest rates.

regulators evaluate this component, consideration is expected

to be given to:

ability to identify, measure,

monitor and control market risk;

the institution’s

the nature and complexity of its activities and its risk profile;

and the adequacy of its capital and earnings in relation to its level of market risk exposure.

Market risk is rated based upon, but not limited to, an

assessment of the sensitivity of the financial institutions earnings or the economic value of its capital to adverse changes in interest rates, foreign exchange rates, commodity prices or equity prices;

managements ability to identify,

measure, monitor and control exposure to market risk;

and the nature and complexity of interest rate risk exposure arising from non-trading positions.

Composite ratings are based on evaluations of an

institutions managerial, operational, financial and compliance performance.

The composite CAMELS rating is not an arithmetical formula or rigid weighting of numerical component ratings.

Elements of subjectivity and examiner judgment,

especially as these relate to qualitative assessments, are important elements in assigning ratings.

The federal bank regulatory agencies are reviewing the CAMELS rating system and their consistency.

The GLB Act and related regulations require banks and their affiliated companies to adopt and disclose privacy policies, including policies regarding the

sharing of personal information with third parties.

The GLB Act also permits bank subsidiaries to engage in financial activities similar to those permitted to financial holding companies.

In December 2015, Congress amended the GLB Act as

part of the Fixing Americas Surface Transportation Act.

This amendment provided financial institutions that meet certain conditions an exemption to the requirement to deliver an annual privacy notice.

On August 10, 2018, the federal

Consumer Financial Protection Bureau (CFPB) announced that it had finalized conforming amendments to its implementing regulation, Regulation P.

A variety of federal and state privacy laws govern the collection, safeguarding, sharing and use of customer information, and require that financial

institutions have policies regarding information privacy and security.

Some state laws also protect the privacy of information of state residents and require adequate security of such data, and certain state laws may, in some circumstances, require

us to notify affected individuals of security breaches of computer databases that contain their personal information.

These laws may also require us to notify law enforcement, regulators or consumer reporting agencies in the event of a data breach,

as well as businesses and governmental agencies that own data.

adequacy of its capital and earnings in relation to its level of market

risk exposure.

Market risk is rated based upon, but not

limited to, an assessment of the sensitivity of the financial institution’s

earnings or the economic value of its capital to

adverse changes in interest rates, foreign exchange rates, commodity

prices or equity prices;

identify, measure, monitor

and control exposure to market risk;

and the nature and complexity

of interest rate risk exposure

arising from non-trading positions.

Composite ratings are based on

evaluations of an institution’s managerial,

financial and compliance performance.

The composite CAMELS rating

is not an arithmetical formula or rigid weighting of

numerical component ratings.

Elements of subjectivity and

examiner judgment, especially as these relate to qualitative

assessments, are important elements in assigning ratings.

The federal bank regulatory agencies are reviewing the CAMELS

rating system and their consistency.

The GLB Act and related regulations require banks and their

affiliated companies to adopt and disclose privacy policies,

including policies regarding the sharing of personal information

with third parties.

The GLB Act also permits bank

subsidiaries to engage in “financial activities” similar to those

permitted to financial holding companies.

In December 2015,

Congress amended the GLB Act as part of the Fixing America’s

Surface Transportation Act.

amendment provided

financial institutions that meet certain conditions an exemption to

the requirement to deliver an annual privacy notice.

August 10, 2018, the federal Consumer Financial Protection Bureau

(“CFPB”) announced that it had finalized conforming

amendments to its implementing regulation, Regulation P.

A variety of federal and state privacy laws govern the collection, safeguarding,

sharing and use of customer information,

and require that financial institutions have policies regarding information

privacy and security.

Some state laws also protect

the privacy of information of state residents and require adequate

security of such data, and certain state laws may,

circumstances, require us to notify affected individuals

of security breaches of computer databases that contain their

personal information.

These laws may also require us to notify law enforcement,

regulators or consumer reporting agencies

in the event of a data breach, as well as businesses and governmental agencies

that own data.

Community Reinvestment Act and Consumer Laws

The Bank is subject to the provisions of the CRA and the Federal Reserves regulations thereunder.

Under the CRA, all FDIC-insured institutions have a

continuing and affirmative obligation, consistent with their safe and sound operation, to help meet the credit needs for their entire communities, including low- and moderate-income neighborhoods.

requires a depository institutions primary federal regulator to periodically assess the institutions record of assessing and meeting the credit needs of the communities served by that institution, including

low- and moderate-income neighborhoods.

The bank regulatory agencys CRA assessment is publicly available.

Further, consideration of the CRA is required of any FDIC-insured institution that has applied

The Bank is subject to the provisions of the CRA and the Fede

ral Reserve’s regulations thereunder.

Under the CRA, all

FDIC-insured institutions have a continuing and affirmative

obligation, consistent with their safe and sound operation, to

help meet the credit needs for their entire communities, including low-

and moderate-income neighborhoods.

requires a depository institution’s

primary federal regulator to periodically assess the institution’s

record of assessing and

meeting the credit needs of the communities served by that institution,

including low- and moderate-income neighborhoods.

The bank regulatory agency’s CRA

assessment is publicly available.

Further, consideration of the CRA is required

FDIC-insured institution that has applied to:

(i) charter a national bank;

(ii) obtain deposit insurance coverage for a newly-chartered institution;

(iii) establish a new branch office that accepts deposits;

(ii) obtain deposit insurance coverage for a newly-

chartered institution;

(iii) establish a new branch office that

accepts deposits;

(iv) relocate an office;

or (v) merge or consolidate with,

or acquire the assets or assume the liabilities of, an FDIC-insured financial institution.

In the case of bank holding company applications to acquire a bank or other bank holding company, the Federal Reserve will assess the records of each

subsidiary depository institution of the applicant bank holding company, and such records may be the basis for denying the application.

A less than satisfactory CRA rating will slow, if not preclude, acquisitions, and new branches and other

expansion activities and may prevent a company from becoming a financial holding company.

CRA agreements with private parties must be disclosed and annual CRA reports must be made to a banks

primary federal regulator.

A financial holding company election, and such election and financial holding company activities are permitted to be continued, only if any affiliated bank has not received less than a satisfactory CRA rating.

The federal CRA regulations require that evidence of discriminatory, illegal or abusive lending practices be considered in the CRA evaluation.

and the FDIC have new CRA rules proposed.

The proposal seeks comments on ways to increase lending and services to people and in low- and moderate-income areas and clarify and expand the types of activities

eligible for CRA consideration, in light of changes in the banking.

The Federal Reserve has not joined this proposal and has its own views of the CA and how to join the OCC in the publication of modernizing CRA, tailoring the CRA regulations for

banks of different sizes and improving the consistency and predictability of CRA evaluations and ratings.

The Bank is also subject to, among other

things, the Equal Credit Opportunity Act (the ECOA) and the Fair Housing Act and other fair lending laws, which prohibit discrimination based on race or color, religion, national origin, sex and familial status in any aspect of a

consumer or commercial credit or residential real estate transaction.

The Department of Justice (the DOJ), and the federal bank regulatory agencies have issued an Interagency Policy Statement on Discrimination in Lending to provide

guidance to financial institutions in determining whether discrimination exists, how the agencies will respond to lending discrimination, and what steps lenders might take to prevent discriminatory lending practices.

The DOJ has prosecuted what it

regards as violations of the ECOA, the Fair Housing Act, and the fair lending laws, generally.

The federal bank regulators have updated their guidance

several times on overdrafts, including overdrafts incurred at automated teller machines and point of sale terminals.

consolidate with, or acquire the assets or assume the liabilities of,

an FDIC-insured financial institution.

In the case of bank

holding company applications to acquire a bank or other

bank holding company, the Federal

Reserve will assess the records

of each subsidiary depository institution of the applicant bank holding

company, and such records

may be the basis for

denying the application.

A less than satisfactory CRA rating will slow,

if not preclude, acquisitions, and new branches and

other expansion activities and may prevent a company from becoming

a financial holding company.

CRA agreements with private parties must be disclosed and annual

CRA reports must be made to a bank’s

primary federal

A financial holding company election, and such election and financial holding

company activities are permitted

to be continued, only if any affiliated bank has not received

less than a “satisfactory” CRA rating.

The federal CRA

regulations require that evidence of discriminatory,

illegal or abusive lending practices be considered in the CRA

On December 13, 2019, the FDIC and OCC issued a joint notice

of proposed rulemaking seeking comment on modernizing

the agencies’ CRA regulations.

The OCC issued final revised

CRA Rules effective October 1, 2020, with compliance dates

of October 1, 2020, and January 1, 2023 or 2024.

has not issued final revised CRA regulations.

24, 2020, the OCC sought additional comment on the general

performance standards of its CRA regulations.

21, 2020, the Federal Reserve issued an advanced notice of proposed

rulemaking seeking comment on ways to strengthen,

clarify and tailor its CRA regulations, which, if adopted,

would govern the Bank’s CRA compliance.

Under the Federal

Reserve proposal, “small banks” would be limited to banks with assets

of $750 million or $1 billion, and could elect

between the existing CRA rules or any newly adopted CRA rules.

The Bank is also subject to, among other things, the Equal Credit

Opportunity Act (the “ECOA”) and the Fair Housing Act

and other fair lending laws, which prohibit discrimination based

on race or color, religion, national origin,

sex and familial

status in any aspect of a consumer or commercial credit or

residential real estate transaction.

The Department of Justice

(the “DOJ”), and the federal bank regulatory agencies have issued

an Interagency Policy Statement on Discrimination in

Lending to provide guidance to financial institutions in determining whether

discrimination exists, how the agencies will

respond to lending discrimination, and what steps lenders might take

to prevent discriminatory lending practices.

has prosecuted what it regards as violations of the ECOA, the

Fair Housing Act, and the fair lending laws, generally.

The federal bank regulators have updated their guidance several

times on overdrafts, including overdrafts incurred at

automated teller machines and point of sale terminals.

Overdrafts also have been a CFPB concern.

Among other things, the federal regulators require banks to monitor accounts and to limit

the use of overdrafts by customers as a form of short-term, high-cost credit, including, for example, giving customers who overdraw their accounts on more than six occasions where a fee is charged in a rolling 12 month period a reasonable

opportunity to choose a less costly alternative and decide whether to continue with fee-based overdraft coverage.

It also encourages placing appropriate daily limits on overdraft fees, and asks banks to

consider eliminating overdraft fees for transactions that overdraw an account by a de minimis amount.

Overdraft policies, processes, fees and disclosures are frequently the subject of litigation against banks in various jurisdictions.

federal bank regulators continue to consider responsible small dollar lending, including overdrafts and related fee issues.

The CFPB proposed on February 6, 2019 to rescind its mandatory underwriting standards for loans covered by its 2017

Payday, Vehicle Title and Certain High-Cost Installment Loans rule, and has separately proposed delaying the effectiveness of such 2017 rule.

has a broad mandate to regulate consumer financial products and services, whether or not offered by banks or their affiliates.

The CFPB has the authority to adopt regulations and enforce various laws, including fair lending laws, the Truth in

Lending Act, the Electronic Funds Transfer Act, mortgage lending rules, the Truth in Savings Act, the Fair Credit Reporting Act and Privacy of Consumer Financial Information rules.

Although the CFPB does not examine or supervise banks with less than

$10 billion in assets, banks of all sizes are affected by the CFPBs regulations, and the precedents set in CFPB enforcement actions and interpretations.

Among other things,

the federal regulators require banks to monitor accounts and

to limit the use of overdrafts by customers as a form of short-

term, high-cost credit, including, for example, giving customers who

overdraw their accounts on more than six occasions

where a fee is charged in a rolling 12 month period

a reasonable opportunity to choose a less costly alternative and decide

whether to continue with fee-based overdraft coverage.

It also encourages placing appropriate daily limits on overdraft

fees, and asks banks to consider eliminating overdraft fees for

transactions that overdraw an account by a

Overdraft policies, processes, fees and disclosures are

frequently the subject of litigation against banks in various

jurisdictions.

The federal bank regulators continue to consider

responsible small dollar lending, including overdrafts and

related fee issues and issued principals for offering small

-dollar loans in a responsible manner on May 20, 2020.

proposed on February 6, 2019 to rescind its mandatory underwriting

standards for loans covered by its 2017 Payday,

Title and Certain High-Cost Installment Loans

rule, and has separately proposed delaying the effectiveness

The CFPB has a broad mandate to regulate consumer financial

products and services, whether or not offered by banks

their affiliates.

The CFPB has the authority to adopt regulations and enforce

various laws, including fair lending laws, the

Truth in Lending Act, the Electronic Funds Transfer

Act, mortgage lending rules, the Truth in Savings Act,

the Fair Credit

Reporting Act and Privacy of Consumer Financial Information

Although the CFPB does not examine or supervise

banks with less than $10 billion in assets, banks of all sizes are

affected by the CFPB’s

regulations, and the precedents

in CFPB enforcement actions and interpretations.

Residential Mortgages

CFPB regulations require that

lenders determine whether a consumer has the ability to repay a mortgage loan.

These regulations establish certain minimum requirements for creditors when making ability to repay determinations, and provide certain safe

harbors from liability for mortgages that are qualified mortgages and are not higher-priced. Generally, these CFPB regulations apply to all consumer, closed-end loans secured by a

dwelling including home-purchase loans, refinancing and home equity loanswhether first or subordinate lien.

Qualified mortgages must generally satisfy detailed requirements related to product features, underwriting standards, and requirements

where the total points and fees on a mortgage loan cannot exceed specified amounts or percentages of the total loan amount.

CFPB regulations require that lenders determine whether a consumer

has the ability to repay a mortgage loan.

regulations establish certain minimum requirements for creditors

when making ability to repay determinations, and provide

certain safe harbors from liability for mortgages that are "qualified

mortgages" and are not “higher-priced.”

these CFPB regulations apply to all consumer,

closed-end loans secured by a dwelling including home

-purchase loans,

refinancing and home equity loans—whether first or subordinate

Qualified mortgages must generally satisfy detailed

requirements related to product features, underwriting standards,

and requirements where the total points and fees on a

mortgage loan cannot exceed specified amounts or percentages of the

total loan amount.

Qualified mortgages must have:

(1) a term not exceeding 30 years;

(2) regular periodic payments that do not result

in negative amortization, deferral of principal repayment, or a balloon payment;

(3) and be supported with documentation of the borrower and its credit.

We focus our residential mortgage origination on qualified mortgages and those that meet

our investors requirements, but we may make loans that do not meet the safe harbor requirements for qualified mortgages.

Growth, Regulatory Relief, and Consumer Protection Act of 2018 (the 2018 Growth Act) provides that certain residential mortgages held in portfolio by banks with less than $10 billion in consolidated assets automatically are deemed

qualified mortgages. This relieves smaller institutions from many of the requirements to satisfy the criteria listed above for qualified mortgages. Mortgages meeting the qualified mortgage safe harbor may not have

negative amortization, must follow prepayment penalty limitations included in the Truth in Lending Act, and may not have fees greater than 3% of the total value of the loan.

The Bank generally services the loans it originates, including those it sells.

The CFPBs mortgage

servicing standards include requirements regarding force-placed insurance, certain notices prior to rate adjustments on adjustable rate mortgages, and periodic disclosures to borrowers.

Servicers are prohibited from processing foreclosures when a

loan modification is pending, and must wait until a loan is more than 120 days delinquent before initiating a foreclosure action.

Servicers must provide borrowers with direct and ongoing access to its personnel, and provide prompt review of any

loss mitigation application.

Servicers must maintain accurate and accessible mortgage records for the life of a loan and until one year after the loan is paid off or transferred.

These standards increase the cost and compliance risks of servicing

mortgage loans, and the mandatory delays in foreclosures could result in loss of value on collateral or the proceeds we may realize from a sale of foreclosed property.

The Federal Housing Finance Authority (FHFA) updated, effective January 1, 2016, The Federal National Mortgage Associations

(Fannie Maes) and the Federal Home Loan Mortgage Corporation (Freddie Macs) (individually and collectively, GSE) repurchase rules, including the kinds of loan defects that could lead to a repurchase

request to, or alternative remedies with, the mortgage loan originator or seller.

(2) regular periodic

payments that do not result in negative amortization, deferral of

principal repayment, or a balloon payment;

(3) and be supported

with documentation of the borrower and its credit.

December 10, 2020, the CFPB issued final rules related to

“qualified mortgage” loans.

Lenders are required under the law

to determine that consumers have the ability to repay mortgage

loans before lenders make those loans.

Loans that meet

standards for QM loans are presumed to be loans for which consumers

have the ability to repay.

We focus our residential

mortgage origination on qualified mortgages and those that meet

our investors’ requirements, but

we may make loans that do not meet the safe harbor requirements

for “qualified mortgages.”

The Economic Growth, Regulatory Relief, and Consumer Protection

Act of 2018 (the “2018 Growth Act”) provides that

certain residential mortgages held in portfolio by banks with less than

$10 billion in consolidated assets automatically are

deemed “qualified mortgages.” This relieves smaller institutions from

many of the requirements to satisfy the criteria listed

above for “qualified mortgages.” Mortgages meeting the “qualified

mortgage” safe harbor may not have negative

amortization, must follow prepayment penalty limitations included

in the Truth in Lending Act, and may not have

greater than 3% of the total value of the loan.

The Bank generally services the loans it originates, including those it

The CFPB’s mortgage servicing standards

include requirements regarding force-placed insurance, certain

notices prior to rate adjustments on adjustable rate

mortgages, and periodic disclosures to borrowers.

Servicers are

prohibited from processing foreclosures when a loan

modification is pending, and must wait until a loan is more than 120

days delinquent before initiating a foreclosure action.

Servicers must provide borrowers with direct and ongoing access

to its personnel, and provide prompt review of any loss

mitigation application.

Servicers must maintain accurate and accessible

mortgage records for the life of a loan and until one

year after the loan is paid off or transferred.

standards increase the cost and compliance risks of servicing mortgage

loans, and the mandatory delays in foreclosures could result in loss of

value on collateral or the proceeds we may realize

from a sale of foreclosed property.

The Federal Housing Finance Authority (“FHFA”)

updated, effective January 1, 2016, The Federal

National Mortgage

Association’s (“Fannie Mae’s”)

and the Federal Home Loan Mortgage Corporation (“Freddie

Mac’s”) (individually and

collectively, “GSE”) repurchase

rules, including the kinds of loan defects that could lead to a

repurchase request to, or

alternative remedies with, the mortgage loan originator or

These rules became effective January 1, 2016.

FHFA also has updated these GSEs representations and warranties framework and provided an independent dispute

resolution (IDR) process to allow a neutral third party to resolve demands after the GSEs quality control and appeal processes have been exhausted.

The Bank is subject to the CFPBs integrated disclosure rules under the Truth in Lending Act and the Real Estate Settlement Procedures Act, referred to

as TRID, for credit transactions secured by real property.

The TRID rules adversely affected our mortgage originations in 2016, when we revised our systems and processes to comply with these rules.

Our residential mortgage strategy,

product offerings, and profitability may change as these regulations are interpreted and applied in practice, and may also change due to any restructuring of Fannie Mae and Freddie Mac as part of the resolution of their conservatorships.

Growth Act reduced the scope of TRID rules by eliminating the wait time for a mortgage, if an additional creditor offers a consumer a second offer with a lower annual percentage rate.

Congress encouraged federal regulators to provide better guidance

on TRID in an effort to provide a clearer understanding for consumers and bankers alike.

The law also provides partial exemptions from the collection, recording and reporting requirements under Sections 304(b)(5) and (6) of the Home Mortgage

Disclosure Act (HMDA), for those banks with fewer than 500 closed-end mortgages or less than 500 open-end lines of credit in both of the

preceding two years, provided the banks rating under the CRA for the previous two years has been at least satisfactory. On August 31, 2018, the CFPB issued an interpretive and procedural rule to implement and clarify these

requirements under the 2018 Growth Act.

has updated these GSEs’ representations and warranties framework

and provided an independent dispute resolution

(“IDR”) process to allow a neutral third party to resolve demands

after the GSEs’ quality control and appeal processes have

been exhausted.

The Bank is subject to the CFPB’s

integrated disclosure rules under the Truth in Lending

Act and the Real Estate

Settlement Procedures Act, referred to as “TRID”, for

credit transactions secured by real property.

Our residential mortgage

strategy, product offerings,

and profitability may change as these regulations are interpreted

and applied in practice, and

may also change due to any restructuring of Fannie Mae and

Freddie Mac as part of the resolution of their conservatorships.

The 2018 Growth Act reduced the scope of TRID rules by eliminating

the wait time for a mortgage, if an additional creditor

offers a consumer a second offer with a lower

annual percentage rate.

Congress encouraged federal

regulators to provide

better guidance on TRID in an effort to provide

a clearer understanding for consumers and bankers alike.

provides partial exemptions from the collection, recording and reporting

requirements under Sections 304(b)(5) and (6) of

the Home Mortgage Disclosure Act (“HMDA”), for those banks with

fewer than 500 closed-end mortgages or less than

500 open-end lines of credit in both of the preceding two years,

provided the bank’s rating under

the CRA for the previous

two years has been at least “satisfactory.”

On August 31, 2018, the CFPB issued an interpretive and procedural

implement and clarify these requirements under the 2018

The Coronavirus Aid, Relief, and Economic Security Act (“CARES

Act”) was enacted on March 27, 2020.

Section 4013 of

the CARES Act, “Temporary

Relief From Troubled Debt Restructurings,”

provides banks the option to temporarily

suspend certain requirements under ASC 340-10 TDR classifications

for a limited period of time to account for the effects

On April 7, 2020, the Federal Reserve and the

other banking agencies and regulators issued a statement,

“Interagency Statement on Loan Modifications and Reporting

for Financial Institutions Working

With Customers

by the Coronavirus (Revised)” (the “Interagency Statement on

COVID-19 Loan Modifications”), to encourage banks to

work prudently with borrowers and to describe the agencies’

interpretation of how accounting rules under ASC 310-40

“Troubled Debt Restructurings by Creditors,”

apply to covered modifications.

The Interagency Statement on

Loan Modifications was supplemented on June 23, 2020

by the Interagency Examiner Guidance for Assessing Safety and

Soundness Considering the Effect of the COVID-19

Pandemic on Institutions.

If a loan modification is eligible,

elect to account for the loan under section 4013 of the CARES

If a loan modification is not eligible under section

4013, or if the bank elects not to account for the loan modification

under section 4013, the Revised Statement includes

criteria when a bank may presume a loan modification is not

a TDR in accordance with ASC 310-40.

Section 4021 of the CARES Act allows borrowers under 1-to

-4 family residential mortgage loans sold to Fannie Mae to

request forbearance to the servicer after affirming that

such borrower is experiencing financial hardships during the

COVID-19 emergency.

Such forbearance will be up to 180 days, subject to

up to a 180 day extension.

During forbearance,

no fees, penalties or interest shall be charged beyond

those applicable if all contractual payments were fully and timely

Except for vacant or abandoned properties, Fannie Mae

servicers may not initiate foreclosures on similar procedures

or related evictions or sales until December 31, 2020.

On February 9.

2021, the forbearance period was extended to March

31, 2021 after being extended to February 28, 2021.

Borrowers who are on a COVID-19 forbearance plan as of February

28, 2021 may apply for an additional forbearance extension of

up to three additional months.

The Bank sells mortgage

loans to Fannie Mae and services these on an actual/actual basis.

As a result, the Bank is not obligated to make any

advances to Fannie Mae on principal and interest on such mortgage

loans where the borrower is entitled to forbearance.

Anti-Money Laundering and Sanctions

The International Money Laundering Abatement and Anti-Terrorism Funding Act of 2001 specifies know your customer requirements that obligate

financial institutions to take actions to verify the identity of the account holders in connection with opening an account at any U.S.

The International Money Laundering Abatement and Anti-Terrorism

Funding Act of 2001 specifies “know your customer”

requirements that obligate financial institutions to take actions

to verify the identity of the account holders in connection

with opening an account at any U.S.

financial institution.

Bank regulators are required to consider compliance with anti-money laundering laws in

acting upon merger and acquisition and other expansion proposals under the BHC Act and the Bank Merger Act, and sanctions for violations of this Act can be imposed in an amount equal to twice the sum involved in the violating transaction, up to

Under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the

USA PATRIOT Act), financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as to enhanced due diligence and know your customer standards in their dealings

with foreign financial institutions and foreign customers.

The USA PATRIOT Act requires financial institutions to establish anti-money laundering

programs, and sets forth minimum standards, or pillars for these programs, including:

Bank regulators are required to consider compliance with anti-

money laundering laws in acting upon merger and acquisition

and other expansion proposals under the BHC Act and the

Bank Merger Act, and sanctions for violations of this Act can

be imposed in an amount equal to twice the sum involved in

the violating transaction, up to $1 million.

Under the Uniting and Strengthening America by Providing Appropriate

Tools Required

to Intercept and Obstruct

Terrorism Act of 2001

(the “USA PATRIOT

Act”), financial institutions are subject to prohibitions against specified

financial transactions and account relationships as well as to

enhanced due diligence and “know your customer” standards

in their dealings with foreign financial institutions and foreign customers.

The USA PATRIOT

Act requires financial institutions to establish anti-money laundering

programs, and sets forth

minimum standards, or “pillars” for these programs, including:

the development of internal policies, procedures, and controls;

3 unchanged sentences

ongoing customer due diligence and monitoring.

New federal Financial Crimes Enforcement Network (FinCEN) rules effective May 2018 require banks

to know the beneficial owners of customers that are not natural persons, update customer information in order to develop a customer risk profile, and generally monitor such matters.

The United States has imposed various sanctions upon various foreign countries, such as Iran, North Korea, Russia and Venezuela, and their certain government

officials and persons.

Banks are required to comply with these sanctions, which require additional customer screening and transaction monitoring.

Federal Financial Crimes Enforcement Network (“FinCEN”)

rules effective May 2018 require banks to know the beneficial

owners of customers that are not natural persons, update customer information

in order to develop a customer risk profile,

and generally monitor such matters.

On August 13, 2020, the federal bank regulators issued a joint statement

clarifying that isolated or technical violations or

deficiencies are generally not considered the kinds of problems that

would result in an enforcement action.

The statement

addresses how the agencies evaluate violations of individual

pillars of the Bank Secrecy Act and anti-money laundering

(“AML/BSA”) compliance program.

It describes how the agencies incorporate

the customer due diligence regulations and

recordkeeping requirements issued by the U.S.

Department of

the Treasury (“Treasury”)

as part of the internal controls

pillar of a financial institution's AML/BSA compliance program.

On September 16, 2020, FinCEN issued an advanced notice of

proposed rulemaking seeking public comment on a wide

range of potential regulatory amendments under the Bank Secrecy Act.

The proposal seeks comment on incorporating an

“effective and reasonably designed” AML/BSA program

component to empower financial institutions to allocate

more effectively.

This component also would seek to implement a common

understanding between supervisory agencies

and financial institutions regarding the necessary

AML/BSA program elements, and would seek to impose minimal

additional obligations on AML programs that already comply under

the existing supervisory framework.

On October 23, 2020, FinCEN and the Federal Reserve invited

comment on a proposed rule that would amend the

recordkeeping and travel rules under the Bank Secrecy Act, which would

lower the applicable threshold from $3,000 to

$250 for international transactions and apply these to transactions

using convertible virtual currencies and digital assets

with legal tender status.

On January 1, 2021, Congress enacted the Anti-Money Laundering

Act of 2020 and the Corporate Transparency Act

(collectively, the “AML Act”),

to strengthen anti-money laundering and countering terrorism financing

other things, the AML Act:

uniform disclosure of beneficial ownership information for all

and foreign entities conducting business

potential fines and penalties for BSA violations and

improves whistleblower incentives;

the risk-based approach to AML compliance;

the duties and powers FinCEN;

coordination and information-sharing among financial institutions,

financial regulators and foreign

financial regulators.

The United States has imposed various sanctions upon various foreign

countries, such as China, Iran, North Korea, Russia

and Venezuela,

and their certain government officials and persons.

Banks are required to comply with these sanctions,

which require additional customer screening and transaction monitoring.

Other Laws and Regulations

The Company is also required

to comply with various corporate governance and financial reporting requirements under the Sarbanes-Oxley Act of 2002, as well as related rules and regulations adopted by the SEC, the Public Company Accounting Oversight Board and Nasdaq.

particular, the Company is required to report annually on internal controls as part of its annual report pursuant to Section 404 of the Sarbanes-Oxley Act.

The Company has evaluated its controls, including compliance with the SEC rules on internal controls, and expects to continue to spend significant amounts of

time and money on compliance with these rules.

If the Company fails to comply with these internal control rules in the future, it may materially adversely affect its reputation, its ability to obtain the necessary certifications to its financial

statements, its relations with its regulators and other financial institutions with which it deals, and its ability to access the capital markets and offer and sell Company securities on terms and conditions acceptable to the Company.

Companys assessment of its financial reporting controls as of December 31, 2019 are included in this report with no material weaknesses reported.

Payment of Dividends and Repurchases of Capital Instruments

The Company is also required to comply with various corporate

governance and financial reporting requirements under the

Sarbanes-Oxley Act of 2002, as well as related rules and regulations

adopted by the SEC, the Public Company Accounting

Oversight Board and Nasdaq.

In particular,

the Company is required to report annually on internal contro

ls as part of its

annual report pursuant to Section 404 of the Sarbanes-Oxley Act.

The Company has evaluated its controls, including compliance

with the SEC rules on internal controls, and expects to

continue to spend significant amounts of time and money on compliance

with these rules.

If the Company fails to comply

with these internal control rules in the future, it may materially

adversely affect its reputation, its ability to ob

necessary certifications to its financial statements, its relations

with its regulators and other financial institutions with which

it deals, and its ability to access the capital markets and offer

and sell Company securities on terms and conditions

acceptable to the Company.

The Company’s assessment of its

financial reporting controls as of December 31, 2020 are

included in this report with no material weaknesses reported.

Payment of Dividends and Repurchases of

Capital Instruments

The Company is a legal entity separate and distinct from the Bank.

The Companys primary source of cash is dividends from the Bank.

Prior regulatory

approval is required if the total of all dividends declared by a state member bank (such as the Bank) in any calendar year will exceed the sum of such banks net profits for the year and its retained net profits for the preceding two calendar

years, less any required transfers to surplus.

During 2019, the Bank paid cash dividends of approximately $8.6 million to the Company.

At December 31, 2019, the Bank could have declared and paid additional dividends of approximately

$8.0 million without prior regulatory approval.

In addition, the Company and the Bank are subject to various general regulatory policies and

requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums.

The appropriate federal and state regulatory authorities are authorized to determine when the payment of dividends would be an

unsafe or unsound practice, and may prohibit such dividends.

The Federal Reserve has indicated that paying dividends that deplete a state member banks capital base to an inadequate level would be an unsafe and unsound banking practice.

Federal Reserve has indicated that depository institutions and their holding companies should generally pay dividends only out of current years operating earnings.

Federal Reserve Supervisory Letter SR-09-4 (February 24, 2009), as revised

December 21, 2015, applies to dividend payments, stock redemptions and stock repurchases.

Prior consultation with the Federal Reserve supervisory staff is required before:

redemptions or repurchases of capital instruments when the bank holding company is experiencing financial

redemptions and purchases of common or perpetual preferred stock which would reduce such Tier 1 capital at end of

the period compared to the beginning of the period.

Bank holding company directors must consider different factors to ensure that its dividend level is prudent

relative to maintaining a strong financial position, and is not based on overly optimistic earnings scenarios, such as potential events that could affect its ability to pay, while still maintaining a strong financial position.

The Company’s primary source

of cash is dividends

from the Bank.

Prior regulatory approval is required if the total of

all dividends declared by a state member bank (such as

the Bank) in any calendar year will exceed the sum of such bank’s

net profits for the year and its retained net profits for the

two calendar years, less any required transfers to surplus.

2020, the Bank paid cash dividends of

approximately $3.6 million to the Company.

At December 31, 2020, the Bank could have declared and paid

dividends of approximately $6.8 million without prior

regulatory approval.

In addition, the Company and the Bank are subject to various general

regulatory policies and requirements relating to the

payment of dividends, including requirements to maintain capital

above regulatory minimums.

The appropriate federal and

state regulatory authorities are authorized to determine when

the payment of dividends would be an unsafe or unsound

practice, and may prohibit such

The Federal Reserve has indicated that paying dividends

that deplete a state

member bank’s capital base to

an inadequate level would be an unsafe and unsound banking practice.

The Federal Reserve

has indicated that depository institutions and their holding companies

should generally pay dividends only out of current

year’s operating earnings.

Federal Reserve Supervisory Letter SR-09-4 (February 24,

2009), as revised December 21, 2015, applies to dividend

payments, stock redemptions and stock repurchases.

Prior consultation with the Federal Reserve supervisory staff

required before:

redemptions or repurchases of capital instruments when the bank

holding company is experiencing financial

redemptions and purchases of common or perpetual preferred

stock which would reduce such Tier 1 capital

end of the period compared to the beginning of the period.

Bank holding company directors must consider different

factors to ensure that its dividend level is prudent relative to

maintaining a strong financial position, and is not based on overly optimistic

earnings scenarios, such as potential events

that could affect its ability to pay,

while still maintaining a strong financial position.

As a general matter,

the Federal Reserve has indicated that the board of directors of a bank holding company should consult with the Federal Reserve and eliminate, defer or significantly reduce the bank holding companys dividends if:

its net income available to shareholders for the past four quarters, net of dividends previously paid during that

Reserve has indicated that the board of directors of a bank holding

company should consult with the Federal Reserve and

eliminate, defer or significantly reduce the bank holding company’s

dividends if:

its net income available to shareholders for the past four quarters,

net of dividends previously paid during that

period, is not sufficient to fully fund the dividends;

its prospective rate of earnings retention is not consistent with its capital needs and overall current and

its prospective rate of earnings retention is not consistent with its capital

needs and overall current and

prospective financial condition;

It will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.

The Basel III Capital Rules further limit permissible dividends, stock repurchases and discretionary bonuses by the Company and the

Bank, respectively, unless the Company and the Bank meet capital conservation buffer requirement effective January 1, 2019.

It will not meet, or is in danger of not meeting, its minimum regulatory

capital adequacy ratios.

The Basel III Capital Rules further limit permissible dividends,

stock repurchases and discretionary bonuses by the

Company and the Bank, respectively,

unless the Company and the Bank meet capital conservation buffer

effective January 1, 2019.

See "Basel III Capital Rules."

Under a new provision of the capital rules, effective January

1, 2021, if a bank’s capital ratios

are within its buffer

requirements, the maximum amount of capital distributions it

can make is based on its eligible retained income.

retained income equals the greater of:

net income for the four preceding calendar quarters, net of any distributions

and associated tax effects not

already reflected in net income;

the average net income over the preceding four quarters.

Regulatory Capital Changes

Simplification

The federal bank

regulators issued final rules on July 22, 2029 simplifying their capital rules.

The last of these changes become effective on April 1, 2020.

The principal changes for standardized approaches institutions, such the Company and the Bank are:

Deductions from capital for certain items, such as temporary difference DTAs, MSAs and investments in

unconsolidated were decreased to those amounts that individually exceed 25% of CET1;

Institutions can elect to deduct investments in unconsolidated subsidiaries or subject them to capital

requirements;

Minority interests would be includable up to 10% of (i) CET1 capital, (ii) Tier 1 capital and

(iii) total capital.

In December 2019, the federal banking regulators published a final rule, effective April 1, 2020, to implement the high volatility commercial real

estate, or HVCRE changes in Section 214 of the 2018 Growth Act.

The new rules define HVCRE loans as loans secured by land or improved real property that:

finance or refinance the acquisition, development, or construction of real property;

the purpose of such loans must be to acquire, develop, or improve such real property into income producing

the repayment of the loan must depend on the future income or sales proceeds from, or refinancing of, such real

Various exclusions from HVCRE are specified.

Banking institutions and their holding companies are required to assign 150%

The federal bank regulators issued final rules on July 22, 2019

simplifying their capital rules.

The last of these changes

become effective on April 1, 2020.

The principal changes for standardized approaches institutions, such

the Company and

the Bank are:

Deductions from capital for certain items, such as temporary difference

DTAs, MSAs and

investments in

unconsolidated were decreased to those amounts that individually exceed

Institutions can elect to deduct investments in unconsolidated

subsidiaries or subject them to capital requirements;

Minority interests would be includable up to 10% of (i) CET1

capital, (ii) Tier 1 capital and (iii) total

In December 2019, the federal banking regulators published

a final rule, effective April 1, 2020, to implement the “high

volatility commercial real estate,” or “HVCRE” changes in Section 214

of the 2018 Growth Act.

The new rules define

HVCRE loans as loans

secured by land or improved real property that:

finance or refinance the acquisition, development, or construction

of real property;

the purpose of such loans must be to acquire, develop,

or improve such real property into income producing

the repayment of the loan must depend on the future income or

sales proceeds from, or refinancing of, such real

exclusions from HVCRE are specified.

Banking institutions and their holding companies are required

150% risk weight to HVCRE loans.

Community Capital Rule

On October 29, 2019, the federal banking regulators adopted, effective January 1, 2020, an optional community banking leverage ratio framework

applicable to depository institutions and their holding companies intended to reduce regulatory burdens for qualifying community banking organizations that do not use advanced approaches capital measures, and that have:

On October 29, 2019, the federal banking regulators adopted,

effective January 1, 2020, an optional community banking

leverage ratio framework applicable to depository institutions

and their holding companies intended to reduce regulatory

burdens for qualifying community banking organizations

that do not use advanced approaches capital measures, and that

less than $10 billion of assets;

a leverage ratio greater than 9%;

off-balance sheet exposures of 25% or less of total consolidated assets;

trading assets plus trading liabilities of less than 5% of total consolidated assets.

The leverage ratio would be Tier 1 capital divided by average total consolidated assets, taking into account the capital simplification discussed above and

the CECL related capital transitions.

The community bank leverage ratio will be the sole capital measure, and electing institutions will not have to

calculate or use any other capital measure.

It is estimated that 85% of depository institutions will be eligible to use this rule.

The Company expect they would be eligible to make such election, if they determined it desirable.

off-balance sheet exposures of 25% or less of total

consolidated assets;

trading assets plus trading liabilities of less than 5% of total consolidated

The leverage ratio would be Tier 1

capital divided by average total consolidated assets, taking into account

simplification discussed above and the CECL related capital

The community bank leverage ratio will be the sole capital measure,

and electing institutions will not have to calculate or

use any other capital measure.

It is estimated that 85% of depository institutions will be eligible to

use this rule.

Company expect they would be eligible to make such election, if they determined

it desirable.

After preliminary

consideration, the Company believes that it would still need to calculate the regulatory capital ratios, which investors would find helpful in comparing the Company to others.

The Federal Reserve has risk-based capital

guidelines for bank holding companies and state member banks, respectively.

These guidelines required at year end 2018 a minimum ratio of capital to risk-weighted assets (including certain off-balance sheet

activities, such as standby letters of credit) and capital conservation buffer of 9.875%.

Tier 1 capital includes common equity and related retained earnings and a limited amount of qualifying preferred stock, less goodwill and certain core deposit

Voting common equity must be the predominant form of capital.

Tier 2 capital consists of nonqualifying preferred stock, qualifying subordinated, perpetual, and/or mandatory convertible debt, term subordinated debt and intermediate

term preferred stock, up to 45% of pretax unrealized holding gains on available for sale equity securities with readily determinable market values that are prudently valued, and a limited amount of general loan loss allowance.

consideration, the Company believes that it would still need to

calculate the regulatory capital ratios, which investors would

find helpful in comparing the Company to others.

The Federal Reserve has risk-based capital guidelines for bank holding

companies and state member banks, respectively.

These guidelines required at year end 2019 a minimum ratio

of capital to risk-weighted assets (including certain off

sheet activities, such as standby letters of credit) and capital conservation

buffer of 10.5%.

Tier 1 capital includes common

equity and related retained earnings and a limited amount of qualifying

preferred stock, less goodwill and certain core

deposit intangibles.

common equity must be the predominant form of capital.

Tier 2 capital consists of non–

qualifying preferred stock, qualifying subordinated, perpetual, and/or

mandatory convertible debt, term subordinated debt

and intermediate term preferred stock, up to 45% of pretax

unrealized holding gains on available for sale equity securities

with readily determinable market values that are prudently valued,

and a limited amount of general loan loss allowance.

Tier 1 and Tier

2 capital equals total capital.

In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies not subject

to the Small BHC Policy, and state member banks, which provide for a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets (leverage ratio) equal to 4%.

In addition, the Federal Reserve has established minimum leverage

ratio guidelines for bank holding companies not subject

to the Small BHC Policy,

and state member banks, which provide for a minimum leverage

ratio of Tier 1 capital to adjusted

average quarterly assets (“leverage ratio”) equal to 4%.

However, bank regulators expect banks and bank holding

companies to operate with a higher leverage ratio.

The guidelines also provide that institutions experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory

levels without significant reliance on intangible assets.

Higher capital may be required in individual cases and depending upon a bank holding companys risk profile.

The guidelines also provide that institutions experiencing internal

growth or making acquisitions will be expected to maintain strong capital

positions substantially above the minimum

supervisory levels without significant reliance on intangible

Higher capital may be required in individual cases and

depending upon a bank holding company’s

risk profile.

All bank holding companies and banks are expected to hold capital

commensurate with the level and nature of their risks including the volume and severity of their problem loans.

Lastly, the Federal Reserves guidelines indicate that the Federal Reserve will continue to consider a tangible Tier 1

leverage ratio (deducting all intangibles) in evaluating proposals for expansion or new activity.

The level of Tier 1 capital to risk-adjusted assets is becoming more widely used by the bank regulators to measure capital adequacy.

Reserve has not advised the Company or the Bank of any specific minimum leverage ratio or tangible Tier 1 leverage ratio applicable to them.

Under Federal Reserve policies, bank holding companies are generally expected to operate with capital

positions well above the minimum ratios.

The Federal Reserve believes the risk-based ratios do not fully take into account the quality of capital and interest rate, liquidity, market and operational risks.

Accordingly, supervisory assessments of

capital adequacy may differ significantly from conclusions based solely on the level of an organizations risk-based capital ratio.

Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), among other things, requires the federal banking agencies to take prompt corrective action regarding depository institutions that do not meet minimum capital

commensurate with the level and nature of their risks including the

volume and severity of their problem loans.

Federal Reserve’s guidelines indicate

that the Federal Reserve will continue to consider a “tangible Tier

1 leverage ratio”

(deducting all intangibles) in evaluating proposals for expansion

or new activity.

The level of Tier 1 capital to

risk-adjusted

assets is becoming more widely used by the bank regulators to

measure capital adequacy.

Federal Reserve has not

advised the Company or the Bank of any specific minimum leverage

ratio or tangible Tier 1 leverage ratio

applicable to

Under Federal Reserve policies, bank holding companies are

generally expected to operate with capital positions well

above the minimum ratios.

The Federal Reserve believes the

risk-based ratios do not fully take into account the quality of

capital and interest rate, liquidity,

market and operational risks.

supervisory assessments of capital adequacy

may differ significantly from conclusions based

on the level of an organization’s

risk-based capital ratio.

The Federal Deposit Insurance Corporation Improvement Act of 1991

(“FDICIA”), among other things, requires the federal

banking agencies to take “prompt corrective action” regarding depository

institutions that do not meet minimum capital

requirements.

FDICIA establishes five capital tiers:

well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. A depository

institutions capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation.

See Prompt Corrective Action Rules.

“well capitalized,”

“adequately capitalized,” “undercapitalized,”

“significantly undercapitalized” and “critically undercapitalized.”

A depository institution’s capital tier will

how its capital levels compare to various relevant capital measures

and certain other factors, as established by regulation.

“Prompt Corrective Action Rules.”

Basel III Capital Rules

The Federal Reserve and the other bank regulators adopted in June 2013 final capital rules for bank holding companies and banks implementing the Basel

Committee on Banking Supervisions Basel III:

A Global Regulatory Framework for more Resilient Banks and Banking Systems. These new U.S.

capital rules are called the Basel III Capital Rules, and generally were fully phased-in on January 1, 2019.

The Basel III Capital Rules limit Tier 1 capital to common stock and

noncumulative perpetual preferred stock, as well as certain qualifying trust preferred securities and cumulative perpetual preferred stock issued before May 19, 2010, each of which were grandfathered in Tier 1 capital for bank holding companies

with less than $15 billion in assets.

The Company had no qualifying trust preferred securities or cumulative preferred stock outstanding at December 31, 2019.

The Basel III Capital Rules also introduced a new capital measure, Common

Equity Tier I Capital or CET1. CET1 includes common stock and related surplus, retained earnings and, subject to certain adjustments, minority common equity interests in subsidiaries.

The Federal Reserve and the other bank regulators adopted

in June 2013 final capital rules for bank holding companies and

banks implementing the Basel Committee on Banking Supervision’s

A Global Regulatory Framework for more

Resilient Banks and Banking Systems.”

These new U.S.

capital rules are called the “Basel III

Capital Rules,” and generally

were fully phased-in on January 1, 2019.

The Basel III Capital Rules limit Tier

1 capital to common stock and noncumulative perpetual preferred

stock, as well as

certain qualifying trust preferred securities and cumulative perpetual

preferred stock issued before May 19, 2010, each of

which were grandfathered in Tier

1 capital for bank holding companies with less than $15 billion

had no qualifying trust preferred securities or cumulative preferred

stock outstanding at December 31, 2020.

The Basel III

Capital Rules also introduced a new capital measure, “Common

Equity Tier I Capital” or “CET1.”

CET1 includes common

stock and related surplus, retained earnings and, subject to

certain adjustments, minority common equity interests in

subsidiaries.

CET1 is reduced by deductions for:

Goodwill and other intangibles, other than mortgage servicing assets (MSRs), which are treated

separately, net of associated deferred tax liabilities (DTLs);

Deferred tax assets (DTAs) arising from operating losses and tax credit carryforwards net of

allowances and DTLs;

Goodwill and other intangibles, other than mortgage servicing assets

(“MSRs”), which are treated separately,

of associated deferred tax liabilities (“DTLs”);

Deferred tax assets (“DTAs”)

arising from operating losses and tax credit carryforwards net

of allowances and

Gains on sale from any securitization exposure;

Defined benefit pension fund net assets (i.e., excess plan assets), net of associated DTLs.

The Company made a one-time election in 2015 and, as a result, CET1 will not be adjusted for

certain accumulated other comprehensive income (AOCI).

Defined benefit pension fund net assets (i.e., excess plan assets),

net of associated DTLs.

The Company made a one-time election in 2015 and, as a

result, CET1 will not be adjusted for certain accumulated other

comprehensive income (“AOCI”).

Additional “threshold deductions” of the following that are individually

greater than 10% of CET1 or collectively greater than 15% of CET1 (after the above deductions are also made):

greater than 10% of CET1 or collectively greater

than 15% of CET1 (after the above deductions are also made):

MSAs, net of associated DTLs;

DTAs arising from temporary differences that could not be realized through net operating loss carrybacks, net of

DTAs arising from temporary

differences that could not be realized through net operating loss

carrybacks, net of

any valuation allowances and DTLs;

Significant common stock investments in unconsolidated financial institutions, net of associated DTLs.

As discussed below, recent regulations change these items to simplify and improve their capital treatment.

Noncumulative perpetual preferred stock and Tier 1 minority interest not included in CET1, subject to limits, will qualify as additional Tier I capital.

other qualifying preferred stock, subordinated debt and qualifying minority interests will be included in Tier 2 capital.

In addition to the minimum

risk-based capital requirements, a new capital conservation buffer of CET1 capital of at least 2.5% of total risk weighted assets, will be required.

The capital conservation buffer will be calculated as the lowest of:

the banking organizations CET1 capital ratio minus 4.5%;

the banking organizations tier 1 risk-based capital ratio minus 6.0%;

the banking organizations total risk-based capital ratio minus 8.0%.

Full compliance with the capital conservation buffer is required by January 1, 2019.

At such time,

permissible dividends, stock repurchases and discretionary bonuses will be limited to the following percentages based on the capital conservation buffer as calculated above, subject to any further regulatory limitations, including those based on

risk assessments and enforcement actions:

Significant common stock investments in unconsolidated financial institutions,

net of associated DTLs.

As discussed below, recent

regulations change these items to simplify and improve their

capital treatment.

Noncumulative perpetual preferred stock and Tier

1 minority interest not included in CET1, subject to limits, will qualify as

additional Tier I capital.

All other qualifying preferred stock, subordinated debt and qualifying minority

interests will be

included in Tier 2 capital.

In addition to the minimum risk-based capital requirements, a

new “capital conservation buffer” of CET1

capital of at least

2.5% of total risk weighted assets, will be required.

The capital conservation buffer will be calculated

the banking organization’s

CET1 capital ratio minus 4.5%;

the banking organization’s

tier 1 risk-based capital ratio minus 6.0%;

the banking organization’s

total risk-based capital ratio minus 8.0%.

Full compliance with the capital conservation buffer was

required by January 1, 2019.

At such time, permissible dividends,

stock repurchases and discretionary bonuses will be limited to

the following percentages based on the capital conservation

buffer as calculated above, subject

to any further regulatory limitations, including those based on risk assessments

enforcement actions:

Buffer % Limit

3 unchanged sentences

> 0.625% - 1.250%

The various capital elements and total capital under the Basel III Capital Rules, at January 1, 2018 were and as fully

phased in on January 1, 2019 are:

Effective March 20, 2020, the Federal Reserve and

the other federal banking regulators adopted an interim final rule that

amended the capital conservation buffer in light of the

disruptive effects of the COVID-19 pandemic.

The interim final rule

as a final rule on August 26, 2020.

The new rule revises the definition of

“eligible retained income” for

purposes of the maximum payout ratio to allow banking organizations

to more freely use their capital buffers to promote

lending and other financial intermediation activities, by making the limitations

on capital distributions more gradual.

eligible retained income is now the greater of (i) net income

for the four preceding quarters, net of distributions and

associated tax effects not reflected in net income;

(ii) the average of all net income over the preceding four quarters.

The interim final rule only affects the capital buffers,

and banking organizations were encouraged

to make prudent capital

distribution decisions.

The various capital elements and total capital under the Basel

III Capital Rules, as fully phased in on January 1, 2019

Fully Phased In

January 1, 2019

CET1 Conservation Buffer

Deductions from CET1

Minimum Tier 1 Capital

Minimum Tier 1 Capital plus

Minimum Tier 1 Capital

conservation buffer

Minimum Total Capital

Minimum Total Capital plus

Minimum Total Capital

conservation buffer

Changes in Risk-Weightings

The Basel III Capital Rules significantly change the risk weightings used to determine risk weighted capital adequacy.

Among various other changes, the Basel

III Capital Rules apply a 250% risk-weighting to MSRs, DTAs that cannot be realized through net operating loss carry-backs and significant (greater than 10%) investments in other financial institutions.

A 150% risk-weighted category applies to

high volatility commercial real estate loans, or HVCRE, which are credit facilities for the acquisition, construction or development of real property, excluding

one-to-four family residential properties or commercial real estate projects where:

loan-to-value ratio is not in excess of interagency real estate lending standards;

and (ii) the borrower has contributed capital equal to not less than 15% of the

real estates as completed value before the loan was made.

The Basel III Capital Rules also changed some of the risk weightings used to

determine risk-weighted capital adequacy.

The Basel III Capital Rules significantly change the risk weightings

used to determine risk weighted capital adequacy.

Among various other changes, the Basel III Capital Rules apply a 250%

risk-weighting to MSRs, DTAs

that cannot be

realized through net operating loss carry-backs and significant (greater

than 10%) investments in other financial

institutions.

A 150% risk-weighted category applies to “high volatility commercial

real estate loans,” or “HVCRE,” which

are credit facilities for the acquisition, construction or development of

real property, excluding one

-to-four family

residential properties or commercial real estate projects

(i) the loan-to-value ratio is not in excess of interagency real

estate lending standards;

and (ii) the borrower has contributed

capital equal to not less than 15% of the real estate’s

completed” value before the loan was made.

The Basel III Capital Rules also changed some of the risk weightings

used to determine risk-weighted capital adequacy.

Among other things, the Basel III Capital Rules:

Assigned a 250% risk weight to MSRs;

Assigned up to a 1,250% risk weight to structured securities, including private label mortgage securities, trust

Assigned up to a 1,250% risk weight to structured securities,

including private label mortgage securities, trust

preferred CDOs and asset backed securities;

Retained existing risk weights for residential mortgages, but assign a 100% risk weight to most commercial real

Retained existing risk weights for residential mortgages, but assign

a 100% risk weight to most commercial real

estate loans and a 150% risk-weight for HVCRE;

Assigned a 150% risk weight to past due exposures (other than sovereign exposures and residential mortgages);

Assigned a 250% risk weight to DTAs, to the extent not deducted from capital (subject to certain maximums);

Retained the existing 100% risk weight for corporate and retail loans;

Increased the risk weight for exposures to qualifying securities firms from 20% to 100%.

Assigned a 150% risk weight to past due exposures (other than

sovereign exposures and residential mortgages);

Assigned a 250% risk weight to DTAs,

to the extent not deducted from capital (subject to certain maximums);

Retained the existing 100% risk weight for corporate

and retail loans;

Increased the risk weight for exposures to qualifying securities firms from

HVCRE loans currently have a risk weight of 150%.

Section 214 of the 2018 Growth Act, restricts the federal bank regulators from applying this risk

weight except to certain ADC loans.

The federal bank regulators issued a notice of a proposed rule on September 18, 2018 to implement Section 214 of the 2018 Growth Act, by revising the definition HVCRE.

If this proposal is adopted, it is

expected that this proposal could reduce the Companys risk weighted assets and thereby may increase the Companys risk-weighted capital.

The Financial Accounting Standards

Boards (the FASB) Accounting Standards Update (ASU) No.

2016-13 Financial Instruments Credit Losses (Topic 326):

Measurement of Credit Losses on Financial

Instruments on June 16, 2016, which changed the loss model to take into account current expected credit losses (CECL).

The Federal Reserve and the other federal banking agencies adopted rules effective on April 1, 2019

that allows banking organizations to phase in the regulatory capital effect of a reduction in retained earnings upon adoption of CECL over a three year period.

CECL is effective for the Company beginning January 1, 2023, and its effects upon

the Company have not yet been determined.

of the 2018 Growth Act, restricts the federal bank

regulators from applying this risk weight except to certain ADC loans.

The federal bank regulators issued a notice of a

proposed rule on September 18, 2018 to implement Section 214

of the 2018 Growth Act, by revising the definition

If this proposal is adopted, it is expected that this proposal

could reduce the Company’s risk weighted

thereby may increase the Company’s

risk-weighted capital.

The Financial Accounting Standards Board’s

(the “FASB”) Accounting

Standards Update (“ASU”) No.

2016-13 “Financial

Instruments – Credit Losses (Topic

Measurement of Credit Losses on Financial Instruments” on

June 16, 2016, which

changed the loss model to take into account current expected

credit losses (“CECL”) in place of the incurred loss method.

The Federal Reserve and the other federal banking agencies adopted

rules effective on April 1, 2019 that allows banking

organizations to phase in the regulatory capital effect

of a reduction in retained earnings upon adoption

of CECL over a

three year period.

On May 8, 2020, the agencies issued a statement describing the measurement

of expected credit

using the CECL methodology,

and updated concepts and practices in existing supervisory guidance

that remain applicable.

CECL is effective for the Company beginning January 1,

2023 and has not been adopted early.

effects upon the

not yet been determined.

Prompt Corrective Action Rules

All of the federal bank regulatory agencies regulations establish risk-adjusted measures and relevant capital levels that implement the prompt

corrective action standards.

The relevant capital measures are the total risk-based capital ratio, Tier 1 risk-based capital ratio, Common Equity Tier 1 capital ratio, as well as, the leverage capital ratio.

Under the regulations, a state

member bank will be:

well capitalized if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio

of 8% or greater, a Common Equity Tier 1 capital ratio of 6.5% or greater, a leverage capital ratio of 5% or greater and is not subject to any written agreement, order, capital directive or prompt corrective action directive by a federal bank

regulatory agency to maintain a specific capital level for any capital measure;

adequately capitalized if it has a total risk-based capital ratio of 8% or greater, a Tier 1

risk-based capital ratio of 6% or greater, a Common Equity Tier 1 capital ratio of 4.5% or greater, and generally has a leverage capital ratio of 4% or greater;

undercapitalized if it has a total risk-based capital ratio of less than 8%, a Tier 1 risk-based

capital ratio of less than 6%, a Common Equity Tier 1 capital ratio of less than 4.5% or generally has a leverage capital ratio of less than 4%;

significantly undercapitalized if it has a total risk-based capital ratio of less than 6%, a Tier 1

risk-based capital ratio of less than 4%, a Common Equity Tier 1 capital ratio of less than 3%, or a leverage capital ratio of less than 3%;

critically undercapitalized if its tangible equity is equal to or less than 2% to total assets.

The federal bank regulatory agencies have authority to require additional capital, and have indicated that higher capital levels may be

required in light of market conditions and risk.

Depository institutions that are adequately capitalized for bank regulatory purposes must

receive a waiver from the FDIC prior to accepting or renewing brokered deposits, and cannot pay interest rates or brokered deposits that exceeds market rates by more than 75 basis points.

Banks that are less than adequately capitalized

cannot accept or renew brokered deposits.

FDICIA generally prohibits a depository institution from making any capital distribution (including paying dividends) or paying any management fee to its holding company, if the depository institution

thereafter would be undercapitalized.

Institutions that are undercapitalized are subject to growth limitations and are required to submit a capital restoration plan for approval.

A depository institutions parent holding company must guarantee that the institution will comply with

such capital restoration plan.

The aggregate liability of the parent holding company is limited to the lesser of 5% of the depository institutions total assets at the time it became undercapitalized and the amount necessary to bring the

institution into compliance with applicable capital standards.

If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.

If the controlling holding company fails to fulfill

its obligations under FDICIA and files (or has filed against it) a petition under the federal Bankruptcy Code, the claim against the holding companys capital restoration obligation would be entitled to a priority in such bankruptcy proceeding

over third party creditors of the bank holding company.

Significantly undercapitalized depository institutions may be subject to a number of requirements

and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks.

undercapitalized institutions are subject to the appointment of a receiver or conservator.

Because the Company and the Bank exceed applicable capital requirements, Company and Bank management do not believe that the provisions of FDICIA have

had or are expected to have any material effect on the Company and the Bank or their respective operations.

Section 201 of the 2018 Growth Act

provides that banks and bank holding companies with consolidated assets of less than $10 billion that meet a community bank leverage ratio, established by the federal bank regulators between 8% and 10%, are deemed to satisfy

applicable risk-based capital requirements necessary to be considered well capitalized. The federal banking agencies have the discretion to determine that an institution does not qualify for such treatment due to its risk profile.

institutions risk profile may be assessed by its off-balance sheet exposure, trading of assets and liabilities, notional derivatives exposure, and other methods.

On November 21,

2018, the federal banking agencies issued for public comment a proposal under which a community banking organization would be eligible to elect the community bank leverage ratio framework if it has less than $10 billion in total consolidated

assets, limited amounts of certain assets and off-balance sheet exposures, and a community bank leverage ratio greater than 9%.

A qualifying community banking organization that has chosen the proposed

framework would not be required to calculate the existing risk-based and leverage capital requirements.

This proposal further provides that an institution would be considered to be well-capitalized under the agencies prompt

corrective action rules, provided it has a community bank leverage ratio greater than 9%.

FDICIA directs that each federal bank regulatory agency prescribe standards for depository institutions and depository institution holding companies relating

to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth composition, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb

losses, a minimum ratio of market value to book value for publicly traded shares, safety and soundness, and such other standards as the federal bank regulatory agencies deem appropriate.

All of the federal bank regulatory agencies’ regulations establish

risk-adjusted measures and relevant capital levels that

implement the “prompt corrective action” standards.

The relevant capital measures are the total risk-based capital

Tier 1 risk-based capital ratio, Common equity

tier 1 capital ratio, as well as, the leverage capital

regulations, a state member bank will be:

well capitalized if it has a total risk-based capital ratio of 10% or

greater, a Tier

1 risk-based capital ratio of 8% or

greater, a Common equity tier 1 capital

ratio of 6.5% or greater, a leverage capital

ratio of 5% or greater and is not

subject to any written agreement, order,

capital directive or prompt corrective action directive by a federal bank

regulatory agency to maintain a specific capital level for any capital

“adequately capitalized” if it has a total risk-based capital ratio

of 8% or greater, a Tier

1 risk-based capital ratio of

6% or greater, a Common Equity Tier

1 capital ratio of 4.5% or greater, and generally has

a leverage capital ratio

of 4% or greater;

“undercapitalized” if it has a total risk-based capital ratio of less than 8%,

a Tier 1 risk-based capital ratio

than 6%, a Common Equity Tier 1

capital ratio of less than 4.5% or generally has a leverage capital

ratio of less

“significantly undercapitalized” if it has a total risk-based capital ratio

of less than 6%, a Tier 1 risk-based capital

ratio of less than 4%, a Common Equity Tier

1 capital ratio of less than

3%, or a leverage capital ratio of less than

“critically undercapitalized” if its tangible equity is equal to or

less than 2% to total assets.

The federal bank regulatory agencies have authority to require

additional capital, and have indicated that higher capital

levels may be required in light of market conditions and risk.

Depository institutions that are “adequately capitalized” for bank regulatory

purposes must receive a waiver from the FDIC

prior to accepting or renewing brokered deposits, and cannot

pay interest rates or brokered deposits that exceeds market

rates by more than 75 basis points.

Banks that are less than “adequately capitalized” cannot

accept or renew brokered

FDICIA generally prohibits a depository institution from making any capital

distribution (including paying

dividends) or paying any management fee to its holding company,

if the depository institution thereafter would be

“undercapitalized”.

Institutions that are “undercapitalized” are subject to

growth limitations and are required to submit a

capital restoration plan for approval.

A depository institution’s parent holding

company must guarantee that the institution will comply with such

restoration plan.

The aggregate liability of the parent holding company is limited

to the lesser of 5% of the depository

institution’s total assets at the time

it became undercapitalized and the amount necessary to

bring the institution into

compliance with applicable capital standards.

If a depository institution fails to submit an acceptable

plan, it is treated as if

it is “significantly undercapitalized”.

If the controlling holding company fails to fulfill its obligations under

files (or has filed against it) a petition under the federal Bankruptc

Code, the claim against the holding company’s

restoration obligation would be entitled to a priority in such bankruptcy

proceeding over third party creditors of the bank

holding company.

Significantly undercapitalized depository institutions may be

subject to a number of requirements and restrictions,

including orders to sell sufficient voting stock to become

“adequately capitalized”, requirements to reduce total assets, and

cessation of receipt of deposits from correspondent banks.

“Critically undercapitalized” institutions are subject to the

appointment of a receiver or conservator.

Because the Company and the Bank exceed applicable capital

requirements,

Company and Bank management do not believe that the provisions

of FDICIA have had or are expected to have any

material effect on the Company and the Bank or

their respective operations.

Section 201 of the 2018 Growth Act provides that banks and

bank holding companies with consolidated assets of less than

$10 billion that meet a “community bank leverage ratio,” established

by the federal bank regulators between 8% and 10%,

are deemed to satisfy applicable risk-based capital requirements necessary

to be considered “well capitalized.” The federal

banking agencies have the discretion to determine that an institution

does not qualify for such treatment due to its risk

An institution’s risk pro

file may be assessed by its off-balance sheet exposure,

trading of assets and liabilities,

notional derivatives’ exposure, and other methods.

The federal bank regulators implemented

a CARES Act provision by replacing interim final rules

adopted in March 2020,

temporarily reducing the community bank leverage ratio threshold.

The threshold is 8% through the end of 2020, 8.5%

2021, and 9% beginning January 1, 2022.

quarter grace

periods are allowed to permit banks that temporarily fall

below these thresholds to remain well-capitalized for regulatory purposes.

FDICIA directs that each federal bank regulatory agency prescribe

standards for depository institutions and depository

institution holding companies relating to internal controls, information

systems, internal audit systems, loan documentation,

credit underwriting, interest rate exposure, asset growth composition,

a maximum ratio of classified assets to capital,

minimum earnings sufficient to absorb

losses, a minimum ratio of market value to book value for publicly traded

safety and soundness, and such other standards as the federal

bank regulatory agencies deem appropriate.

Enforcement Policies and Actions

The Federal Reserve

and the Alabama Superintendent monitor compliance with laws and regulations.

The CFPB monitors compliance with laws and regulations applicable to consumer financial products and services.

Violations of laws and regulations, or other unsafe and

unsound practices, may result in these agencies imposing fines, penalties and/or restitution, cease and desist orders, or taking other formal or informal enforcement actions.

Under certain circumstances, these agencies may enforce these remedies

directly against officers, directors, employees and others participating in the affairs of a bank or bank holding company, in the form of fines, penalties, or the recovery, or claw-back, of compensation.

The federal prudential banking regulators

have been bringing more enforcement actions recently.

The Federal Reserve and the Alabama Superintendent monitor

compliance with laws and regulations.

The CFPB monitors

compliance with laws and regulations applicable to consumer

financial products and services.

Violations of laws and

regulations, or other unsafe and unsound practices, may result

in these agencies imposing fines, penalties and/or restitution,

cease and desist orders, or taking other formal or informal enforcement

Under certain circumstances, these

agencies may enforce these remedies directly against officers,

directors, employees and others participating in the affairs

a bank or bank holding company,

in the form of fines, penalties, or the recovery,

or claw-back, of compensation.

federal prudential banking regulators have been bringing more

enforcement actions recently.

Fiscal and Monetary Policy

Banking is a business that depends on interest rate differentials.

In general, the difference between the interest paid by a bank on its deposits and its

other borrowings, and the interest received by a bank on its loans and securities holdings, constitutes the major portion of a banks earnings.

Thus, the earnings and growth of the Company and the Bank, as well as the values of, and earnings

on, its assets and the costs of its deposits and other liabilities are subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies,

particularly the Federal Reserve.

The Federal Reserve regulates the supply of money through various means, including open market dealings in United States government securities, the setting of discount rate at which banks may borrow from the Federal

Reserve, and the reserve requirements on deposits.

The Federal Reserve has been paying interest on depository institutions required and excess reserve

balances since October 2008.

The payment of interest on excess reserve balances was expected to give the Federal Reserve greater scope to use its lending programs to address conditions in credit markets while also maintaining the federal funds rate

close to the target rate established by the Federal Open Market Committee.

The Federal Reserve has indicated that it may use this authority to implement a mandatory policy to reduce excess liquidity, in the event of inflation or the threat of

In April 2010, the Federal Reserve Board amended Regulation D (Reserve Requirements of Depository Institutions) authorizing the Reserve Banks

to offer term deposits to certain institutions.

Term deposits, which are deposits with specified maturity dates, will be offered through a Term Deposit Facility.

Term deposits will be one of several tools that the Federal Reserve could employ to

drain reserves when policymakers judge that it is appropriate to begin moving to a less accommodative stance of monetary policy.

In 2011, the Federal

Reserve repealed its historical Regulation Q to permit banks to pay interest on demand deposits.

The Federal Reserve also engaged in several rounds of quantitative easing (QE) to reduce interest rates by buying bonds, and Operation

Twist to reduce long term interest rates by buying long term bonds, while selling intermediate term securities.

Beginning December 2013, the Federal Reserve began to taper the level of bonds purchased, but continues to reinvest the principal

of its securities as these mature.

The Federal Reserve adopted, in September 2014, a normalization of monetary policy that includes gradually raising the

Federal Reserves target range for the Federal Funds rate to more normal levels and gradually reducing the Federal Reserves holdings of U.S.

government and agency securities.

The Federal Reserves target Federal Funds rate has

increased nine times since December 2015 in 25 basis point increments from 0.25% to 2.50% on December 30, 2018.

Although the Federal Reserve considers the target Federal Funds rate its primary means of monetary policy normalization, in

September 2017 it began reducing its securities holdings by not reinvesting the principal of maturing securities, subject to certain monthly caps on amounts not reinvested.

In 2019, due to various factors, the Federal Reserve stopped further

increases in its target Federal Funds rate, and decreased the targeted federal funds three times by 25 basis points.

The adverse economic effects of the coronavirus may cause the Federal Reserve to further loosen monetary policy.

The nature and timing of any changes in monetary policies and their effect on the Company and the Bank cannot be predicted.

The turnover of a majority of the

Federal Reserve Board and the members of its FOMC and the appointment of a new Federal Reserve Chairman may result in changes in policy and the timing and amount of monetary policy normalization.

In general, the difference between the interest paid by a

bank on its deposits and its other borrowings, and the interest received

by a bank on its loans and securities holdings,

constitutes the major portion of a bank’s

Thus, the earnings and growth of the Company and the Bank, as well

the values of, and earnings on, its assets and the costs of its de

posits and other liabilities are subject to the influence of

economic conditions generally,

both domestic and foreign, and also to the monetary and fiscal policies

of the United States

and its agencies, particularly the Federal Reserve.

The Federal Reserve regulates the supply of money through

means, including open market dealings in United States government

securities, the setting of discount rate at which banks

may borrow from the Federal Reserve, and the reserve requirements

The Federal Reserve has been paying interest on depository institutions’

required and excess reserve balances since October

The payment of interest on excess reserve balances was expected

to give the Federal Reserve greater scope to use its

lending programs to address conditions in credit markets while

also maintaining the federal funds rate close to the target

rate established by the Federal Open Market Committee.

The Federal Reserve has indicated that it may use this authority

implement a mandatory policy to reduce excess liquidity,

in the event of inflation or the threat of inflation.

In April 2010, the Federal Reserve Board amended Regulation

D (Reserve Requirements of Depository Institutions)

authorizing the Reserve Banks to offer term deposits

to certain institutions.

Term deposits,

which are deposits with

specified maturity dates, will be offered through a Term

Deposit Facility.

Term deposits will

be one of several tools that

the Federal Reserve could employ to drain reserves when policymakers

judge that it is appropriate to begin moving to a less

accommodative stance of monetary policy.

In 2011, the Federal Reserve repealed

its historical Regulation Q to permit banks to pay interest on demand

Federal Reserve also engaged in several rounds of quantitative

easing (“QE”) to reduce interest rates by buying bonds, and

“Operation Twist” to reduce

long term interest rates by buying long term bonds, while selling intermediate

term securities.

Beginning December 2013, the Federal Reserve began to taper

the level of bonds purchased, but continues to reinvest the

principal of its securities as these mature.

On March 3, 2020, the Federal Reserve reduced the Federal Funds

rate target by 50 basis points to 1.00-1.25%.

Reserve further reduced the Federal Funds Rate target by an

additional 100 basis points to 0-0.25% on March 16,

Federal Reserve established various liquidity facilities pursuant

to section 13(3) of the Federal Reserve Act to help stabilize

the financial system.

The Federal Reserve’s current

policy is to seek maximum employment and inflation of 2%

over the longer run, with

inflation moderately running over 2% for some time.

a target federal funds range of 0-0.25%, and

purposes of at least $80 billion of Treasury

securities and $40 billion of agency mortgage-backed securities until

further progress has been made towards its goals.

In light of disruptions in economic conditions caused by the outbreak

of COVID-19 and the stress in U.S.

financial markets,

the Federal Reserve, Congress and the Department of the Treasury

took a host of fiscal and monetary measures to minimize

the economic effect of COVID-19.

The CARES Act provided a $2 trillion stimulus package and

various measures to provide relief from the COVID-19

pandemic, including:

The Paycheck Protection Program (“PPP”), which expands eligibility for

special new SBA guaranteed loans,

forgivable loans and other relief to small businesses affected

A new $500 billion federal stimulus program for air carriers

and other companies in severely distressed sectors of

the American economy.

lending programs impose stock buyback, dividend, executive compensation,

other restrictions on direct loan recipients.

Optional temporary suspension of certain requirements under

ASC 340-10 TDR classifications for a limited period

of time to account for the effects of COVID-19.

The creation of rapid tax rebates and expansion of unemployment

benefits to provide relief to individuals.

Substantial federal spending and significant changes for health care

companies, providers, and patients.

Over $525 billion of PPP loans were made in 2020.

On December 27, 2020, the Economic Aid to Hard-Hit Smal

Businesses, Nonprofits, and Venues

Act (the “Economic Aid

Act”) was signed into law.

Economic Aid Act provides a second $900 billion stimulus

package, including $325 billion

in additional PPP loans, changed the eligibility rules to focus

more on smaller business, further enhances other Small

Business Association programs.

The nature and timing of any changes in monetary policies and

their effect on the Company and the Bank cannot be

The turnover of a majority of the Federal Reserve Board

and the members of its FOMC and the appointment of a

new Federal Reserve Chairman may result in changes in policy

and the timing and amount of monetary policy

normalization.

FDIC Insurance Assessments

The Banks deposits are

insured by the FDICs DIF, and the Bank is subject to FDIC assessments for its deposit insurance, as well as assessments by the FDIC to pay interest on Financing Corporation (FICO) bonds.

Since 2011, and as discussed above under Recent Regulatory Developments, the FDIC has been calculating assessments based on an institutions

average consolidated total assets less its average tangible equity (the FDIC Assessment Base) in accordance with changes mandated by the Dodd-Frank Act.

The FDIC changed its assessment rates which shifted part of the burden of deposit

insurance premiums toward depository institutions relying on funding sources other than deposits.

In 2016, the FDIC again changed its deposit insurance

pricing and eliminated all risk categories and now uses financial ratios method based on CAMELS composite ratings to determine assessment rates for small established institutions with less than $10 billion in assets (Small

The financial ratios method sets a maximum assessment for CAMELS 1 and 2 rated banks, and set minimum assessments for lower rated institutions.

The Bank’s deposits are insured

by the FDIC’s DIF,

and the Bank is subject to FDIC assessments for its deposit insurance,

as well as assessments by the FDIC to pay interest on Financing Corporation

(“FICO”) bonds.

Since 2011, and as discussed above under

“Recent Regulatory Developments”, the FDIC has been calculating

based on an institution’s average

consolidated total assets less its average tangible equity (the “FDIC

Assessment Base”) in

accordance with changes mandated by the Dodd-Frank Act.

The FDIC changed its assessment rates which shifted part of

the burden of deposit insurance premiums toward depository

institutions relying on funding sources other than deposits.

In 2016, the FDIC again changed its deposit insurance pricing and

eliminated all risk categories and now uses “financial

ratios method” based on CAMELS composite ratings to determine assessment

rates for small established institutions with

less than $10 billion in assets (“Small Banks”).

The financial ratios method sets a maximum assessment for

and 2 rated banks, and set minimum assessments for lower rated

institutions.

All basis points are annual amounts.

The following table shows the FDIC assessment schedule for 2018 applicable to Small Banks, such as the Bank.

The following table shows the FDIC assessment schedule for

2020 applicable to Small Banks, such as the Bank.

Established Small Institution

10 unchanged sentences

1.5 to 16 basis points

3 to 30 basis points

3 to 30 basis

11 to 30 basis points

On March 15, 2016 the FDIC implemented Dodd-Frank Act provisions by raising the DIFs minimum

Reserve Ratio from 1.15% to 1.35%.

The FDIC imposed a 4.5 basis point annual surcharge on insured depository institutions with total consolidated assets of $10 billion or more (Large Banks).

The new rules grant credits to smaller

banks for the portion of their regular assessments that contribute to increasing the reserve ratio from 1.15% to 1.35%.

The FDICs reserve ratio

reached 1.36% on September 30, 2018, exceeding the minimum requirement.

As a result, deposit insurance surcharges on Large Banks ceased, and smaller banks will receive credits against their deposit assessments from the FDIC for their portion of

assessments that contributed to the growth in the reserve ratio from 1.15% to 1.35%.

The Banks credit was $0.2 million, and credits will be received and applied against the Banks deposit insurance assessment each quarter that the

reserve ratio exceeds 1.36%.

Prior to June 30, 2016, when the new assessment system became effective, the Banks overall rate for assessment

calculations was 9 basis points or less, which was within the range of assessment rates for the lowest risk category under the former FDIC assessment rules.

In 2019 and 2018, the Company recorded FDIC insurance premiums expenses of

$0.1 million and $0.2 million, respectively.

In addition, all FDIC-insured institutions are required to pay a pro rata portion of the interest

due on FICO bonds, which mature during 2017 through 2019.

FICO assessments are set by the FDIC quarterly on each institutions FDIC Assessment Base.

The FICO Assessment rate was 0.560 basis points in the first quarter of 2017, and 0.540 basis

points through December 31, 2017.

FICO assessments have been set at 0.460 basis points in the first quarter of 2018, 0.440 basis points in the second quarter of 2018 and 0.320 basis points for the third and fourth quarters of 2018.

assessments of approximately $20 thousand and $2 thousand were paid to the FDIC in 2018 and 2019, respectively.

The final FICO assessments were paid in the second quarter of 2019.

On March 15, 2016 the FDIC implemented Dodd-Frank Act provisions

by raising the DIF’s minimum

Reserve Ratio from

1.15% to 1.35%.

The FDIC imposed a 4.5 basis point annual surcharge

on insured depository institutions with total

consolidated assets of $10 billion or more (“Large

The new rules grant credits to smaller banks for the portion of

their regular assessments that contribute to increasing the reserve

ratio from 1.15% to 1.35%.

The FDIC’s reserve ratio reached

1.36% on September 30, 2018, exceeding the minimum

As a result, deposit

insurance surcharges on Large Banks ceased,

and smaller banks will receive credits against their deposit

assessments from

the FDIC for their portion of assessments that contributed to the growth

in the reserve ratio from 1.15% to 1.35%.

Bank’s credit was $0.2 million,

and was received and applied against the Bank’s

deposit insurance assessments during 2019

Given the extraordinary growth in deposits in the first six months of 2020

due to the pandemic and government

stimulus, the reserve ratio declined below 1.35% to 1.30%.

The FDIC issued a restoration plan on September 15, 2020

designed to restore the reserve ratio to at least the statutory minimum

of 1.35% within 8 years.

Although the FDIC

maintained current assessment rates, the FDIC may increase deposit

assessment rates by up to two basis points without

notice, or more following notice and a comment period, to

meet the required reserve ratio.

On June 22, 2020, the FDIC issued a final rule designed to

mitigate the deposit insurance assessment effect of the PPP

the related liquidity programs established by the Federal Reserve.

Specifically, the rule removes

the effects of participating

in PPP and liquidity facilities from the various risk measures used

to calculate assessment rates and provides an offset

assessments for the increase in assessment base rates attributed

to participation in the PPP and liquidity facilities.

Prior to June 30, 2016, when the new assessment system became

effective, the Bank’s

overall rate for assessment

calculations was 9 basis points or less, which was within the range of

assessment rates for the lowest “risk category” under

the former FDIC assessment rules.

The Company recorded FDIC insurance premiums expenses of $0.1

million in 2020

and 2019, respectively.

Lending Practices

The federal bank regulatory agencies

released guidance in 2006 on Concentrations in Commercial Real Estate Lending (the Guidance).

The Guidance defines CRE loans as exposures secured by raw land, land development and construction (including 1-4 family residential construction), multi-family property, and non-farm nonresidential property where the primary or a significant source of repayment is derived from rental

income associated with the property (that is, loans for which 50% or more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or

permanent financing of this property.

Loans to REITs and unsecured loans to developers that closely correlate to the inherent risks in CRE markets would also be considered CRE loans under the Guidance.

Loans on owner occupied CRE are generally

In December 2015, the Federal Reserve and other bank regulators issued an interagency statement to highlight prudent risk management practices from existing guidance that regulated financial institutions and made recommendations regarding

maintaining capital levels commensurate with the level and nature of their CRE concentration risk.

The Guidance requires that appropriate processes be in

place to identify, monitor and control risks associated with real estate lending concentrations.

This could include enhanced strategic planning, CRE underwriting policies, risk management, internal controls, portfolio stress testing and risk

exposure limits as well as appropriately designed compensation and incentive programs.

Higher allowances for loan losses and capital levels may also be required.

The Guidance is triggered when either:

Total reported loans for construction, land development, and other land of 100% or more of a banks total

Total reported loans secured by multifamily and nonfarm nonresidential properties and loans for construction,

land development, and other land are 300% or more of a banks total risk-based capital.

This Guidance was supplemented by the

Interagency Statement on Prudent Risk Management for Commercial Real Estate Lending (December 18, 2015).

The Guidance also applies when a bank has a sharp increase in CRE loans or has significant concentrations of CRE secured by a particular

property type.

The Guidance did not apply to the Banks CRE lending activities during 2018 or 2019.

December 31, 2019, the Bank had outstanding $32.8 million in construction and land development loans and $270.3 million in total CRE loans (excluding owner occupied), which represent approximately 33.7% and 277.8%, respectively, of

the Banks total risk-based capital at December 31, 2019.

The Company has always had significant exposures to loans secured by commercial real estate due to the nature of its markets and the loan needs of both its retail and commercial

The Company believes its long term experience in CRE lending, underwriting policies, internal controls, and other policies currently in place, as well as its loan and credit monitoring and administration procedures, are generally

appropriate to manage its concentrations as required under the Guidance.

The federal bank regulatory agencies released guidance in 2006

on “Concentrations in Commercial Real Estate Lending”

(the “Guidance”).

The Guidance defines CRE loans as exposures secured by raw land,

land development and construction

(including 1-4 family residential construction), multi-family prope

rty, and non-farm nonresidential property

primary or a significant source of repayment is derived from rental

income associated with the property (that is, loans for

which 50% or more of the source of repayment comes from third

party, non-affilia

ted, rental income) or the proceeds of the

sale, refinancing, or permanent financing of this property.

Loans to REITs

and unsecured loans to developers that closely

correlate to the inherent risks in CRE markets would also be

considered CRE loans under the Guidance.

Loans on owner

occupied CRE are generally excluded.

In December 2015, the Federal Reserve and other bank regulators

interagency statement to highlight prudent risk management

practices from existing guidance that regulated financial

institutions and made recommendations regarding maintaining capital

levels commensurate with the level and nature of

their CRE concentration risk.

The Guidance requires that appropriate processes be in place

to identify, monitor and control

risks associated with real

estate lending concentrations.

This could include enhanced strategic planning, CRE underwriting policies,

management, internal controls, portfolio stress testing and risk exposure

limits as well as appropriately designed

compensation and incentive programs.

Higher allowances for loan losses and capital levels may also

Guidance is triggered when either:

Total reported

loans for construction, land development, and other land of 100%

or more of a bank’s total capital;

Total reported

loans secured by multifamily and nonfarm nonresidential properties

and loans for construction, land

development, and other land are 300% or more of a bank’s

total risk-based capital.

This Guidance was supplemented by the Interagency Statement

on Prudent Risk Management for Commercial Real Estate

Lending (December 18, 2015).

The Guidance also applies when a bank has a sharp increase

in CRE loans or has significant

concentrations of CRE secured by a particular property type.

The Guidance did not apply to the Bank’s

CRE lending activities during 2019 or 2020.

At December 31, 2020, the Bank

had outstanding $33.5 million in construction and land development

loans and $201.1 million in total CRE loans (excluding

owner occupied), which represent approximately 34.9% and

266.0%, respectively, of the

Bank’s total risk-based capital

December 31, 2020.

The Company has always had significant exposures to loans secured

by commercial real estate due to

the nature of its markets and the loan needs of both its retail

and commercial customers.

The Company believes its long

term experience in CRE lending, underwriting policies, internal controls,

and other policies currently in place, as well as its

loan and credit monitoring and administration procedures, are

generally appropriate to manage its concentrations as

required under the Guidance.

In 2013, the Federal Reserve and other banking regulators issued their

Interagency Guidance on Leveraged Lending highlighting standards for originating leveraged transactions and managing leveraged portfolios, as well as requiring banks to identify their highly leveraged transactions, or HLTs.

Government Accountability Office issued a statement on October 23, 2017 that this guidance constituted a rule for purposes of the Congressional Review Act, which provides Congress with the right to review the guidance and issue a

joint resolution for signature by the President disapproving it.

No such action was taken, and instead, the federal bank regulators issued a September 11, 2018 Statement Reaffirming the Role of Supervisory Guidance. This Statement

indicated that guidance does not have the force or effect of law or provide the basis for enforcement actions, but this guidance can outline supervisory agencies views of supervisory expectations and priorities, and appropriate practices.

federal bank regulators continue to identify elevated risks in leveraged loans and shared national credits.

The Bank did not have any loans at year-end 2019 or 2018 that were leveraged loans subject to the Interagency Guidance on Leveraged Lending or that were shared national credits.

“Interagency Guidance on Leveraged Lending”

highlighting standards for originating leveraged transactions and

managing leveraged portfolios, as well as requiring banks

to identify their highly leveraged transactions, or HLTs.

The Government Accountability Office issued a

October 23, 2017 that this guidance constituted a “rule” for purposes

of the Congressional Review Act, which provides

Congress with the right to review the guidance and issue a joint resolution

for signature by the President disapproving it.

No such action was taken, and instead, the federal bank regulators

issued a September 11, 2018 “Statement Reaffirming

Role of Supervisory Guidance.”

This Statement indicated that guidance does not have the

force or effect of law or provide

the basis for enforcement actions, but this guidance can outline

supervisory agencies’ views of supervisory expectations

priorities, and appropriate practices.

The federal bank regulators continue to identify elevated risks in

leveraged loans and

shared national credits.

The Bank did not have any loans at year-end 2020

or 2019 that were leveraged loans subject to the Interagency Guidance

on Leveraged Lending or that were shared national credits.

Other Dodd-Frank Act Provisions

In addition to the

capital, liquidity and FDIC deposit insurance changes discussed above, some of the provisions of the Dodd-Frank Act we believe may affect us are set forth below.

In addition to the capital, liquidity and FDIC deposit insurance

changes discussed above, some of the provisions of the

Dodd-Frank Act we believe may affect us are set forth

Executive Compensation

The Dodd-Frank Act provides

shareholders of all public companies with a say on executive compensation.

Under the Dodd-Frank Act, each company must give its shareholders the opportunity to vote on the compensation of its executives, on a

non-binding advisory basis, at least once every three years.

The Dodd-Frank Act also adds disclosure and voting requirements for golden parachute compensation that is payable to named executive officers in

connection with sale transactions.

The SEC is required under the Dodd-Frank Act to issue rules obligating companies to disclose in proxy materials for

annual shareholders meetings, information that shows the relationship between executive compensation actually paid to their named executive officers and their financial performance, taking into account any change in the value of the shares of a

companys stock and dividends or distributions.

The Dodd-Frank Act also provides that a companys compensation committee may only select a consultant, legal counsel or other advisor on methods of compensation after taking into

consideration factors to be identified by the SEC that affect the independence of a compensation consultant, legal counsel or other advisor.

Section 954 of the Dodd-Frank Act added section 10D to the Exchange Act.

Section 10D directs the SEC to adopt rules prohibiting a national

securities exchange or association from listing a company unless it develops, implements, and discloses a policy regarding the recovery or claw-back of executive compensation in certain circumstances.

The policy must require that, in the

event an accounting restatement due to material noncompliance with a financial reporting requirement under the federal securities laws, the company will recover from any current or former executive officer any incentive-based compensation (including

stock options) received during the three year period preceding the date of the restatement, which is in excess of what would have been paid based on the restated financial statements.

There is no requirement of wrongdoing by the executive, and the

claw-back is mandatory and applies to all executive officers.

Section 954 augments section 304 of the Sarbanes-Oxley Act, which requires the CEO and CFO to return any bonus or other incentive or equity-based compensation received during the 12

months following the date of similarly inaccurate financial statements, as well as any profit received from the sale of employer securities during the period, if the restatement was due to misconduct.

Unlike section 304, under which only the SEC may

seek recoupment, the Dodd-Frank Act requires the Company to seek the return of compensation.

The SEC adopted rules in September 2013 to implement pay ratios pursuant to Section 953 of the

Dodd-Frank Act, which apply to fiscal year 2017 annual reports and proxy statements.

The SEC proposed Rule 10D-1 under Section 954 on July 1, 2015 which would direct Nasdaq and the other national

securities exchanges to adopt listing standards requiring companies to adopt policies requiring executive officers to pay back erroneously awarded incentive-based compensation.

In February 2017, the acting SEC Chairman indicated interest in

reconsidering the pay ratio rule.

The Dodd-Frank Act, Section 955, requires the SEC, by rule, to require that each company disclose in the proxy

materials for its annual meetings whether an employee or board member is permitted to purchase financial instruments designed to hedge or offset decreases in the market value of equity securities granted as compensation or otherwise held by the

The Dodd-Frank Act provides shareholders of all public companies

with a say on executive compensation.

Dodd-Frank Act, each company must give its shareholders the opportunity

to vote on the compensation of its executives, on

a non-binding advisory basis, at least once every three years.

The Dodd-Frank Act also adds disclosure and voting

requirements for golden parachute compensation that is payable

to named executive officers in connection with sale

transactions.

The SEC is required under the Dodd-Frank Act to issue rules obligating

companies to disclose in proxy materials for annual

shareholders meetings, information that shows the relationship

between executive compensation actually paid to their

named executive officers and their financial performance,

taking into account any change in the value of the shares

company’s stock and dividends

or distributions.

The Dodd-Frank Act also provides that a company’s

committee may only select a consultant, legal counsel or other

advisor on methods of compensation after taking into

consideration factors to be identified by the SEC that affect the

independence of a compensation consultant, legal counsel

or other advisor.

Section 954 of the Dodd-Frank Act added section 10D to the Exchange

Section 10D directs the SEC to adopt rules

prohibiting a national securities exchange or association from listing

a company unless it develops, implements, and

discloses a policy regarding the recovery or “claw-back” of executive

compensation in certain circumstances.

must require that, in the event an accounting restatement due

to material noncompliance with a financial reporting

requirement under the federal securities laws, the company will

recover from any current or former executive officer

incentive-based compensation (including stock options) received

during the three year period preceding the date of the

restatement, which is in excess of what would have been paid

based on the restated financial statements.

requirement of wrongdoing by the executive, and the claw-back

is mandatory and applies to all executive officers.

954 augments section 304 of the Sarbanes-Oxley Act, which requires

the CEO and CFO to return any bonus or other

incentive or equity-based compensation received during the

12 months following the date of similarly inaccurate financial

statements, as well as any profit received from the sale of employer securities

during the period, if the restatement was due

to misconduct.

Unlike section 304, under which only the SEC may seek recoupment,

the Dodd-Frank Act requires the

Company to seek the return of compensation.

The SEC adopted rules in September 2013 to implement pay

ratios pursuant to Section 953 of the Dodd-Frank Act, which

apply to fiscal year 2017 annual reports and proxy statements.

The SEC proposed Rule 10D-1 under Section 954 on July

1, 2015 which would direct Nasdaq and the other national securities exchanges

to adopt listing standards requiring

companies to adopt policies requiring executive officers

to pay back erroneously awarded incentive-based compensation.

In February 2017, the acting SEC Chairman indicated interest

in reconsidering the pay ratio rule.

The Dodd-Frank Act, Section 955, requires the SEC, by rule,

to require that each company disclose in the proxy materials

for its annual meetings whether an employee or board

member is permitted to purchase financial instruments designed to

hedge or offset decreases in the market value of equity securities

granted as compensation or otherwise held by the

employee or board member.

The SEC proposed implementing rules in February 2015, though the rules have not been implemented to date.

Section 956 of

the Dodd-Frank Act prohibits incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial institutions, are deemed to be excessive, or that may lead to material losses.

In June 2010, the federal bank

regulators adopted Guidance on Sound Incentive Compensation Policies, which, although targeted to larger, more complex organizations than the Company, includes principles that have been applied to smaller organizations similar to the Company.

Guidance applies to incentive compensation to executives as well as employees, who, individually or a part of a group, have the ability to expose the relevant banking organization to material amounts of risk. Incentive compensation

Provide employees incentives that appropriately balance risk and reward;

The SEC proposed implementing rules in February 2015,

though the rules have not been

implemented to date.

Section 956 of the Dodd-Frank Act prohibits incentive-based

compensation arrangements that encourage inappropriate

taking by covered financial institutions, are deemed to be excessive,

or that may lead to material losses.

In June 2010, the

federal bank regulators adopted Guidance on Sound Incentive

Compensation Policies, which, although targeted

more complex organizations than the Company,

includes principles that have been applied to smaller organi

zations similar

to the Company.

This Guidance applies to incentive compensation to executives

as well as employees, who, “individually

or a part of a group, have the ability to expose the relevant banking organization

to material amounts of risk.”

compensation should:

Provide employees incentives that appropriately balance risk

Be compatible with effective controls and risk-management;

Be supported by strong corporate governance, including active and effective oversight by the organizations

board of directors.

The federal bank regulators, the SEC and other regulators proposed regulations implementing Section 956 in

April 2011, which would have been applicable to, among others, depository institutions and their holding companies with $1 billion or more in assets.

An advance notice of a revised proposed joint rulemaking under Section 956 was published

by the financial services regulators in May 2016, but these rules have not been adopted.

Debit Card Interchange Fees

The Durbin Amendment to the Dodd-Frank Act provides for a set of new rules requiring that interchange transaction fees for electronic debit

transactions be reasonable and proportional to certain costs associated with processing the transactions.

The Federal Reserve has established standards for assessing whether interchange fees are reasonable and proportional, which a

Federal District Court ruled were improperly adopted.

This decision in NACS v.

Board of Governors of the Federal Reserve System , was reversed by the District of Columbia Circuit Court of Appeals in 2014 and the Supreme Court declined to hear

an appeal on January 20, 2015.

The Durbin Amendment is not applicable to banks with assets less than $10 billion.

Other Legislative and

Regulatory Changes

Various legislative and regulatory proposals, including substantial changes in banking, and the regulation of banks, thrifts and

other financial institutions, compensation, and the regulation of financial markets and their participants and financial instruments, and the regulators of all of these, as well as the taxation of these entities, are being considered by the

executive branch of the federal government, Congress and various state governments, including Alabama.

The President has frozen new rulemaking

generally, and on February 3, 2017 issued an executive order containing Core Principles for Regulating the United States Financial System (Core Principles).

The Core Principles direct the Secretary of the Treasury to

consult with heads of Financial Stability Oversight Councils members and report to the President within 120 days and periodically thereafter on how laws and government policies promote the Core Principles and to identify laws, regulations,

guidance and reporting that inhibit financial services regulation in a manner consistent with the Core Principles.

Another executive order required the repeal of two existing rules for any new significant regulatory proposal.

Although this executive

order does not apply to the SEC, the federal bank regulators or the CFPB, these independent agencies were encouraged to seek cost savings that would offset the costs of new significant regulatory actions.

The federal regulators and the White House,

pursuant to a Fall 2019 executive order, are considering further clarification as to the effect of guidance and whether it creates the basis for enforcement actions.

The 2018 Growth Act, which, was enacted on May 24, 2018, amends the Dodd-Frank Act, the BHC Act, the

Federal Deposit Insurance Act and other federal banking and securities laws to provide regulatory relief in these areas:

Be supported by strong corporate governance, including active

and effective oversight by the organization’s

The federal bank regulators, the SEC and other regulators proposed

regulations implementing Section 956 in April 2011,

which would have been applicable to, among others, depositor

institutions and their holding companies with $1 billion

What changed 10-K

Item 1. Business