What changed in this filing

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Item 1. Business

2022-03-08 compared with 2021-03-09 · 1169 added, 1269 removed, 662 unchanged (79% of the section changed)

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 “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

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As a bank holding

company, the Company may diversify

into a broader range of financial services and other business activities

than currently

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

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.

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

Bank’s primary regulators are

the Federal Reserve and the Alabama Superintendent of Banks (the

Bank’s 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 Bank has been a member of the Federal Home Loan Bank of Atlanta (the “FHLB”)

The Company’s business is conducted

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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

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.

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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

appearing on the website are not included or incorporated in, and are not part

The Company files annual, quarterly and current reports, proxy statements, and

other information with the

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

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Washington, DC 20549.

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

of the public

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,

that contains reports, proxy, and other

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

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,

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.

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

the largest providers of automated teller services in East Alabama and

machines in 13 locations in its

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logo that work like checks

but can be used anywhere Visa

is accepted, including ATMs.

but can be used anywhere Visa is accepted,

including ATM

The Bank’s Visa

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through the Plus

The Bank offers online banking, bill payment

and other electronic services through its Internet

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

Our online banking services, bill payment and electronic services are subject

cybersecurity risks.

See “Risk Factors – Our information systems may experience

interruptions and security breaches.”

See “Risk Factors – Our information systems may experience interruptions

and security breaches.”

The banking business in East Alabama, including Lee County,

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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

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 the

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.

As more and different kinds of businesses enter the market for financial

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

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

Bank’s service area offer

services which are not presently offered directly

by the Bank and they typically have substantially

Many of the major commercial banks or their affiliates operating in

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

Banks also have experienced significant competition for deposits from mutual

funds, insurance companies and other

investment companies and from money center banks’ offerings

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Certain of these

competitors are not subject to the same regulatory restrictions

competitors are not subject to the same regulatory restrictions as the Bank.

Selected Economic Data

Lee County’s population was estimated

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

Census Bureau estimates Lee County’s

population was 174,241 in 2020, and has increased approximately 24.2%

from 2010 to 2020.

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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.

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

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 2022, the Auburn-Opelika MSA grew an estimated 23.9%,

the second fastest growing MSA in

The Auburn-Opelika MSA population is estimated to grow 6.73% from 2022

During the same time,

household income is estimated to increase 13.34%, to $67,593.

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

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

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with commercial, real estate acquisition, construction and

development, agricultural and consumer lending than with residentia

real estate mortgage loans.

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,

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.

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affecting the borrower, the borrower’s

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

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

borrower’s past credit performance.

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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.

See “Lending Practices” for a discussion of regulatory guidance on commercial real

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,

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

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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

cyclical and adversely affected by increases in interest rates.

Decreases in automobile sales, including adverse changes due

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

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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.

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.

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

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.

Human Capital

At December 31, 2021, the Company and its subsidiaries had 152

full-time equivalent employees, including 39 officers.

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

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

We continue to provide

services through our online and other electronic channels.

we established

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

We experienced

little turnover as a result of the COVID-19 pandemic.

strong employee retention

historically.

Our average term of service is approximately 10 years.

We seek to provide

competitive compensation and benefits.

We encourage and support

the growth and development of our

employees and, wherever possible, seek to fill positions by promotion and transfer

from within the organization.

development is advanced through ongoing performance and development conversations

with employees, internally

developed training programs and other training and development opportunities.

Our employees are encouraged to be active

in our communities as part of our commitment to these communities and our employees.

Statistical Information

Certain statistical information is included in response to Item

7 of this Annual Report on Form 10-K.

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.

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

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

The Company and the Bank are extensively regulated under federal and state laws applicable

to 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 Company’s

following discussion is qualified in its entirety by

reference to the particular laws and rules referred

Any change in applicable law or regulation may have a material effect

on the Company’s business.

following discussion is qualified in its entirety by reference to the particular laws and

rules referred to below.

Bank Holding Company Regulation

The Company, as a bank holding company,

is subject to supervision, regulation and examination by the Federal

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

Bank holding companies generally are limited to the business of banking,

managing or controlling

banks, and certain related activities.

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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

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

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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

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

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

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

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 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

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

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”), but has taken no action.

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

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

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.

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

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

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,

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

branch anywhere in the United States.

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or otherwise supplying funds to the Company.

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

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

Federal Reserve Act and Federal Reserve Regulation W thereunder.

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include extensions of credit, and limits a bank’s

covered transactions with any affiliate to 10%

of such bank’s capital and

covered transactions with any affiliate to 10% of such bank’s

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

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.

Finally, Section 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

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

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

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

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 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 bank’s

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

In addition, where a bank holding

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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.

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

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

company to such subsidiary banks likely will be unsecured and subordinated

to such bank’s depositors and to other

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

Company’s 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,

Company’s capital adequacy

will continue to be evaluated on a bank only basis.

See “Capital.”

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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

all areas of the Bank’s operations, including

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

establishment of branches,

capital adequacy and compliance with laws.

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

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,

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Alabama law permits statewide branching by banks.

The powers granted to Alabama-chartered banks by state law

certain provisions designed to provide such banks competitive

equality with national 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

Council’s (“FFIEC”) rating system,

assigns each financial institution a confidential composite “CAMELS”

rating based on an evaluation and rating of six

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,

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

management’s ability to identify,

monitor and control market risk;

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

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

risk exposure.

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

Market risk is rated based upon, but not

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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

adverse changes in interest rates, foreign exchange rates, commodity prices or

equity prices;

management’s 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 institution’s managerial,

Composite ratings are based on evaluations of an institution’s

managerial, operational,

financial and compliance performance.

The composite CAMELS rating

is not an arithmetical formula or rigid weighting of

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

Elements of subjectivity and examiner judgment,

especially as these relate to qualitative

assessments, are important elements in assigning ratings.

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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 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.

subsidiaries to engage in “financial activities” similar to those permitted to financial

holding companies.

In December 2015,

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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

This amendment

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

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.

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.

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 Fede

ral Reserve’s regulations thereunder.

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

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

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

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 of any

FDIC-insured institution that has applied to:

(i) charter a national bank;

(ii) obtain deposit insurance coverage for a newly-

(ii) obtain deposit

insurance coverage for a newly-

chartered institution;

(iii) establish a new branch office that

accepts deposits;

(iii) establish a new branch office that accepts

(iv) relocate an office;

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

an FDIC-insured financial institution.

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

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.

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if not preclude, acquisitions, and new branches and

other expansion activities and may prevent a company from becoming

a financial holding company.

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.

CRA reports must be made to a bank’s primary

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

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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

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 OCC issued final revised CRA Rules effective

October 1, 2020, which were repealed

The Federal bank regulators are cooperating and working on new CRA regulations,

which are expected to be

proposed around the end of March 2022.

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

(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

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

Overdrafts also have been a CFPB concern, and in 2021 began

refocusing on this issue with a view to “insure that banks continue to evolve their

businesses to reduce reliance on overdraft

and not sufficient funds fees.”

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

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.

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

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 and

issued principals for offering small-dollar

loans in a responsible manner on May 20, 2020.

The CFPB 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 of such 2017

The CFPB 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

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

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

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 CFPB’s

regulations, and the precedents

banks with less than $10 billion in assets,

banks of all sizes are affected by the CFPB’s

regulations, and the precedents set

in CFPB enforcement actions and interpretations.

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when making ability to repay determinations, and provide

certain safe harbors from liability for mortgages that are "qualified

mortgages" and are not “higher-priced.”

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

closed-end loans secured by a dwelling including home-purchase loans,

refinancing and home equity loans—whether first or subordinate lien.

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.

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

(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.

(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.

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.

standards for QM loans are presumed to be loans for which consumers have the ability to

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

mortgage origination on qualified mortgages and those that meet our investors’ requirements,

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

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

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

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

The CFPB’s mortgage servicing standards

include requirements regarding force-placed insurance, certain

notices prior to rate adjustments on adjustable rate

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

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.

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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

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

updated, effective January 1, 2016, The Federal National

Association’s (“Fannie Mae’s”)

and the Federal Home Loan Mortgage Corporation (“Freddie

Mac’s”) (individually and

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

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.

These rules became effective January 1, 2016.

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

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.

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Act and the Real Estate

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

credit transactions secured by real property.

Our residential mortgage

Settlement Procedures Act, referred to as “TRID”, for credit transactions secured

by real property.

Our residential

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

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

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.

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

implement and clarify these requirements under the 2018 Growth

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

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

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

Customers Affected

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

The Interagency Statement on COVID-19

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, a bank may

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

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

Such forbearance will be up to 180 days, subject to up to a 180 day extension.

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.

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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.

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

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.

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.

FinCEN published a request for information and comment on December 15,

2021 seeking ways to streamline, modernize

the United States AML and countering the financing of terrorists.

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

The International Money Laundering Abatement and Anti-Terr

orism 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.

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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

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

Under the Uniting and Strengthening America by Providing Appropriate Tools

Required to Intercept and Obstruct

Terrorism Act of 2001

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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

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

Act requires financial institutions to establish anti-money laundering programs,

and sets forth

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

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ongoing customer due diligence and monitoring.

Federal Financial Crimes Enforcement Network (“FinCEN”)

rules effective May 2018 require banks to know the beneficial

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

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and generally monitor such matters.

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

clarifying that isolated or technical violations or

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

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The statement

addresses how the agencies evaluate violations of individual

pillars of the Bank Secrecy Act and anti-money laundering

addresses how the agencies evaluate violations of individual pillars of the Bank Secrecy

Act and anti-money laundering

(“AML/BSA”) compliance program.

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recordkeeping requirements issued by the U.S.

Department of

the Treasury (“Treasury”)

as part of the internal controls

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

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

proposal seeks comment on incorporating an

“effective and reasonably designed” AML/BSA program component

to empower financial institutions to allocate resources

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

This component also would seek to implement a common understanding

between supervisory

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

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.

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Act of 2020 and the Corporate Transparency Act

(collectively, the “AML Act”),

to strengthen anti-money laundering and countering terrorism financing

(collectively, the “AML

Act”), to strengthen anti-money laundering and countering terrorism

financing programs.

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,

specifies uniform disclosure of beneficial ownership information for all U.S.

foreign entities conducting business

increases potential fines and penalties for BSA violations and improves

whistleblower incentives;

codifies the risk-based approach to AML compliance;

modernizes AML systems;

expands the duties and powers FinCEN;

emphasizes coordination and information-sharing among financial institutions, U.S.

financial regulators and foreign

financial regulators.

The United States has imposed various sanctions upon various foreign

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

The United States has imposed various sanctions upon various foreign countries,

such as China, Iran, North Korea, Russia

and Venezuela,

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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

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

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.

1 unchanged sentence

with the SEC rules on internal controls, and expects to

continue to spend significant amounts of time and money on compliance

with these rules.

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

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

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acceptable to the Company.

The Company’s assessment of its

financial reporting controls as of December 31, 2020 are

The Company’s

assessment of its financial reporting controls as of December 31, 2021 are

included in this report with no material weaknesses reported.

Payment of Dividends and Repurchases of

Capital Instruments

Payment of Dividends and Repurchases of Capital

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

The Company’s primary source

of cash is dividends

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

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

preceding two calendar years, less any required transfers to surplus.

the Bank paid total cash dividends of

approximately $3.7 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.

At December 31, 2021, the Bank could have declared and paid additional

dividends of approximately $8.3 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

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

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 bank’s 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

year’s operating earnings.

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payments, stock redemptions and stock repurchases.

Prior consultation with the Federal Reserve supervisory staff

Prior consultation with the Federal Reserve supervisory staff is

required before:

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holding company is experiencing financial

redemptions and purchases of common or perpetual preferred

stock which would reduce such Tier 1 capital

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

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,

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As a general matter,

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

company should consult with the Federal Reserve and

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

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

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

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

The Basel III Capital Rules further limit permissible dividends, stock repurchases and discretionary

bonuses by the

Company and the Bank, respectively,

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Under a new provision of the capital rules, effective January 1,

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.

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

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

tax effects not

already reflected in net income;

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Simplification

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

simplifying their capital rules.

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 principal changes for standardized approaches institutions, such the

the Bank are:

Deductions from capital for certain items, such as temporary difference

DTAs, MSAs and

investments in

DTAs, MSAs and investments

unconsolidated were decreased to those amounts that individually exceed 25%

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.

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

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

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

Banking institutions and their holding companies are required to assign

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

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

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

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

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.

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

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

Company expects it would be eligible to make such election, if the Company determined

it desirable.

After preliminary

consideration, the Company believes that it would still need to

calculate the regulatory capital ratios, which investors would

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%.

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-balance

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

Tier 1 capital includes common

equity and related retained earnings and a limited amount of qualifying

preferred stock, less goodwill and certain core

equity and related retained earnings and a limited amount of qualifying preferred

stock, less goodwill and certain core

deposit intangibles.

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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

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,

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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

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%.

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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

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

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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.

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

their problem loans.

Federal Reserve’s guidelines indicate

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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

(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.

The 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

The Federal Reserve believes the risk-based

ratios do not fully take into account the quality of

capital and interest rate, liquidity,

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supervisory assessments of capital adequacy

may differ significantly from conclusions based

on the level of an organization’s

risk-based capital ratio.

may differ significantly from conclusions based solely on the

level of an organization’s risk

-based capital ratio.

The Federal Deposit Insurance Corporation Improvement Act of 1991

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FDICIA establishes five capital tiers:

“well capitalized,”

“adequately capitalized,” “undercapitalized,”

“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.

A depository institution’s capital tier

will depend upon

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

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

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These new U.S.

capital rules are called the “Basel III

Capital Rules,” and generally

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 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.

had no qualifying trust preferred securities or cumulative preferred stock outstanding at December

The Basel III

Capital Rules also introduced a new capital measure, “Common

Equity Tier I Capital” or “CET1.”

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

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,

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

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

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”).

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DTAs arising from temporary

differences that could not be realized through net operating loss

carrybacks, net of

differences that could not be realized through net operating loss carrybacks,

any valuation allowances and DTLs;

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net of associated DTLs.

As discussed below, recent

regulations change these items to simplify and improve their

capital treatment.

As discussed below, recent regulations

change these items to simplify and improve their capital treatment.

Noncumulative perpetual preferred stock and Tier

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additional Tier I capital.

All other qualifying preferred stock, subordinated debt and qualifying minority

interests will be

All other qualifying preferred stock, subordinated debt and qualifying minority interests

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

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 capital conservation buffer will be calculated as the

the banking organization’s

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total risk-based capital ratio minus 8.0%.

Full compliance with the capital conservation buffer was

required by January 1, 2019.

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

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:

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> 0.625% - 1.250%

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.

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.

was adopted as a final rule on August 26, 2020.

The new rule revises the definition of

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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

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

and (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

The various capital elements and total capital under the Basel III Capital Rules, as fully phased

in on January 1, 2019 are:

Fully Phased In

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CET1 Conservation Buffer

Deductions from CET1

Minimum Tier 1 Capital

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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

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

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

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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

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:

(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

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.

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 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

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

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

HVCRE loans currently have a risk weight of 150%.

of the 2018 Growth Act, restricts the federal bank

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

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

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

reduce the Company’s risk weighted assets

thereby may increase the Company’s

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The Financial Accounting Standards Board’s

(the “FASB”) Accounting

Standards Update (“ASU”) No.

(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.

Measurement of Credit Losses on Financial Instruments” on June 16, 2016,

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

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

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

credit losses

using the CECL methodology,

and updated concepts and practices in existing supervisory guidance

that remain applicable.

and updated concepts and practices in existing supervisory guidance that

remain applicable.

CECL is effective for the Company beginning January 1, 2023

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effects upon the

not yet been determined.

Company have 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

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

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.

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

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,

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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

“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

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

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

“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

“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

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

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,

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“undercapitalized”.

Institutions that are “undercapitalized” are subject to

growth limitations and are required to submit a

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

A depository institution’s 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

institution’s total assets at the time

it became undercapitalized and the amount necessary to

bring the institution into

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

If a depository institution fails to submit an acceptable plan, it is treated

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

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 company’s 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

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.

1 unchanged sentence

appointment of a receiver or conservator.

Because the Company and the Bank exceed applicable capital

requirements,

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,

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 profile

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,

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%

The threshold is 8% through

the end of 2020, 8.5% for

2021, and 9% beginning January 1, 2022.

quarter grace

periods are allowed to permit banks that temporarily fall

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,

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.

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.

Enforcement Policies and Actions

The Federal Reserve and the Alabama Superintendent monitor

compliance with laws and regulations.

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.

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

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

1 unchanged sentence

directors, employees and others participating in the affairs

a bank or bank holding company,

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

a bank or bank holding company, in the

form of fines, penalties, or the recovery,

or claw-back, of compensation.

4 unchanged sentences

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

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 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

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

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

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

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 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.

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,

2 unchanged sentences

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

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

In 2011, the Federal Reserve repealed its historical Regulation

Q to permit banks to pay interest on demand deposits.

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, 2020.

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.

As a result of inflation, the decline in serious COVID-19 cases, and the strengthening of

following the March 2020 outbreak of the COVID-19 pandemic, the Federal

Reserve is considering increasing the discount

rate and reducing its holdings of securities.

In light of disruptions in economic conditions caused by the outbreak of COVID-19 and the

stress in U.S.

financial markets,

2 unchanged sentences

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

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,

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

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,

programs impose stock buyback, dividend, executive compensation, and

other restrictions on direct loan recipients.

Optional temporary suspension of certain requirements under

ASC 340-10 TDR classifications for a limited period

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.

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

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits,

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

Economic Aid Act provides a second $900 billion stimulus package, including

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

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.

3 unchanged sentences

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

Assessments by the FDIC to pay interest on Financing Corporation (“FICO”)

bonds ended in September 2019.

Since 2011, and as discussed above under “Recent Regulatory

Developments”, the FDIC has been calculating assessments

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

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

1 unchanged sentence

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.

The financial ratios method sets a maximum assessment for CAMELS 1

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

All basis points are annual amounts.

11 unchanged sentences

-5 to 0 basis points

Total Base Assessment Rate

Total Base Assessment

1.5 to 16 basis points

3 to 30 basis

3 to 30 basis points

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

by raising the DIF’s minimum

Reserve Ratio from

11 to 30 basis points

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 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%.

their regular assessments that contribute to increasing the reserve ratio from 1.15%

The FDIC’s reserve ratio reached 1.36%

1.36% on September 30, 2018, exceeding the minimum

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%.

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

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.

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

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

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

assessment effect of the PPP and

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 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 to

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 $0.3

million in 2020

and $0.1 million in

2021 and 2020, respectively.

3 unchanged sentences

(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

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 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

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

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

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

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

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;

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

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

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

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.

2 unchanged sentences

At December 31, 2021, the Bank

had outstanding $33.5 million in construction and land development

loans and $201.1 million in total CRE loans (excluding

had outstanding $32.4 million in construction and land development loans and $229.8

million in total CRE loans (excluding

owner occupied), which represent approximately 30.8% and 218.5%,

266.0%, respectively, of the

Bank’s total risk-based capital

respectively, of the Bank’s

total risk-based capital at

December 31, 2021.

1 unchanged sentence

by commercial real estate due to

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

and commercial customers.

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

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”

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

on Leveraged Lending”

highlighting standards for originating leveraged transactions and

1 unchanged sentence

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

The Government Accountability Office issued a statement

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

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.

The federal bank regulators continue to identify elevated risks in

leveraged loans and

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

The Bank did not have any

loans at year-end 2021 or 2020 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

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.

Executive Compensation

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

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

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

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.

taking into account any change in the value of the shares of a

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

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 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.

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

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 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.

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

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

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

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

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

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

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

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.

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

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 organi

zations similar

includes principles that have been applied to smaller organizations

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.”

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

Provide employees incentives that appropriately balance risk and reward;

Be compatible with effective controls and risk-management;

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

Be supported by strong corporate governance, including active and effective

oversight by the organization’s

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

What changed 10-K

Item 1. Business