AUBURN NATIONAL BANCORPORATION, INC 10-K

ITEM 1A. RISK FACTORS Any of the following risks could harm our business, results of operations and financial condition and an investment in our stock. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. Risk Factor Summary The following summarizes the risks provided after this summary and is qualified by the more detailed discussion of “Risk Factors” that follows this Summary, and which should be read in their entirety. Our risks include operational risks, financial risks and legal and regulatory risks, which are related and intertwined as discussed more fully in the Risk Factors that follow this summary. Operational risks are inherent in our business, and include: ● The effects of local, national and regional market and economic conditions and cyclicality, including inflation, interest rates and their effects on borrowers and markets, including real estate markets ● The risks and costs of nonperforming assets ● Our allowance for credit losses is based on estimates and judgments and may prove to be inadequate to our credit risks ● The soundness of other financial institutions and perceptions regarding our industry, especially when other banks experience difficulties or fail ● Our concentrations in commercial real estate loans in our market ● We operate in a highly competitive market against a number of larger national and regional competitors ● Future acquisitions may disrupt our business, dilute shareholder value and adversely affect our operating results and financial condition, among other risks ● Technological changes affect our business, and we may have fewer resources than various of our larger regulated and unregulated competitors, inside and outside our market area, which may increase the competition we face ● Potential gaps in our risk management, including managing the risks to us of data security and cybersecurity, including risks to our service providers could affect our results of operations, financial condition, customer relationship and reputation ● Our ability to attract and retain key people ● Risks of severe weather, natural disasters, climate changes, epidemics and severe health issues in the population, wars and acts of terrorism and other events Table of Contents 33 Financial risks result in part from our operational risks and the risk of our business, and include: ● Increases in costs of funds due to inflation, monetary and fiscal policies, changes in costumer behaviors and competitive pressures ● Our results of operations and financial condition, including the values of our assets and liquidity, may be affected by changes in interest rates and interest rate levels, the shape of the yield curve and economic conditions ● Liquidity risks, including the costs and availability of funding, and the liquidity of our assets, including our investment securities portfolio, and institutional lending sources ● Changes in accounting and tax rules ● The adequacy of our capital and availability of capital, if needed ● Potentially excessive risk taking by our associates ● Our ability to pay dividends depends on our earnings, liquidity and regulatory requirements related to our capital and our risks ● A limited trading market exists for our common stock Legal and regulatory risks include: ● The Company is a legal entity separate and distinct from the Bank, and transactions between the Bank and the Company are limited by law ● The Company is required to be a source of financial and managerial strength to the Bank, even where further investment in the Bank may not be warranted in the circumstances ● The scope, volume and complexity of regulations and regulatory and legal changes affect us, increase the time and costs of compliance and may limit our business and adversely affect our financial condition and results of operations ● Litigation, investigations and other claims by government agencies and private parties and regulatory actions, including those related to assertions of compliance failures ● The amount of and changes in the capital we are required to maintain in respect of our business and risk, and regulatory perceptions of us and our industry ● Liquidity requirements Operational Risks Market conditions and economic cyclicality may adversely affect our industry. We believe the following, among other things, may affect us in 2024: ● The COVID-19 pandemic disrupted the economy beginning late in the first quarter of 2020. Auburn University, government agencies and businesses were limited to remote work and gatherings were limited. Supply chains continue to be disrupted and labor markets remain tight. Hotels, motels, restaurants, retail and shopping centers were especially affected. COVID-19 continues, but with diminishing direct economic effects due to population health, generally. President Biden has terminated the COVID-19 national emergencies effective May 11, 2023. ● Extraordinary monetary and fiscal stimulus in 2020 and in early 2021 offset certain of the pandemic’s adverse economic effects, but together with supply chain disruptions, continued consumer demand, Russia’s invasion of Ukraine and its effects on energy and food prices, and tight labor markets, have resulted in inflation. Inflation is running at levels unseen in decades and well above the Federal Reserve’s long term inflation goal of 2.0% annually. Beginning in March 2022, the Federal Reserve has been raising target federal funds interest rates and reducing its securities holdings in an effort to reduce inflation. The nature and timing of any future changes in monetary and fiscal policies and their effect on us cannot be predicted. At the end of 2023, many believed that the Federal Reserve would loosen its monetary policy in response to inflation, which was declining, but remained above the Fed’s 2% long term target level. Strong economic data and inflation reports since then appear to have reduced expectations as to the number, timing and size of any reductions in the target federal funds rate in the near term. Table of Contents 34 ● Market developments, including unemployment, price levels, stock and bond market volatility, and changes, including those resulting from Russia’s invasion of Ukraine affect consumer confidence levels, economic activity and inflation. Increases in market interest rates, inflation and consumer and business confidence may cause changes in customers’ savings and payment behaviors, including potential increases in loan delinquencies and default rates. These could affect our earnings and credit quality. ● Our ability to assess the creditworthiness of our customers and those we do business with, and the values of our assets and loan collateral may be adversely affected and less predictable as a result of inflation and higher market interest rates We adopted CECL on January 1, 2023 as required by generally accepted accounting principles (“GAAP”). CECL changed the loss model to take into account current expected credit losses in place of the incurred loss method used historically under GAAP. This changes the process we use to estimate losses inherent in our credit exposures. The process for estimating expected losses requires difficult, subjective, and complex judgments, including forecasts of economic conditions and how those economic predictions might affect the ability of our borrowers to repay their loans or the value of assets. Changes in economic conditions and factors used in our CECL models may increase the variability of our provisions for loan losses and our earnings. Nonperforming and similar assets take significant time to resolve and may adversely affect our results of operations and financial condition. Our nonperforming loans were 0.16% of total loans as of December 31, 2023, and we had no other real estate owned as result of foreclosures or otherwise in full or partial payments in respect of loans (“OREO”). Non-performing assets may adversely affect our net income in various ways. We do not record interest income on nonaccrual loans or OREO and these assets require higher loan administration and other costs, thereby adversely affecting our income. Decreases in the value of these assets, or the underlying collateral, or in the related borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires commitments of time from management, which can be detrimental to the performance of their other responsibilities. Our non-performing assets may be adversely affected by loan deferrals and modifications made in response to the pandemic and the moratoria on foreclosures and evictions. There can be no assurance that we will not experience increases in nonperforming loans in the future, much of which is affected by the economy and the levels of interest rates, generally. Our allowance for loan losses may prove inadequate or we may be negatively affected by credit risk exposures. We periodically review our allowance for loan losses for adequacy considering economic conditions and trends, collateral values and credit quality indicators, including past charge-off experience and levels of past due loans and nonperforming assets. We cannot be certain that our allowance for loan losses will be adequate over time to cover credit losses in our portfolio because of unanticipated adverse changes in the economy, including the continuing effects of the pandemic and fiscal and monetary response to COVID-19 and the shift beginning in March 2022 from an extraordinarily expansionary monetary policies to a tightening monetary policy to fight inflation, market conditions or events adversely affecting specific customers, industries or markets, including disruptions of supply chains and the war in Ukraine, and changes in borrower behaviors. Certain borrowers and their businesses and real estate and commercial projects and businesses may be adversely affected by inflation and higher interest rates, and economic slowdowns arising from tighter monetary policies, and may request or need loan modifications and deferrals. Various businesses will be unable to fully pass on increased costs due to inflation, and their profits may shrink. If the credit quality of our customer base materially decreases, if the risk profile of the market, industry or group of customers changes materially or weaknesses in the real estate markets worsen, borrower payment behaviors change, or if our allowance for loan losses is not adequate, our business, financial condition, including our liquidity and capital, and results of operations could be materially adversely affected. CECL, a new accounting standard for estimating expected future loan losses, is effective for the Company beginning January 1, 2023, and its effects upon the Company in the current environment have not yet been determined fully due to its short existence. The CECL model incorporates various economic condition elements, where changes in fiscal and monetary policy, as well as market interest rates, could result in more volatility in our provisions for loan losses under CECL, which could adversely affect our net income. Table of Contents 35 Changes in the real estate markets, including the secondary market for residential mortgage loans, may continue to adversely affect us. Beginning in March 2022, inflation and the Federal monetary policies to increase interest rates to fight inflation have caused mortgage rates to increase significantly. Higher interest rates and the increased level of housing costs as a result of the COVID-19 pandemic, have caused housing starts and sales to slow. Inventories of existing homes for sale have remained generally low, and many believe that higher mortgage rates are adversely affecting potential sellers from selling their existing houses and incurring higher mortgage interest rates on their replacement home. These conditions have adversely affected housing affordability and increased monthly mortgage payments. House prices have begun to decline in certain markets from their earlier highs. This adversely affects our mortgage loan productions and the value of residential mortgage collateral. Commercial real estate projects’ economic assumptions may be adversely affected, and certain projects with short term and/or unhedged variable rate debt may be especially affected by increased interest rates and a slower economy. The CFPB’s mortgage and servicing rules, including TRID rules for closed end credit transactions, enforcement actions, reviews and settlements, affect the mortgage markets and our mortgage operations. The CFPB requires that lenders determine whether a consumer has the ability to repay a mortgage loan have limited the secondary market for and liquidity of many mortgage loans that are not “qualified mortgages.” Recently adopted changes to the CFPB’s qualified mortgage rules are reportedly being reconsidered. The Tax Cuts and Jobs Act’s (the “2017 Tax Act”) limitations on the deductibility of residential mortgage interest and state and local property and other taxes and federal moratoria on single-family foreclosures and rental evictions could adversely affect consumer behaviors and the volumes of housing sales, mortgage and home equity loan originations, as well as the value and liquidity of residential property held as collateral by lenders such as the Bank, and the secondary markets for single and multi-family loans. Acquisition, construction and development loans for residential development may be similarly adversely affected. Fannie Mae and Freddie Mac (“GSEs”) have been in conservatorship since September 2008. Since Fannie Mae and Freddie Mac dominate the residential mortgage markets, any changes in their operations and requirements, as well as their respective restructurings and capital, could adversely affect the primary and secondary mortgage markets, and our residential mortgage businesses, our results of operations and the returns on capital deployed in these businesses. The timing and effects of resolution of these government sponsored enterprises cannot be predicted. We may be contractually obligated to repurchase mortgage loans we sold to third parties on terms unfavorable to us. As part of its routine business, the Company originates mortgage loans that it subsequently sells in the secondary market, generally to Fannie Mae, a GSE. In connection with the sale of these loans, the Company makes customary representations and warranties, the breach of which may result in the Company being required to repurchase the loan or loans. Furthermore, the amount paid may be greater than the fair value of the loan or loans at the time of the repurchase. Although mortgage loan repurchase requests made to us have been limited, if these increased, we may have to establish reserves for possible repurchases and adversely affect our results of operation and financial condition. Mortgage servicing rights requirements may change and require us to incur additional costs and risks. The CFPB’s residential mortgage servicing standards may adversely affect our costs to service residential mortgage loans. The effects of reduced housing starts and mortgage activity due to higher market interest rates, have decreased our generation of new mortgage loans and related MSRs. This may be offset partially by decreases in mortgage prepayments and refinancings, and corresponding increases in the duration of our existing MSRs and their values. This net effect could reduce our aggregate income from servicing these types of loans and make it more difficult and costly to timely realize the value of collateral securing such loans upon a borrower default. The Basel III Rules relating to MSRs may also increase the potential capital required as a result of MSRs, when considered with other capital rule adjustments and deductions. Table of Contents 36 The soundness of other financial institutions could adversely affect us. We routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, central clearinghouses, banks, including our correspondent banks and other financial institutions. Our ability to engage in routine investment and banking transactions, as well as the quality and values of our investments in holdings of other obligations of other financial institutions such as the FHLB-Atlanta, could be adversely affected by the actions, financial condition, and profitability of such other financial institutions, including the FHLB-Atlanta and our correspondent banks. Financial services institutions are interrelated as a result of shared credits, trading, clearing, counterparty and other relationships. Most LIBOR reference interest rates used by many financial institutions to price extensions of credit stopped being quoted June 30, 2023 and their use has been strongly discouraged by regulatory agencies. Most banks did not adopt CECL until January 1, 2023. The failures of Silicon Valley Bank, Signature Bank and First Republic Bank in 2023 due to concentrations of deposits and depositors holding large amounts of deposits in excess of FDIC insurance limits, as well as flawed business models and management, adversely affected the financial system and public confidence. These have resulted in increased regulatory scrutiny of bank liquidity, funding and capital, depressed bank stock values generally, and higher FDIC deposit insurance premiums on the largest banks, as well as regulatory proposals to increase large banks’ capital and expand enhanced prudential standards starting at $100 billion of assets instead of $250 billion. The federal bank regulators have been advocating more use of the Federal Reserve discount window to improve bank liquidity. At the same time, these bank failures, together with the failure of the very small Heartland State bank in Kansas due to apparent embezzlement by its president due to losses from his personal crypto trading, have also led to calls to reduce Federal Home Loan Bank lending to banks. Traditionally, the Federal Home Loan Banks have been stable sources of liquidity and funding for banks. The Federal Housing Finance Agency (“FHFA) regulates the Federal Home Loan Banks. The FHFA’s FHLBank System at 100: Focusing on the Future (Nov. 2023) suggest less traditional Federal Home Loan Bank lending to banks, especially banks experiencing financial stress. These changes, together with any exposures other institutions may have to crypto or digital assets, or cybersecurity and data breaches, could cause disruption and unexpected changes in the industry. Any losses, defaults by, or failures of, the institutions we do business with could adversely affect our holdings of the equity in such other institutions, our participation interests in loans originated by other institutions, and our business, including our liquidity, financial condition and earnings. Failures of several banks earlier in 2023 and in early 2024 have resulted in increased market volatility for financial service companies’ securities and in changes in regulatory views and emphases that may adversely affect us and may not be disclosable under law. The failures of Silicon Valley Bank, Signature Bank, First Republic and Heartland Tri-State Bank in 2023 have resulted in significant market volatility for bank stocks, and have caused uncertainty in the investor community and among bank customers, generally, greater bank regulatory scrutiny of banking organizations, especially those experiencing rapid growth and regional banks with $100 billion or more in assets. Similarly concerns about credit quality and capital adequacy at New York Community Bank following two acquisitions raised market concerns and led to replacement of management and a dilutive equity capital raise. Changes in regulations have been proposed as part of the Basel III endgame to the capital, liquidity, long term debt and resolution planning of banking organizations with over $100 billion in assets. These failures also have resulted in market volatility in financial services securities. Regulators have focused supervisory activities, generally, at all sizes of banking organizations on various risks, especially capital adequacy and liquidity in light of growth, asset, liability and customer concentrations and risks; CRE, levels of uninsured deposits; crypto businesses and customers; strategic, capital and liquidity plans and contingency plans; and risk management. Such enhanced scrutiny is often applied as part of the regulatory examination processes, as well as through a variety of nonpublic supervisory actions such as “matters requiring attention,” board of director resolutions, memoranda of understanding, and other regulatory criticism and informal supervisory actions. The bank and bank holding examination processes, as well as any nonpublic supervisory actions, are “confidential supervisory information” for regulatory purposes, whose existence and terms, if any, may not be disclosed by banking organizations. Table of Contents 37 Our concentration of commercial real estate loans could result in further increased loan losses, and adversely affect our business, earnings, and financial condition. Commercial real estate, or CRE, is cyclical and poses risks of possible loss due to concentration levels and the risks of the assets being financed, which include loans for the acquisition and development of land and residential construction. The federal bank regulatory agencies released guidance in 2006 on “Concentrations in Commercial Real Estate Lending.” The guidance defines CRE loans as exposures secured by raw land, land development and construction loans (including 1-4 family residential construction loans), multi-family property, and non-farm non-residential 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 the property. Loans to REITs and unsecured loans to developers that closely correlate to the inherent risks in CRE markets are also CRE loans. Loans on owner occupied commercial real estate are generally excluded from CRE for purposes of this guidance. Excluding owner occupied commercial real estate, we had 39.6% of our loan por tfolio in CRE loans at year-end 2023 compared to 40.4% and 42.6% at year-end 2022 and 2021, respectively. The banking regulators continue to give CRE lending scrutiny and require banks with higher levels of CRE loans to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as higher levels of allowances for possible losses and capital levels as a result of CRE lending growth and exposures. Increases in interest rates beginning in March 2022 may adversely affect the assumptions and performance of CRE, and the ability of borrowers to refinance on terms that CRE borrowers and their projects can support. Lower demand for CRE and fewer CRE purchase and sale transactions, and reduced availability of, and higher interest rates and costs for, CRE loans could adversely affect CRE values and liquidity, our CRE loans and sales of OREO, and therefore our earnings and financial condition, including our capital and liquidity. Our future success is dependent on our ability to compete effectively in highly competitive markets. The East Alabama banking markets which we operate are highly competitive and our future growth and success will depend on our ability to compete effectively in these markets. Nineteen banks, including JP Morgan Chase, Wells Fargo, Truist, PNC, Regions, Valley National and SouthState, have offices in Lee County. Eleven of these banks are headquartered outside of Alabama. We compete for loans, deposits and other financial services with other local, regional and national commercial banks, thrifts, credit unions, mortgage lenders, and securities and insurance brokerage firms. Lenders operating nationwide over the internet are growing rapidly. Many of our competitors offer products and services different from us, and have substantially greater resources, name recognition and market presence than we do, which benefits them in attracting business. In addition, larger competitors may be able to price loans and deposits more aggressively than we are able to and have broader and more diverse customer and geographic bases to draw upon. Out of state banks may branch into our markets. Fintech and other non-bank competitors also compete for our customers, and may partner with other banks and/or seek to enter the payments system. The failures of other banks with offices in our markets could also lead to the entrance of new, stronger competitors in our markets. Our success depends on local economic conditions. Our success depends on the general economic conditions in the geographic markets we serve in Alabama. The local economic conditions in our markets have a significant effect on our commercial, real estate and construction loans, the ability of borrowers to repay these loans and the value of the collateral securing these loans. Adverse changes in the economic conditions of the Southeastern United States in general, or in one or more of our local markets, including the effects of higher market interest rates and inflation, supply chain disruptions, changes in customer behaviors and in the workforce and demand for space since the COVID-19 pandemic, and the timing and magnitude of future inflation and interest rates, could negatively affect our results of operations and our profitability. Our local economy is also affected by the growth of automobile manufacturing and related suppliers located in our markets and nearby. Auto sales and housing sales are cyclical and generally are affected adversely by higher interest rates. Table of Contents 38 Attractive acquisition opportunities may not be available to us in the future. While we seek continued organic growth, including loan growth, we also may consider the acquisition of other businesses. We expect that other banking and financial companies, many of which have significantly greater resources, will compete with us to acquire financial services businesses. This competition could increase prices for potential acquisitions that we believe are attractive. Also, acquisitions are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests, and regulatory approvals could contain conditions that reduce the anticipated benefits of any transaction. Among other things, our regulators consider our capital, liquidity, profitability, regulatory compliance and levels of goodwill and intangibles when considering acquisition and expansion proposals. Any acquisition could be dilutive to our earnings and shareholders’ equity per share of our common stock. The regulatory agencies are carefully scrutinizing financial institution mergers, and the merger application process has lengthened. Future acquisitions and expansion activities may disrupt our business, dilute shareholder value and adversely affect our operating results and financial condition. We regularly evaluate potential acquisitions and expansion opportunities, including new branches and other offices. To the extent that we grow through acquisitions, we cannot assure you that we will be able to adequately or profitably manage this growth. Acquiring other banks, branches, or businesses, as well as other geographic and product expansion activities, involve various risks including: ● risks of unknown or contingent liabilities, and potential asset quality issues; ● unanticipated costs and delays; ● risks that acquired new businesses will not perform consistent with our growth and profitability expectations; ● risks of entering new markets or product areas where we have limited experience; ● risks that growth will strain our infrastructure, staff, internal controls and management, which may require additional personnel, time and expenditures; ● difficulties, expenses and delays of integrating the operations and personnel of acquired institutions; ● potential disruptions to our business; ● possible loss of key employees and customers of acquired institutions; ● potential short-term decreases in profitability; and ● diversion of our management’s time and attention from our existing operations and business. Technological changes affect our business, and we may have fewer resources than many competitors to invest in technological improvements. The financial services industry is undergoing rapid technological changes with frequent introductions of new technology driven products and services and growing demands for mobile and user-based banking applications. In addition to allowing us to analyze our customers better, the effective use of technology may increase efficiency and may enable financial institutions to reduce costs, risks associated with fraud and compliance with anti-money laundering and other laws, and various operational risks. Largely unregulated “fintech” businesses have increased their participation in the lending and payments businesses, and have increased competition in these businesses. Our future success will depend, in part, upon our ability to use technology to provide products and services that meet our customers’ preferences and create additional efficiencies in operations, while avoiding cyber-attacks and disruptions, data breaches and anti-money laundering and other potential violations of law. The COVID-19 pandemic and increased remote work has accelerated electronic banking activity and the need for increased operational efficiencies and data security. We may need to make significant additional capital investments in technology, including cyber and data security, and we may not be able to effectively implement new technology-driven products and services, or such technology may prove less effective than anticipated. Many larger competitors have substantially greater resources to invest in technological improvements and, increasingly, non-banking firms are using technology to compete with traditional lenders for loans, payments, and other banking services. As a result, our competition from service providers not located in our markets has increased. Table of Contents 39 Operational risks are inherent in our businesses. Operational risks and losses can result from internal and external fraud; gaps or weaknesses in our risk management or internal audit procedures; errors by employees or third parties, including our vendors, failures to document transactions properly or obtain proper authorizations; failure to comply with applicable regulatory requirements in the various jurisdictions where we do business or have customers; failures in our estimates models that rely on; equipment failures, including those caused by natural disasters, or by electrical, telecommunications or other essential utility outages; business continuity and data security system failures, including those caused by computer viruses, cyberattacks, unforeseen problems encountered while implementing major new computer systems or, failures to timely and properly upgrade and patch existing systems or inadequate access to data or poor response capabilities in light of such business continuity and data security system failures; or the inadequacy or failure of systems and controls, including those of our vendors or counterparties. The COVID-19 pandemic presented operational challenges to maintaining continuity of operations of customer services while protecting our employees’ and customers’ safety and similar situations may occur in the future. In addition, we face certain risks inherent in the ownership and operation of our bank premises and other real-estate, including liability for accidents on our properties. Although we have implemented risk controls and loss mitigation actions, and substantial resources are devoted to developing efficient procedures, identifying and rectifying weaknesses in existing procedures and training staff and potential environmental risks, it is not possible to be certain that such actions have been or will be effective in controlling these various operational risks that evolve continuously. Potential gaps in our risk management policies and internal audit procedures may leave us exposed to unidentified or unanticipated risk, which could negatively affect our business. Our enterprise risk management and internal audit program is designed to mitigate material risks and losses to us. We have developed and continue to develop risk management and internal audit policies and procedures to reflect the ongoing review of our risks and expect to continue to do so in the future. Nonetheless, our policies and procedures may not be comprehensive and may not identify timely every risk to which we are exposed, and our internal audit process may fail to detect such weaknesses or deficiencies timely in our risk management framework. Many of our risk management models and estimates use observed historical market behavior to model or project potential future exposure. The models used by our business, including the new CECL models, are based on assumptions and projections. These models may not operate properly, or our inputs and assumptions may be inaccurate, or changes in economic and market conditions, customer behaviors or regulations may adversely affect the accuracy or usefulness of the models. As a result, these methods may not fully or timely predict future exposures, which can be significantly greater and/or faster than historically. Other risk management methods depend upon the evaluation of information regarding markets, clients, or other matters that are publicly available or otherwise accessible to us. This information may not always be accurate, complete, up-to-date or properly evaluated. Furthermore, there can be no assurance that we can effectively review and monitor all risks or that all of our employees will closely follow our risk management policies and procedures, nor can there be any assurance that our risk management policies and procedures will enable us to accurately identify all risks and limit our exposures based on our assessments. In addition, we may have to implement more extensive and perhaps different risk management policies and procedures as our regulation changes. For example, the Federal Reserve and the federal bank regulators issued Principles for Climate- Related Risk for Large Financial Institutions (October 14, 2023). The bank regulators’ guidance applies to banks with over $100 billion in assets. The SEC adopted a climate risk rule on March 6, to require more disclosure on climate risks, also. All of these could adversely affect our costs, and our financial condition and results of operations. Table of Contents 40 Any failure to protect the confidentiality of customer information could adversely affect our reputation and have a material adverse effect on our business, financial condition and results of operations . Various laws enforced by the bank regulators and other agencies protect the privacy and security of customers’ non-public personal information. Many of our employees have access to, and routinely process personal information of clients through a variety of media, including information technology systems. Our internal processes, policies and controls are designed to protect the confidentiality of client information we hold and that is accessible to us and our employees. It is possible that an employee could, intentionally or unintentionally, disclose or misappropriate confidential client information or our data could be the subject of a cybersecurity attack. Such personal data could also be compromised via intrusions into our systems or those of our service providers or other persons we do business with such as credit bureaus, data processors and merchants who accept credit or debit cards for payment. If we fail to maintain adequate internal controls, or if our employees fail to comply with our policies and procedures, misappropriation or inappropriate disclosure or misuse of client information could occur. Such internal control inadequacies or non-compliance could materially damage our reputation, lead to remediation costs and civil or criminal penalties. These could have a material adverse effect on our business, financial condition and results of operations. See Item 1C. of this report for more information about cybersecurity and our management and strategies. Our information systems may experience interruptions and security brea ches. We rely heavily on communications and information systems, including those provided by third-party service providers, to conduct our business. Any failure, interruption, or security breach of these systems could result in failures or disruptions which could affect our customers’ privacy and our customer relationships, generally. Our business continuity plans, including those of our service providers, for back-up and service restoration, may not be effective in the case of widespread outages due to severe weather, natural disasters, pandemics, or power, communications and other failures. See Item 1C. of this report for more information about cybersecurity and our management and strategies. Our systems and networks, as well as those of our third-party service providers, are subject to security risks and could be susceptible to disruption through cyber-attacks, such as denial of service attacks, hacking, terrorist activities, or identity theft. Cybercrime risks have increased as electronic and mobile banking activities increased as a result of the COVID-19 pandemic, and may increase as a result of the Russia invasion of Ukraine and tensions with mainland China and other countries. Other financial service institutions and their service providers have reported material security breaches in their websites or other systems, some of which have involved sophisticated and targeted attacks, including use of stolen access credentials, malware, ransomware, phishing and distributed denial-of -service attacks, among other means. Such cyber- attacks may also seek to disrupt the operations of public companies or their business partners, effect unauthorized fund transfers, obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems. Hacking and identity theft risks, in particular, could cause serious reputational harm. Despite our cybersecurity policies and procedures and our Board of Directors and management’s efforts to monitor and ensure the integrity of the systems we and our third-party service providers use, we may not be able to anticipate the rapidly evolving security threats, nor may we be able to implement preventive measures effective against all such threats. The techniques used by cyber criminals change frequently, may not be recognized until launched and can originate from a wide variety of sources, including external service providers, organized crime affiliates, terrorist organizations or hostile foreign governments. These risks may increase in the future as the use of mobile banking and other internet electronic banking continues to grow. Security breaches or failures may have serious adverse financial and other consequences, including significant legal and remediation costs, disruptions to operations, misappropriation of confidential information, damage to systems operated by us or our third-party service providers, as well as damages to our customers and our counterparties. In addition, these events could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. In July 2023, the SEC adopted rules, effective September 5, 2023, that require reporting companies to disclose material cybersecurity incidents they experience on SEC Form 8-K within four business days, nature, scope, and timing of the incident, and the material impact or reasonably likely material impact on the registrant, including its financial condition and results of operations. As a smaller reporting company, the Company has to comply with these Form 8-K reporting requirements beginning June 15, 2024. Annually, reporting companies are required to disclose material information regarding their cybersecurity risk management, strategy, and governance, beginning for years ending on or after December 15, 2023. Table of Contents 41 We may be unable to attract and retain key people to support our business. Our success depends, in large part, on our ability to attract and retain key people. We compete with other financial services companies for people primarily on the basis of compensation and benefits, support services and financial position. Intense competition exists for key employees with demonstrated ability, and we may be unable to hire or retain such employees. Effective succession planning is also important to our long-term success. The unexpected loss of services of one or more of our key persons and failure to ensure effective transfer of knowledge and smooth transitions involving such persons could have a material adverse effect on our business due to loss of their skills, knowledge of our business, their years of industry experience and the potential difficulty of promptly finding qualified replacement employees. Proposed rules implementing the executive compensation provisions of the Dodd -Frank Act may limit the type and structure of compensation arrangements and prohibit the payment of “excessive compensation” to our executives. These restrictions could negatively affect our ability to compete with other companies in recruiting and retaining key personnel. Severe weather and natural disasters, including as a result of climate change, pandemics, epidemics, acts of war or terrorism or other external events could have significant effects on our business. Severe weather and natural disasters, including hurricanes, tornados, drought and floods, epidemics and pandemics, acts of war or terrorism or other external events could have a significant effect on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. Although management has established disaster recovery and business continuity policies and procedures, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations. The COVID-19 pandemic, trade wars, tariffs, sanctions and similar events and disputes, domestic and international, have adversely affected, and may continue to adversely affect economic activity globally, nationally and locally. Market interest rates have changed significantly and suddenly. The Federal Reserve’s target federal funds rates declined to 0-0.25% in March 2020, where these remained until March 17 2022. The Federal Reserve increased the target federal funds rates 11 from March 17, 2022 through July 27, 2023 to 5.25-5.50% due to inflation. As of March 6, 2023, this range remained at 5.25-5.50% and inflation remains above the Federal Reserve’s target rate of 2%. Such events also may adversely affect business and consumer confidence, generally. We and our customers, and our respective suppliers, vendors and processors may be adversely affected by rising costs and shortages of needed equipment and supplies and tight labor markets. The continuation or worsening of these conditions may adversely affect our profitability, growth asset quality and financial condition. Financial Risks Our ability to realize our deferred tax assets may be reduced in the future if our estimates of future taxable income from our operations and tax planning strategies do not support this amount, and the amount of net operating loss carry-forwards realizable for income tax purposes may be reduced under Section 382 of the Internal Revenue Code by sales of our capital securities. We are allowed to carry -back losses for two years for Federal income tax purposes. As of December 31, 2023, we had a net deferred tax asset of $10.3 million compared to $13.8 million one year earlier. These and future deferred tax assets may be further reduced in the future if our estimates of future taxable income from our operations and tax planning strategies do not support the amount of the deferred tax asset. The amount of net operating loss carry-forwards realizable for income tax purposes potentially could be further reduced under Section 382 of the Internal Revenue Code by a significant offering and/or other sales of our capital securities. Current bank capital rules also reduce the regulatory capital benefits of deferred tax assets. Table of Contents 42 Our cost of funds may increase as a result of general economic conditions, interest rates, inflation and changes in customer behaviors and competitive pressures. Our costs of funds have increased as a result of general economic conditions, increasing interest rates and competitive pressures, and inflation, and anticipated future changes by the Federal Reserve to reduce inflation. Traditionally, we have obtained funds principally through local deposits and borrowings from other institutional lenders such as the FHLB- Atlanta, which we believe are a cheaper and more stable source of funds than borrowings, generally. Increases in interest rates have caused consumers to shift their funds to more interest-bearing instruments and to increase the competition for and costs of deposits. If customers move money out of bank deposits and into other investment assets or from transaction deposits to higher interest-bearing time deposits, we could lose a relatively low cost source of funds, increasing our funding costs and potentially reducing our net interest income and net income. Additionally, any such loss of funds could result in lower loan originations and growth, which could materially and adversely affect our results of operations and financial condition. See “Supervision and Regulation – Fiscal and Monetary Policy.” Our profitability and liquidity may be affected by changes in interest rates and interest rate levels, the shape of the yield curve and economic conditions. Our profitability depends upon net interest income, which is the difference between interest earned on interest-earning assets, such as loans and investments, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Our income is primarily driven by the spread between these rates. Net interest income will be adversely affected if market interest rates and the interest we pay on deposits and borrowings increases faster than the interest earned on loans and investments. Interest rates, and consequently our results of operations, are affected by general economic conditions (national, international and local) and fiscal and monetary policies, as well as expectations of interest rate changes, fiscal and monetary policies and the shape of the yield curve. As a result, a steeper yield curve, meaning long-term interest rates are significantly higher than short-term interest rates, would provide the Bank with a better opportunity to increase net interest income. Conversely, a flattening yield curve could further pressure our net interest margin as our cost of funds increases relative to the spread we can earn on our assets. The yield curve continues to remain inverted, and this results in a lower spread between our costs of funds and our interest income. In addition, net interest income could be affected by asymmetrical changes in the different interest rate indexes, given that not all of our assets or liabilities are priced with the same index. Higher market interest rates and continuing run-off of maturing securities held by the Federal Reserve in furtherance of its quantitative tightening policy to reduce inflation generally reduce economic activity and may reduce loan demand and growth. The production of mortgages and other loans and the value of collateral securing our loans are dependent on demand within the markets we serve, as well as interest rates. Lower interest rates typically increase mortgage originations, decrease MSR values and promote economic growth. Increases in market interest rates tend to decrease mortgage originations, increase MSR values, decrease the value and liquidity of collateral securing loans, and potentially increase net interest spread depending upon the yield curve and the magnitude and duration of interest rate increase, and constrain economic growth. Increases in market interest rates have also caused unrealized losses in our securities portfolio as our available for sale investments are carried at fair value and market prices have declined as market interest rates increase. Although these unrealized losses do not adversely affect our regulatory capital, these do reduce our reported GAAP tangible stockholders’ equity. Sales of securities with unrealized losses would result in realized losses for GAAP, regulatory capital and tax purposes. Increases in interest rates may also change depositor behaviors as customers seek higher yielding deposits. This may adversely affect our costs of funds, growth, net interest income and net income, and may also adversely affect our liquidity. Liquidity risks could affect operations and jeopardize our financial condition. The COVID-19 pandemic generally has increased our deposits and at banks, generally, while reducing the interest rates earned on loans and securities. Such excess liquidity and the resulting balance sheet growth requires capital support and reduced returns on assets and equity. Inflation and tightening monetary policies beginning in early 2022 have increased interest spreads, but may change the mix and costs of our deposits over time. The growth in deposits exceeded our loan growth and the difference was invested in high-quality, marketable U.S. government and government agency securities, including agency mortgage-backed securities. Table of Contents 43 Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, proceeds from loan repayments or sales proceeds from maturing loans and securities, and other sources could have a negative effect on our liquidity. Our funding sources include deposits (primarily core deposits), federal funds purchased, securities sold under repurchase agreements, and short- and long-term debt. We maintain a portfolio of marketable high-quality securities that can be used as a source of liquidity. As market interest rates have risen, however, we have experienced unrealized losses on such securities, which would become realized losses upon the sale of such securities, and such sales at a loss would reduce our net income and our regulatory capital. We are also members of the FHLB-Atlanta and the Federal Reserve Bank of Atlanta, and we can obtain advances collateralized with eligible assets, and maintain uncommitted federal funds lines of credit with other banks. On March 12, 2023, the Federal Reserve established a new Bank Term Funding Program (“BTFP”), which offers loans of up to one year to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral valued at par. The BTFP ended March 11, 2024 and we have not used this program. In addition, the discount window will apply the same margins used for the securities eligible for the BTFP, further increasing the value of investment securities at the discount window. Other sources of liquidity available to the Company or the Bank, if needed, include our ability to acquire additional non- core deposits. We may be able, depending upon market conditions, to borrow money or issue and sell debt and preferred or common securities in public or private transactions. Our access to funding sources in amounts adequate to finance or capitalize our activities on terms which are acceptable to us could be impaired by factors that affect us specifically, or the financial services industry, the economy and market interest rates and fiscal and monetary policies. General conditions that are not specific to us, such as disruptions in the financial markets, failures of other bank, such as Silicon Valley Bank, Signature Bank and First Republic Bank in 2023, or negative views and expectations about the prospects for the financial services industry could adversely affect us. Changes in accounting and tax rules applicable to banks could adversely affect our financial conditions and results of operations. From time to time, the FASB and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in us restating prior period financial statements . We may need to raise additional capital in the future, but that capital may not be available when it is needed or on favorable terms. We anticipate that our current capital resources will satisfy our capital requirements for the foreseeable future under currently effective rules. We may, however, need to raise additional capital to support our growth or currently unanticipated losses, or to meet the needs of our communities, resulting from failures or cutbacks by our competitors. Our ability to raise additional capital, if needed, will depend, among other things, on conditions in the capital markets at that time, which are limited by events outside our control, and on our financial performance. If we cannot raise additional capital on acceptable terms when needed, our ability to further expand our operations through internal growth and acquisitions could be limited. Our associates may take excessive risks which could negatively affect our financial condition and business. Banks are in the business of accepting certain risks. Our executive officers and other members of management, sales intermediaries, investment professionals, product managers, and other associates, make decisions and choices that involve exposing us to risk. We endeavor, in the design and implementation of our compensation programs and practices, to avoid giving our associates incentives to take excessive risks; however, associates may nonetheless take such risks. Similarly, although we employ controls and procedures designed to prevent misconduct, to monitor associates’ business decisions and prevent them from taking excessive risks, these controls and procedures may not be effective. If our associates take excessive risks, risks to our reputation, financial condition and business operations could be materially and adversely affected. Table of Contents 44 Our ability to continue to pay dividends to shareholders and repurchase stock in the future is subject to our profitability, capital, liquidity and regulatory requirements and these limitations may prevent or limit future dividends. Cash available to pay dividends to our shareholders is derived primarily from dividends paid to the Company by the Bank. The ability of the Bank to pay dividends, as well as our ability to pay dividends to our shareholders, will continue to be subject to and limited by laws limiting dividend payments by the Bank, the results of operations of our subsidiaries and our need to maintain appropriate liquidity and capital at all levels of our business consistent with regulatory requirements and the needs of our businesses. We can only pay dividends, repurchase stock and pay discretionary bonuses, if our capital conservation buffer exceeds 2.5% and from our eligible retained income over the last four calendar quarters. Although we believe our securities portfolio repositioning in December 2023 improved our balance sheet and reduced our interest rate risks, the losses on such securities sales reduced our eligible retained income available for dividends, share repurchases and discretionary bonuses. See “Supervision and Regulation - Payment of Dividends and Repurchases of Capital Instruments.” The Federal Reserve expects bank holding companies to inform and consult with Federal Reserve supervisory staff sufficiently in advance of (i) declaring and paying a dividend that could raise safety and soundness concerns, such as declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid); (ii) redeeming or repurchasing regulatory capital instruments when the bank holding company is experiencing financial weaknesses; or (iii) redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction as of the end of a quarter in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. Further, the Company is also required to maintain sufficient capital, liquidity and resources to serve as a source of managerial and financial strength to the Bank, which may limit its capacity to pay dividends on Company common stock. The Federal Reserve may require the Company to commit resources to the Bank, even where it is not otherwise in the interests of the Company or its shareholders or creditors. A limited trading market exists for our common shares, which could result in price volatility. Your ability to sell or purchase common shares depends upon the existence of an active trading market for our common stock. Although our common stock is quoted on the Nasdaq Global Market under the trading symbol “AUBN,” our trading volume has been limited historically. As a result, you may be unable to sell or purchase shares of our common stock at the volume, price and time that you desire. Additionally, whether the purchase or sales prices of our common stock reflects a reasonable valuation of our common stock also is affected by limited trading market, and thus the price you receive for a thinly-traded stock, such as our common stock, may not reflect its true or intrinsic value. The limited trading market for our common stock may cause fluctuations in the market value of our common stock to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading market. Legal and Regulatory Risks The Company is an entity separate and distinct from the Bank. The Company is an entity separate and distinct from the Bank. Company transactions with the Bank are limited by Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W. We depend upon the Bank’s earnings and dividends, which are limited by law and regulatory policies and actions, for cash to pay the Company’s corporate obligations, and to pay dividends to our shareholders. If the Bank’s ability to pay dividends to the Company was terminated or limited, the Company’s liquidity and financial condition could be materially and adversely affected. Table of Contents 45 Legislative and regulatory changes The Biden Administration and its appointees to the various government agencies, including the bank regulators, CFPB and SEC, have proposed, and continue to propose changes to bank regulation, SEC rules and corporate tax changes that could have an adverse effect on our results of operations and financial condition. The bank regulators, the CFPB and the SEC have actively developed a broad range of new and changed rules over the last several years , many of which are complex and lengthy, such as the new CRA regulations and various SEC rules, including the cybersecurity rule adopted in September 2023 and climate change rules adopted on March 6, 2024. Some rules, such as the SEC share repurchase modernization rules, have been struck down by the courts and have been withdrawn, creating more compliance uncertainty during the pendency of the litigation. Ten states attorney generals immediately challenged the new climate change rules, and the Sierra Club is reported to be considering action against the SEC rules because it was scaled back from the original proposal. Compliance with the volume and complexity of these rule changes is costly and imposes material time and personnel burdens on financial services companies, especially on smaller companies, such as the Company. Increasing litigation on regulatory rules and whether these exceed the agencies’ statutory authority or have been improperly adopted has also created further uncertainty and risks as to the final timing, content and scope of new rules, and business changes needed to be made to comply with the effective or compliance dates of the new or changed rules. For example, the SEC’s share repurchase disclosure modernization amendments were adopted in May 2023, with a compliance date for calendar year issuers beginning with their 2023 annual Form 10-K report. The SEC postponed the rule on November 22, 2023, following a court ruling ordering the SEC to correct the defects in the rule by November 30, 2023. In December 2023, the court vacated the rule due to inaction by the SEC, and the SEC reverted on February 9, 2024 to its pre-existing rules. We are subject to extensive regulation that could limit or restrict our activities and adversely affect our earnings. We and our subsidiaries are regulated by several regulators, including the Federal Reserve, the Alabama Superintendent, the SEC and the FDIC. Although not regulated or supervised by the CFPB, we are subject to the regulations and interpretations of the CFPB and the Federal Reserve’s supervision of our compliance with such regulations and pronouncements. Our success is affected by state and federal laws and regulations affecting banks and bank holding companies, and the securities markets, and our costs of compliance could adversely affect our earnings. Banking regulations are primarily intended to protect depositors, and the FDIC’s DIF, not shareholders. The financial services industry also is subject to frequent legislative and regulatory changes and proposed changes. In addition, the interpretations of regulations by regulators may change and statutes may be enacted with retroactive impact. From time to time, regulators raise issues during examinations of us which, if not determined satisfactorily, could have a material adverse effect on us. Compliance with applicable laws and regulations is time consuming and costly and may affect our profitability. Our regulators could have a material adverse effect on financial services regulation, generally. Litigation and regulatory actions could harm our reputation and adversely affect our results of operations and financial condition. A substantial legal liability or a significant regulatory action against us, as well as regulatory inquiries or investigations, could harm our reputation, result in material fines or penalties, result in significant legal and other costs, divert management resources away from our business, and otherwise have a material adverse effect on our ability to expand on our existing business, financial condition and results of operations. Even if we ultimately prevail in litigation, regulatory investigation or action, our ability to attract new customers, retain our current customers and recruit and retain employees could be materially and adversely affected. Regulatory inquiries and litigation may also adversely affect the prices or volatility of our securities specifically, or the securities of our industry, generally. As a participating lender in the PPP, the Bank is subject to additional risks of litigation from the Bank’s customers or other parties regarding the Bank’s processing of loans for the PPP and risks of potential SBA or bank regulatory claims. The Bank participated as a lender in the PPP and made a total of $56.7 million of PPP loans in 2020 and 2021, generally to support existing customers in the Bank’s markets. All PPP loans made by the Bank have been forgiven by the SBA, except for one credit where the borrower is voluntarily repaying the loan. Since the beginning of the PPP, various banks have been subject to litigation regarding the processes and procedures used in processing applications for the PPP, and greater governmental attention is directed at preventing fraud. We may be exposed to similar litigation risks, from both customers and non-customers that approached the Bank regarding PPP loans that we extended. Table of Contents 46 The SBA, the Department of Justice and the bank regulators are investigating various PPP lenders and borrowers with respect to potential fraud or improper activities under the PPP loan programs. Although the SBA has not indicated any issues with the Bank’s participation in the PPP program and honored all PPP forgiveness requests, the Bank could have potential liability if the SBA later determines deficiencies in the manner in which PPP loans were originated, funded or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, or its forgiveness of a PPP properly, including those related to the ambiguities in the laws, rules and guidance regarding the PPP’s operation. The Bank is unaware of any such investigation or claims. If any such claims are made against the Bank and are not resolved favorably to the Bank, it may result in financial liability or adversely affect our reputation. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse effect on our business, financial condition and results of operations. Similar issues may also result in the denial of forgiveness of PPP loans, which could expose us to potential borrower bankruptcies and potential losses and additional costs. We are required to maintain capital to meet regulatory requirements, and if we fail to maintain sufficient capital, our financial condition, liquidity and results of operations would be adversely affected. We and the Bank must meet regulatory capital requirements and maintain sufficient liquidity, including liquidity at the Company, as well as the Bank. If we fail to meet these capital and other regulatory requirements, including more rigorous requirements arising from our regulators’ implementation of Basel III, our financial condition, liquidity and results of operations would be materially and adversely affected. Our failure to remain “well capitalized” and “well managed”, including meeting the Basel III capital conservation buffers, for bank regulatory purposes, could affect customer confidence, our ability to grow, our costs of funds and FDIC insurance, our ability to raise brokered deposits, our ability to pay dividends on our common stock and our ability to make acquisitions, and we may no longer meet the requirements for becoming a financial holding company. These could also affect our ability to use discretionary bonuses to attract and retain quality personnel. See “Supervision and Regulation—Basel III Capital Rules.” Although we currently have capital ratios that exceed all these minimum levels and a strategic plan to maintain these levels, we or the Bank may be unable to continue to satisfy the capital adequacy requirements and/or maintain our liquidity for various reasons, which may include: ● losses and/or increases in the Bank’s credit risk assets and expected losses resulting from the deterioration in the creditworthiness of borrowers and the issuers of equity and debt securities; ● difficulty in refinancing or issuing instruments upon redemption or at maturity of such instruments to raise capital under acceptable terms and conditions; ● declines in the value of our securities portfolios or sales of securities for losses; ● revisions to the regulations or their application by our regulators that increase our capital requirements; ● reduced total earnings on our assets will reduce our internal generation of capital available to support our balance sheet growth; ● reductions in the value of our MSRs and DTAs; and other adverse developments; and ● unexpected growth and an inability to increase capital timely. A failure to remain “well capitalized,” for bank regulatory purposes, including meeting the Basel III Capital Rule’s conservation buffer, could adversely affect customer confidence, and our: ● ability to grow; ● the costs of and availability of funds; ● FDIC deposit insurance premiums; ● ability to raise or replace brokered deposits; ● ability to pay or increase dividends on our capital stock. ● Ability to repurchase our common stock ● ability to make discretionary bonuses to attract and retain quality personnel; ● ability to make acquisitions or engage in new activities; ● flexibility if we become subject to prompt corrective action restrictions; and ● ability to make payments of principal and interest on any of our capital instruments that may be then outstanding. Table of Contents 47 The Federal Reserve may require us to commit capital resources to support the Bank. As a matter of policy, the Federal Reserve expects a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. The Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank. In addition, the Dodd-Frank Act amended the FDI Act to require that all companies that control a FDIC-insured depository institution serve as a source of financial strength to their depository institution subsidiaries. Under these requirements, we could be required to provide financial assistance to the Bank should it experience financial distress, even if further investment was not otherwise warranted. See “Supervision and Regulation.” Our operations are subject to risk of loss from unfavorable fiscal, monetary and political developments in the U.S. Our businesses and earnings are affected by the fiscal, monetary and other policies and actions of various U.S. governmental and regulatory authorities. Changes in these are beyond our control and are difficult to predict and, consequently, changes in these policies could have negative effects on our activities and results of operations. Failures of the executive and legislative branches to agree on spending plans and budgets previously have led to Federal government shutdowns, which may adversely affect the U.S. economy. Additionally, any prolonged government shutdown may inhibit our ability to evaluate the economy, generally, and affect government workers who are not paid during such events, and where the absence of government services and data could adversely affect consumer and business sentiment, our local economy and our customers and therefore our business. Litigation and regulatory investigations are increasingly common in our businesses and may result in significant financial losses and/or harm to our reputation. We face risks of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including the risk of class action lawsuits. Plaintiffs in class action and other lawsuits against us may seek very large and/or indeterminate amounts, including punitive and treble damages. Due to the vagaries of litigation, the ultimate outcome of litigation and the amount or range of potential loss at particular points in time may be difficult to ascertain. We do not have any material pending litigation or regulatory matters affecting us. Failures to comply with the fair lending laws, CFPB regulations or the Community Reinvestment Act, or CRA, could adversely affect us. The Bank is subject to, among other things, the provisions of the Equal Credit Opportunity Act, or ECOA, and the Fair Housing Act, both of which prohibit discrimination based on race or color, religion, national origin, sex and familial status in any aspect of a consumer, commercial credit or residential real estate transaction. The DOJ and the federal bank regulatory agencies have issued an Interagency Policy Statement on Discrimination in Lending have provided guidance to financial institutions to evaluate whether discrimination exists and how the agencies will respond to lending discrimination, and what steps lenders might take to prevent discriminatory lending practices. Failures to comply with ECOA, the Fair Housing Act and other fair lending laws and regulations, including CFPB regulations or interpretations, could subject us to enforcement actions or litigation, and could have a material adverse effect on our business financial condition and results of operations. Our Bank is also subject to the CRA and periodic CRA examinations. The CRA requires us to serve our entire communities, including low- and moderate-income neighborhoods. Our CRA ratings could be adversely affected by actual or alleged violations of the fair lending or consumer financial protection laws. The CRA and fair lending responsibilities are related and mutually reinforcing. Even though we have maintained an “satisfactory” CRA rating since 2000, we cannot predict our future CRA ratings. Violations of fair lending laws or if our CRA rating falls to less than “satisfactory” could adversely affect our business, including expansion through branching or acquisitions. The Federal Reserve adopted comprehensive revisions to its CRA regulations on October 24, 2023. The other bank regulators jointly adopted the new CRA regulations, also, and published the new rule in the Federal Register on February 1, 2024. These new rules are first effective for the Bank beginning on January 1, 2026 with data reporting beginning January 1, 2027. The Bank will be an “intermediate bank” and will be subject to the “retail lending test” and either the “intermediate bank community development test,” or if the bank elects, “the community development financing test.” We are evaluating the new rules but cannot predict their effects on us, but these could significantly affect our compliance costs and activities. See “Supervision and Regulation - Community Reinvestment Act and Consumer Laws.” Table of Contents 48 COVID-19 Risks The national emergencies related to COVID-19 have been terminated by the President effective May 11, 2023 and in February 2024 the Centers for Disease Control likened COVID-19 to the flu, and recommended continued use of booster vaccinations. The medical and direct economic effects of COVID-19 diminished further in 2023 and are not directly affecting the Company’s business. COVID-19 continues to have various indirect effects and risks, the most important of which are described herein, including continuing inflation and the Federal Reserve’s change from accommodative monetary policy to a tightening monetary policy to fight inflation following significant fiscal and monetary stimuli provided to reduce the effects of COVID-19 pandemic on the economy, as well significant changes resulting from the pandemic, including supply chain disruptions, a tight labor market, remote work away from the office, population and business shifts within regions of the United States, changes in commercial real estate utilization, and shortages of housing and increases in rents and housing costs in various areas of the country. These risks are discussed in this report. The Company’s assessment of risks related to COVID-19 and its effects on the Company applicable during the pandemic are discussed in the Company‘s Annual Report on Form 10-K filed with the SEC on March 8, 2022 under the caption “Risk Factors-COVID 19 Risks” and in our Quarterly Reports on Form 10-Qs though September 30, 2022.