What changed in this filing

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Item 1. Business

2025-03-11 compared with 2024-03-14 · 1933 added, 1688 removed, 708 unchanged (84% of the section changed)

Auburn National Bancorporation, Inc.

(the “Company”) is a bank holding company registered

with the Board of Governors

(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

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its Alabama predecessor as

the bank holding company controlling AuburnBank, an Alabama state

member bank with its principal office in Auburn,

the bank holding company controlling AuburnBank, an Alabama state member

bank with its principal office in Auburn,

Alabama (the “Bank”).

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company, the Company

may diversify into a broader range of financial services and other business activities than currently

may diversify into a broader range of financial services and other business activities than

are permitted to the Bank under applicable laws and regulations.

The holding company structure also provides greater

financial and operating flexibility than is presently permitted to the Bank.

The Bank has operated continuously since 1907 and currently conducts its business primarily

in East Alabama, including

financial and operating flexibility than is presently permitted to the

The Bank has operated continuously since 1907 and currently conducts its business

primarily in East Alabama, including

Lee County and surrounding areas.

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Reserve Bank”) since April 1995.

The Bank’s primary regulators are

the Federal Reserve and the Alabama Superintendent

The Bank’s primary regulators are the Federal

Reserve and the Alabama Superintendent

of Banks (the “Alabama Superintendent”).

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“FHLB-Atlanta”) since 1991.

The Company’s business is conducted primarily

through the Bank and its subsidiaries.

The Company’s business is conducted

primarily through the Bank and its subsidiaries.

Although it has no immediate plans

to conduct any other business, the Company may engage directly or indirectly in a number

of activities closely related to

to conduct any other business, the Company may engage directly or

indirectly in a number of activities closely related to

banking permitted by the Federal Reserve.

The Company’s principal executive offices

are located at 100 N.

Gay Street, Auburn, Alabama 36830, and its telephone

The Company’s principal

executive offices are located at 100 N.

Gay Street, Auburn, Alabama 36830,

and its telephone

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

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www.auburnbank.com

Company’s website and the information

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

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 the

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

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

Washington, DC 20549.

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

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The SEC maintains an Internet site at

that contains reports, proxy, and other

that contains reports, proxy,

and other information,

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

The Bank offers checking, savings, transaction deposit accounts and

certificates of deposit, and is an active residential

mortgage lender in its primary service area.

The Bank’s primary service area includes the

cities of Auburn and Opelika,

Alabama and nearby surrounding areas in East Alabama, primarily in Lee County.

The Bank also offers commercial,

financial, agricultural, real estate construction and consumer loan products and other

financial services.

The Bank is one of

the largest providers of automated teller machine (“ATM”)

services in East Alabama and operates ATM

machines in 12

locations in its primary service area.

The Bank operates its main office and 7 branches in Auburn, Opelika,

Notasulga, and Valley,

Alabama and a loan

production office in Phenix City,

evaluate the utilization of our existing facilities and customer preferences

for online and mobile banking.

In addition to opening our new main office in 2022, we closed one

branch office in Auburn

at the end of 2024, whose customers could be served conveniently and more

efficiently by another existing Bank branch.

It offers checking, savings, transaction deposit accounts and

certificates of deposit, and is an active residential mortgage

lender in its primary service area.

The Bank’s primary service area includes

the cities of Auburn and Opelika, Alabama and

nearby surrounding areas in East Alabama, primarily in Lee County.

The Bank also offers commercial, financial,

agricultural, real estate construction and consumer loan products,

and other financial services.

The Bank operates ATM

machines in 10 locations in its primary service area.

The Bank offers Visa

Checkcards, which are debit cards with the Visa

logo that work

like checks and can be used anywhere Visa

is accepted, including ATMs.

Checkcards, which are debit cards with the

Visa logo that work

like checks and can be used anywhere Visa is accepted,

including ATMs.

The Bank’s Visa

Checkcards can be used

internationally through the Plus

The Bank offers online banking, bill payment and other electronic banking

services through its Internet website,

can be used internationally through the Plus

The Bank offers online banking, bill payment and other electronic

banking services through its Internet website,

www.auburnbank.com

Our online banking services, bill payment and electronic

services are subject to certain cybersecurity risks.

Our online banking services, bill payment and

electronic services are subject to certain cybersecurity risks.

See “Risk Factors – Our information systems may experience

interruptions and security breaches.”

The Bank does not offer any services related to any Bitcoin or other digital or crypto instruments

or stablecoins or

The Bank had the largest share of the Auburn-Opelika MSA’s

deposits (20.1%) at June 30, 2023.

The Bank has not offered any services related to any Bitcoin or

other digital or crypto instruments, stablecoins or

The Bank had the largest share of the Lee County,

Alabama’s deposits (21.3%) at June 30, 2024.

The banking business in

East Alabama, including Lee County,

is highly competitive with respect to loans, deposits, and other financial

The area is served by 19 banks, 11 of which are headquartered

outside of Alabama and have 26 offices in our market.

Larger national and regional competitors that have offices

in our market include J.P.

is highly competitive with respect to loans, deposits, and other financial services.

Lee County is served by 19 banks, 10 of which are headquartered outside

Other banks have 35 offices in Lee

National and regional competitors that have offices in our market

Morgan Chase, Wells

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PNC, Regions, Valley

National and SouthState.

The regional and national banks and bank holding companies that we

compete with have substantially greater resources, and numerous offices

and affiliates operating over wide geographic

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

well as with credit unions, mortgage

companies, insurance companies, and other local and nonlocal financial institutions,

including institutions offering services

through the mail, by telephone and over the Internet.

As more and different kinds of businesses enter the market for

financial services, competition from nonbank financial institutions

may be expected to intensify further.

Among the advantages that larger financial institutions have over

the Bank are their ability to finance extensive advertising

campaigns, to diversify their funding sources, and to allocate and diversify their assets among

loans and securities of the

National, SouthState and Cadence.

The national and regional banks we compete with have

substantially greater resources, and numerous offices

and affiliates operating over wide geographic areas.

competes for deposits, loans and other business with these banks, as well as with credit

unions, mortgage companies,

insurance companies, and other local and nonlocal financial institutions,

including institutions offering services through

mail, by telephone and over the Internet.

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

competition from nonbank financial institutions may be expected to intensify

Among the advantages that larger financial institutions have

over the Bank are their ability to finance extensive advertising

campaigns, to diversify their funding sources, and to allocate and diversify

their assets among loans and securities of the

highest yield in locations with the greatest demand.

Many of the major commercial banks or their affiliates operating

Bank’s service area offer services

which are not presently offered directly by the Bank,

and these other banks typically have

Bank’s service area offer

services which are not presently offered directly by the Bank, and these other

banks typically have

substantially higher lending limits than the Bank.

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funds, insurance companies and other

investment companies and from money center banks’ offerings of

high-yield investments and deposits, including CDs and

investment companies and from money center banks’ offerings

of high-yield investments and deposits, including CDs and

savings accounts.

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Selected Economic Data

The Auburn-Opelika Metropolitan Statistical Area is Lee County,

Alabama, including Auburn, Opelika and part of Phenix

City, Alabama.

Our market is Lee County,

Alabama, including Auburn, Opelika and part of Phenix City,

Lee County and Macon

County form the Auburn-Opelika MSA.

Census Bureau estimates Lee County’s

population was 180,773 in 2022, and has increased

approximately 29% from 2010 to 2022.

population was 174,241 in 2020

and an estimated 183,215 in July 2023.

The largest employers in the area are Auburn University,

East Alabama Medical

Center, Lee County School System, Auburn City Schools,

Wal-Mart Distribution

Center, Lee County School System, Auburn

and Opelika City Schools, Auburn City Schools, Wal

-Mart Distribution

Center, Aptar CSP Technologies,

Pharmavite, LLC, HL Mando America Corporation (automobile brakes and steering),

Golden State Foods and Briggs &

Auto manufacturing and related suppliers are increasingly important along

Interstate Highway 85 to the east and

west of Auburn.

Pharmavite, LLC, HL Mando America Corporation (automobile

brakes and steering),

SCA (automotive plastics), Borbet Alabama (automotive aluminum

wheels), Golden State Foods 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

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suppliers to the automotive industry have facilities in Lee

The unemployment rate in Lee County was 2.4% at

year end 2023

As of year-end 2024, the unemployment rate in Lee County was 2.8%,

and 3.3% for the State of Alabama

according to the U.S.

Bureau of Labor

Between 2010 and 2022, the Auburn-Opelika MSA was the second fastest

growing MSA in Alabama.

Bureau of Labor Statistics.

Between 2010 and 2022, the Auburn-Opelika MSA was the second

fastest growing MSA in Alabama.

Opelika MSA population is estimated to grow 6.6% from 2023 to 2028.

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While there are certain risks unique to each type of

lending, management believes that there is more risk associated with commercial, real

estate acquisition, construction and

development, agricultural and consumer lending than with residential real estate

mortgage loans.

lending, management believes that there is more risk associated with commercial,

real estate acquisition, construction and

development, agricultural and consumer lending than with residential real

estate mortgage loans.

To help manage these

risks, the Bank has established underwriting standards used in evaluating each extension

of credit on an individual basis,

risks, the Bank has established underwriting standards used in evaluating

each extension of credit on an individual basis,

which are substantially similar for each type of loan.

These standards include a review of the economic conditions

affecting the borrower, the borrower’s

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

affecting the borrower,

the borrower’s financial strength and capacity to repay the debt, the underlying

collateral and the

borrower’s past credit performance.

We apply these standards

at the time a loan is made and monitor them periodically

apply these standards at the time a loan is made and monitor them periodically

throughout the life of the loan.

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

Our commercial real estate (“CRE”) loans, including $66.8 million of loans on owner occupied

property, as of December

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

Our commercial real estate (“CRE”) loans, including $55.4 million of

loans on owner occupied property,

as of December

31, 2024 totaled $290.2 million (51% of total loans).

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property from CRE.

Excluding our owner occupied loans, our CRE loans were $220.5 million (40% of total

loans) at year

Excluding our owner-occupied loans, our CRE loans were $234.8 million

(42% of total loans) at year

See “Lending Practices –

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

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 local

businesses, and individuals in the community that have entered into loans

with the Bank.

other conditions affecting these industries would

also likely have an adverse effect on the local workforce, other local

businesses, and individuals in the community that have entered

into loans with the Bank.

For example, the auto

manufacturing business and its suppliers have positively affected

our local economy, but automobile sales

manufacturing is

manufacturing business and its suppliers have positively

affected our local economy,

but automobile sales manufacturing is

cyclical and adversely affected by increases in interest rates.

in automobile sales, including adverse changes due

to interest rate increases, and the remaining economic effects of the

COVID-19 pandemic, including continuing supply

chain disruptions and a tight labor market,

could adversely affect nearby Kia and Hyundai automotive plants

suppliers' local spending and employment, and could adversely affect economic

conditions in the markets we serve.

However, management believes that due to the diversified

mix of industries located within our markets, adverse changes in

one industry may not necessarily affect other area industries

to the same degree or within the same time frame.

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

fluctuations.

While most loans are

made within our primary service area, some residential mortgage loans are originated

outside the primary service area, and

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

We also may make

loans to other borrowers outside these areas, especially where we have a relationship

with the borrower, or its business or

Decreases in automobile sales, including adverse changes due

to interest rate increases and inflation, tariffs, supply

chain disruptions (including changes resulting from the effects of

tariffs and related changes in countries and producers in

the supply chains) and a tight labor market, could adversely affect

nearby Kia and Hyundai automotive plants and their suppliers' local spending

and employment, and could adversely affect

economic conditions in the markets we serve.

However, management believes that due

to the diversified mix of industries

located within our markets, adverse changes in one industry may not necessarily

affect other area industries to the same

degree or within the same time frame.

The Bank’s primary service area also is subject

to both local and national economic

conditions and fluctuations.

While most loans are made within our primary service area, some residential mort

are originated outside the primary service area, and the Bank from

time to time has purchased loan participations from

outside its primary service area.

also may make loans to other borrowers outside these areas, especially where we

a relationship with the borrower, or

its business or owners.

Human Capital

At December 31, 2023, the Company and its subsidiaries had 149.5 full-time equivalent employees,

including 38 officers.

Our average term of service is approximately 10 years.

At December 31, 2024, the Company and its subsidiaries had 145 full-time

equivalent employees, including 39 officers.

Our employees have been with us an average of approximately 11

We successfully implemented

plans to protect our employees’

health consistent with CDC and State of Alabama guidelines during the COVID-19 pandemic,

while maintaining critical

banking services to our communities.

In addition, we developed our remote and electronic banking services,

established remote work access to help employees stay at home where job

duties permitted.

This promoted employee

retention, and these efforts will provide us proven experience and flexibility

to meet other disruptive events and conditions,

and still provide our customers and communities continuity of service.

We experienced

little turnover as a result of the COVID-19 pandemic and made no staff

As a result, we

received a federal employee retention tax credit of approximately $1.6

million in 2022.

We have a talented group

of employees,

many of whom,

have a college or associate degree.

We believe the Auburn-

Opelika MSA is a desirable place to live and work with excellent schools and quality of life.

plans to protect our

employees’ health consistent with CDC and State of Alabama guidelines

during the COVID-19 pandemic, while

maintaining critical banking services to our communities and experiencing

little employee turnover.

In addition, we

developed our remote and electronic banking services, and established remote

work access to help employees stay at home

where their job duties permitted.

This promoted employee retention, and these efforts will provide us proven

and flexibility to meet other disruptive events and conditions, and still provide our

customers and communities continuity

We have a talented

group of employees, many of whom, have a college or associate degree.

We believe the

Opelika MSA is a desirable place to live and work with excellent schools and quality

Our MSA was the second

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and employee families.

employees have a family member that is employed by or is attending the University.

We had a successful

management transition in 2022 where our CEO became Chairman, and

was succeeded by our CFO,

management transition in 2022 where our CEO became Chairman,

and was succeeded by our CFO,

whose role was then filled by our Chief Accounting Officer.

At the time of transition, our Chairman had served the Bank

his entire 39-year career, our President and CEO had been

with us 16 years and our Chief Accounting Officer had been

with us for 7 years.

39 years, our President and CEO had been with us 16 years and our Chief Accounting

Officer had been with us for 7 years.

Our new President and CFO had careers with major national and regional

accounting firms and focused

on financial services before joining the Bank.

We seek to provide

accounting firms and focused on financial

services before joining the Bank.

We seek to offer

competitive compensation and benefits.

employer matches for employee contributions to

our 401(k) retirement plan.

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.

Career development is advanced

through ongoing performance and development conversations with employees,

internally developed training programs and

other training and development opportunities.

employer matches for employee contributions to our

401(k) retirement plan.

In 2024, our shareholders approved our 2024 Equity and Incentive Compensation

Plan (the “2024

Incentive Plan”).

The Plan provides for a variety

of equity and equity-based awards, including stock options, performance

shares, performance units, stock appreciation rights (“SARs”), restricted

stock and restricted stock units (“RSUs”) and cash

incentive awards.

We believe that the 2024

Incentive Plan provides the flexibility to structure appropriate incentives to

attract and retain talented people in a competitive market where many

of our competitors are public companies who offer

stock-based incentives.

and support the growth and development of our employees and, wherever possible, seek

to fill positions by

promotion and transfer from within the organization.

Career 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

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Statistical Information

Certain statistical information is included in responses to Items 6, 7, 7A and 8 of this

Annual Report on Form 10-K.

Certain statistical information is included in responses to Items 6, 7, 7A and 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 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

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,

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Bank Holding Company Regulation

The Company, as a bank holding company,

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

The Company, as a bank

holding company, is subject to supervision,

regulation and examination by the Federal Reserve

under the BHC Act.

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banks, and certain related activities.

The Company is required to file periodic reports and other information

The Company is required to file periodic reports

and other information with the

Federal Reserve.

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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

for a merger or consolidation of a bank holding company with another

bank holding company.

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

shares or substantially all the assets of any bank, or

for a merger or consolidation of a bank holding company

with another bank holding company.

The BHC Act generally

prohibits a bank holding company from acquiring direct or indirect ownership or

control of voting shares of any company

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

activity other than banking or

managing or controlling banks or performing services for its authorized subsidiar

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

subsidiaries.

A bank holding company may,

however, engage in or acquire an interest in a company that

engages in activities that the Federal Reserve has determined

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

as to be a proper incident

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,

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

The Federal Reserve adopted new rules, effective September

30, 2020, simplifying determinations of control of

banking organizations for BHC Act purposes.

Changes in control of bank holding companies are subject to prior notice

to, and nonobjection by the Federal Reserve under

the federal Change in Bank Control Act (the “Control Act”) and by the Alabama

Superintendent of Banks (the “Alabama

Superintendent”) under the Alabama Banking Code.

In August 2024, the FDIC proposed changes to its Control Act

regulations that would result in persons seeking control of a bank holding company

under the Control Act, to file a notice

with and obtain non-objection from the FDIC in addition to those filings

and notices currently required from the Federal

Reserve and the Alabama Superintendent.

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”

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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.

“financial holding companies.”

holding companies and their subsidiaries are permitted to acquire or engage

in activities such as insurance underwriting,

securities underwriting, travel agency activities, broad insurance

agency activities, merchant banking and other activities

that the Federal Reserve determines to be financial in nature or complementary

In addition, under the BHC Act’s

banking authority and Federal Reserve regulations, financial holding companies

are authorized to invest in companies that

engage in activities that are not financial in nature, as long as the financial holding company

makes its investment, subject

to limitations, including a limited investment term, no day-to-day management,

and no cross-marketing with any depositary

institutions controlled by the financial holding company.

The Federal Reserve recommended repeal of 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,

merchant banking authority and Federal Reserve regulations, financial

holding companies are authorized to invest in

companies that engage in activities that are not financial in nature,

as long as the financial holding company makes its

investment, subject to limitations, including a limited investment term,

no day-to-day management, and no cross-marketing

with any depositary institutions controlled by the financial holding

The Federal Reserve recommended repeal of

the merchant banking powers in a September 16, 2016 study undertaken

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

The BHC Act permits acquisitions of banks by bank holding companies, subject

to various restrictions, including that the

Financial holding companies

continue to be subject to Federal Reserve supervision, regulation and

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

of functional regulation to subsidiary activities.

For example, insurance activities would be subject to supervision and

regulation by state insurance authorities and

securities broker-dealer and investment advisory activities are regulated

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”.

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

transaction with one or more out-of-state banks, and an out-of-state bank resulting

from such transaction may continue to

transaction with one or more out-of-state banks, and an out-of-state bank

resulting from such transaction may continue to

operate the acquired branches in Alabama.

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

anywhere in the United States.

Banks, including Alabama banks, may branch anywhere in the United States.

See “Bank Regulation”.

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Section 23A defines “covered transactions,” which

include extensions of credit, and limits a bank’s

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

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

on terms and conditions consistent

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

from purchasing low-quality assets

from the bank’s affiliates.

Finally, 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

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 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 a bankruptcy of the bank holding

In addition, where a bank

holding company has more than one bank or thrift subsidiary,

each of the bank holding company’s subsidiary

institutions may be responsible for any losses to the FDIC’s

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

institution fails.

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

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

and to other creditors of the bank.

include extensions of credit and other transactions with affiliates, and

limits a bank’s covered transactions

with any affiliate

to 10% of such bank’s capital and

All covered and exempt transactions between a bank and its affiliates

on terms and conditions consistent with safe and sound banking practices, and

banks and their subsidiaries are prohibited

from purchasing low-quality assets from the bank’s

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

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 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.

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

priority in a bankruptcy of the bank holding company.

Where a bank holding company has more than one bank or thrift

subsidiary, each of

the bank holding company’s subsidiary

depository institutions may be responsible for any losses to the

FDIC’s Deposit Insurance Fund

(“DIF”), if an affiliated depository institution fails.

As a result, a bank holding company

may be required to loan money to a bank subsidiary in the form of subordinated

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 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

under the Small BHC Policy.

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.

The Federal Reserve’s Small Bank

Holding Company Policy Statement (the “Small BHC Policy”) covers

qualifying bank

and thrift holding companies with up to $3 billion of pro forma consolidated

Proposed legislation, entitled the

“Small Bank Holding Company Relief Act” would direct the Federal Reserve

raise the permitted consolidated asset level to

Such legislation is among various bills highlighted in February

2025 by House Financial Services Committee

The Federal Reserve treats the Company as a small banking holding

company under the Small BHC Policy.

unless and until the Company fails to qualify under the Small BHC Policy,

the Company’s capital adequacy

will continue

to be evaluated on a bank only basis.

See “Capital.”

Bank Regulation

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

It is subject to supervision, regulation and examination

by the Federal Reserve and the Alabama Superintendent, which monitor all areas

of the Bank’s operations, including loans,

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 insured by

the FDIC to the maximum extent provided by law,

and the Bank is subject to various FDIC regulations applicable to FDIC-

insured banks.

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

It is subject to supervision, regulation and

examination by the Alabama Superintendent and the Federal Reserve, which

monitor all areas of the Bank’s operations,

including loans, reserves, mortgages, capital adequacy,

liquidity, funding sources

and concentrations, issuances and

redemption of capital securities, payment of dividends, establishment of

branches, and compliance with laws.

deposits are insured by the FDIC to the maximum extent provided

by law, and the Bank is subject to various

regulations applicable to FDIC-insured banks.

See “FDIC Insurance Assessments.”

Alabama law permits statewide branching by banks.

The powers granted to Alabama-chartered banks by state law include

certain provisions designed to provide such banks competitive equality with national

The Federal Reserve has adopted the Federal Financial Institutions Examination Council’s

(“FFIEC”) Uniform Financial

Institutions Rating System (“UFIRS”), which assigns each financial institution a confidential

composite “CAMELS” rating

The Alabama Banking Code has provisions designed to ensure

Alabama banks have competitive equality with national banks.

The Federal Reserve has adopted the Federal Financial Institutions Examination

Council’s (“FFIEC”) Uniform

Institutions Rating System (“UFIRS”), which assigns each financial

institution a confidential composite “CAMELS” rating

based on an evaluation and rating of six essential components of an institution’s

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management practices.

For most institutions, the FFIEC has indicated that market risk primarily reflects

For most institutions, the FFIEC has indicated that market risk primarily

reflects exposures to

changes in interest rates.

When regulators evaluate this component, consideration is expected

to be given to management’s

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

to management’s

ability to identify, measure,

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and its risk profile;

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

is rated based upon, but not limited to, an assessment of the sensitivity of the financial institution’s

earnings or the

economic value of its capital to adverse changes in interest rates, foreign exchange rates,

commodity prices or equity prices;

and the adequacy of its capital and earnings in relation

to its level of market risk exposure.

is rated based upon, but not limited to, an assessment of the sensitivity of

the financial institution’s earnings

economic value of its capital to 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

and the nature and complexity

interest rate risk exposure arising from non-trading positions.

ratings are based on evaluations of an institution’s

managerial, operational, financial and compliance performance.

composite CAMELS rating is not an arithmetical

operational, financial and compliance performance.

The composite CAMELS

rating is not an arithmetical

formula or rigid weighting of numerical component ratings.

subjectivity and examiner judgment, especially as

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

The federal bank regulatory agencies

are reviewing the CAMELS rating system and their consistency.

In addition, and separate from the interagency UFIRS, the Federal Reserve assigns a risk

-management rating to all state

member banks.

or composite, rating, as well as each of the assessment areas, including risk management,

delineated on a numerical scale of 1 to 5, with 1 being the highest or best possible rating.

a bank with a composite

rating of 1 requires the lowest level of supervisory attention while a 5-rated bank has the

most critically deficient level of

performance and therefore requires the highest degree of supervisory attention.

Bank mergers, which generally accompany holding company

mergers, are also subject to the approval of the resulting

bank’s primary federal regulator.

On March 19, 2022, the FDIC published a “Request for Information and Comment on

Rules, Regulations, Guidance, and Statements of Policy Regarding Bank Merger

Transactions” (the “FDIC Notice”).

FDIC solicited comments from interested parties regarding the application of the laws, practices,

rules, regulations,

guidance, and statements of policy (together, regulatory

framework) that apply to merger transactions involving one

more insured depository institution, including the merger between

an insured depository institution and a noninsured

The FDIC is interested in receiving comments regarding the effectiveness

of the existing framework in meeting

the requirements of the Bank Merger Act.

On January 29, 2024, the Office of the Comptroller of the Currency (“OCC”)

issue a notice of proposed rulemaking to change its standards for reviewing business combination

applications and issue a

policy statement of principles used by the OCC in its merger reviews.

The FDIC Notice described the consolidation of the banking industry,

the increase in the number of large and systemically

important banking organizations and the need to evaluate large

mergers’ financial stability and the resolution of failing

bank risks consistent with the

Dodd-Frank Act changes to the BHC Act and the Bank Merger Act, and the effects

banking mergers on competition.

The FDIC Notice also stated that Executive Order Promoting Competition in the

American Economy (July 9, 2021) (the “Executive Order”), among other things,

“instructs U.S.

agencies to consider the

impact that consolidation may have on maintaining a fair,

open, and competitive marketplace, and on the welfare of

workers, farmers, small businesses, startups, and consumers.”

The FDIC requested comments on all aspects of the bank

regulatory framework, including qualitative and quantitative support for such responses.

The other Federal bank regulators

as well as the United States Department of Justice (“DoJ”), are also considering the framework

for mergers involving

banking organizations, including the competitive effects of

such combinations.

The federal bank regulators have not

announced any conclusions, but these reviews could result in changes to the frameworks

used to evaluate banking

combinations which could make such combinations more difficult,

time consuming and expensive.

Federal Reserve

Governor Bowman, in a March 7, 2024 speech, stated that “regulatory reforms in this area

should prioritize speed and

Stakeholders who are concerned about current bank M&A procedures

and policies should consider direct

engagement with regulators.”

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.

of subjectivity and examiner judgment, especially as

these relate to qualitative assessments, are important elements in assigning

The Federal Reserve is maintaining a

heightened focus on bank funding pressures based on risk profiles and

management’s ability to manage their

In addition, and separate from the interagency UFIRS, the Federal Reserve

assigns a risk-management rating to all state

member banks and bank holding companies.

In February 2021 the Federal Reserve expanded its Guidance for Assessing

Risk Management to institutions with under $100 billion

This guidance states that principles of sound

management should apply to all risk confronting a banking organization,

including credit, market, liquidity,

compliance, and legal risks.

For a small community banking organization (“CBO”) engaged

solely in traditional banking

activities and whose senior management is actively involved in the details of

day-to-day operations, relatively basic risk

management systems may be adequate.

In accordance with the Interagency

Guidelines Establishing Standards for Safety

and Soundness, a CBO is expected, at a minimum, to have internal controls,

information systems, and internal audit that are

appropriate for the size of the institution and the nature, scope, and risk of

its activities.

The summary, or composite,

rating, as well as each of the assessment areas, including risk management,

is delineated on a numerical scale of 1 to 5, with

1 being the highest or best possible rating.

Thus, a bank with a composite rating of 1 requires the lowest level of

supervisory attention while a 5-rated bank has the most critically deficient

level of performance and therefore requires the

highest degree of supervisory attention.

Bank mergers, which generally accompany holding

company mergers, are also subject to the approval of the resulting

bank’s primary federal

The Federal Reserve and the Alabama Superintendent must approve mergers

acquisitions by the Bank.

The FDIC and the Office of the Comptroller of the Currency

(“OCC”) may comment on mergers

involving the Company or the Bank.

Although the Federal Reserve has not issued any new rules or policies applicable

to mergers of bank holding companies or

state member banks, the FDIC and the OCC changed their merger

policies and rules in September 2024.

adopted a Statement of Policy on Bank Merger Transactions

(the “FDIC Merger Policy”).

The new FDIC Merger Policy

recognizes Biden Administration Executive Order 14036 “Promoting

Competition in the American Economy” (July 9,

2021) (“Executive Order 14036”), which, among other things, “instructs U.S.

to consider the impact that

consolidation may have on maintaining a fair,

open, and competitive marketplace, and on the welfare of workers, farmers,

small businesses, startups, and consumers.”

Executive Order 14036 apparently has not been rescinded as of February 17,

The adopting release for the FDIC Merger Policy states that “the analytical

methods the FDIC employs in

conducting its independent analysis will continue to be informed

by the United States Department of Justice’s

approach to evaluating competitive effects.”

In September 2024, the OCC updated its regulations for business combinations

involving national banks and federal

savings associations, deleted expedited and streamline applications for

business combinations and adopted a policy

statement clarifying its review of applications under the Bank Merger

Act’s statutory factors.

It is unclear whether these new FDIC and OCC policies and rules will affect

their views of mergers where the Federal

Reserve is the responsible regulator, especially

in light of change in the President and changing leadership at the FDIC and

The Bank Merger Act and the BHC Act require evaluation, among

other factors, of the effects of the transaction on

The primary federal bank regulator of a resulting bank, in a transaction subject to

approval under the Bank

Merger Act and the Federal Reserve, in acquisitions and mergers

subject to the BHC Act, must notify the DoJ, who has an

important advisory role in bank and BHC mergers,

but the bank regulators are the primary decision makers.

regulators may then consider the Antitrust Division’s

competitive factors report as part of their respective review processes,

and use their own methods for screening and evaluating bank mergers.

The DoJ and the Federal Trade Commission

adopted new non-binding Merger Guidelines in 2023.

In September 2024, the DoJ revoked its 1995 Bank Merger

Guidelines and replaced these with a 2024 Banking Addendum to its 2023 Merger

The 1995 Bank Merger

Guidelines had been adopted together with the federal banking agencies, and

notwithstanding the FDIC Merger Policy,

none of the federal banking agencies have withdrawn from those Guidelines.

The Federal Reserve continues to apply the

1995 Bank Merger Guidelines in evaluating bank and bank holding

company mergers.

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, which are similar to those permitted

to financial holding companies.

December 2015, Congress amended the GLB Act as part of the Fixing America’s

Surface Transportation Act.

amendment provided financial institutions, which meet certain conditions,

an exemption from the requirement to deliver an

annual privacy notice.

On August 10, 2018, the federal Consumer Financial

Protection Bureau (“CFPB”) announced that it

had finalized conforming amendments to its implementing regulation, Regulation

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

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

subsidiaries to engage in financial activities, which are similar to those

permitted to financial holding companies.

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.

1165, The Data Privacy Act of 2023,

was introduced in Congress on February 24, 2023 by Rep.

Chairman of the House Financial Services Committee, to which the Bill was referred.

It amends various sections of the

GLB Act and preempts certain state privacy laws.

Its preemption provisions have triggered opposition by the minority in

the House of Representatives.

Community Reinvestment Act and Consumer Laws

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.

The Data Privacy Act of 2023 was introduced in Congress on February

It would amend various sections of the

GLB Act and preempt certain state privacy laws.

The American Privacy Rights Act of 2024 sought to establish the first

federal standard for comprehensive data privacy and security regulation.

Neither of these bills were adopted.

privacy legislation may be proposed.

Consumer Laws and the Community Reinvestment Act

The Consumer Financial Protection Bureau (the “CFPB”) has a broad mandate

that requires it 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 the 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

Financial Information rules.

Although the CFPB does not examine or supervise banks with less than $10 billion

banks of all sizes, including the Bank, are subject to the CFPB’s

regulations, and the precedents set in CFPB enforcement

actions and interpretations.

The Bank is subject to the provisions of the CRA and the Federal Reserve’s

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Under the CRA, all FDIC-

insured institutions have a continuing and affirmative obligation,

consistent with their safe and sound operation, to help

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

and moderate-income (“LMI”) neighborhoods.

requires a depository institution’s primary

federal regulator to periodically assess the institution’s

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 (“LMI”) neighborhoods.

requires a depository institution’s

primary federal regulator to periodically assess the institution’s

record of assessing and

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

and moderate-income neighborhoods.

The bank regulatory agency’s

CRA assessment is publicly available.

Further, consideration of the CRA is required

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

ing low- and moderate-income neighborhoods.

The bank regulatory agency’s CRA assessment

is publicly available.

Further, consideration of the CRA is required of

FDIC-insured institution that has applied to:

(i) charter a national bank;

(ii) obtain deposit

insurance coverage for a newly-

chartered institution;

(iii) establish a new branch office that accepts

(iv) relocate an office;

or (v) merge or

consolidate with, or acquire the assets or assume the liabilities of, an FDIC-insured financial

satisfactory CRA rating will slow,

if not preclude, acquisitions, and new branches and other expansion activities and

prevent a company from becoming a financial holding company.

The federal CRA regulations require that evidence of

discriminatory, illegal or abusive

practices be considered in the CRA evaluation.

CRA agreements with private parties must be disclosed and annual

CRA reports must be made to a bank’s primary

Community benefit plans have become common in banking mergers, especially

larger bank combinations.

National Community Resolution Coalition reported in February 2023 that it had

executed more than 20 community benefit

plans with banking organizations.

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.

obtain deposit insurance coverage for all new-

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

relocate an office;

or (v) merge or consolidate

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

A less than satisfactory CRA rating

will slow, if not preclude,

acquisitions, and new branches and other expansion activities and may prevent

a company from

becoming a financial holding company.

The federal CRA regulations require that evidence of discriminatory,

illegal or abusive lending practices be considered in

the CRA evaluation.

The Bank had a “satisfactory” CRA rating in its latest CRA public evaluation dated February 28,

2022, with satisfactory

ratings on both its lending and community development tests.

abusive lending practices be considered in the CRA evaluation.

The federal CRA regulations require that evidence of discriminatory,

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the CRA evaluation.

A financial holding company election, and the continuation of such election and financial

holding company activities are

permitted, if any affiliated bank has not received less than a “satisfactory”

The Federal Reserve considers the effect of a bank acquisition proposal

on the convenience and needs of the markets served

by the combining organizations.

In the case of bank holding company applications to acquire a bank, the Federal Reserve

will assess and emphasize CRA records of each subsidiary depository institution of the applicant

bank holding company

and the target bank in meeting the needs of their entire communities, including

and moderate-income (“LMI”)

neighborhoods, and such records may be the basis for denying the application.

Financial holding company elections and the continuation of financial

holding company activities are permitted, only if

each affiliated bank has received a “satisfactory” or better

CRA agreements with private parties must be disclosed and annual

CRA reports must be made to a bank’s primary

Community benefit plans have become common in banking mergers, especially

larger bank combinations.

National Community Reinvestment Coalition reported in January 2024

that it had executed more than 21 community

benefit plans with banking organizations, with an estimated value of $580

billion to LMI and under-resourced communities.

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

“ECOA”) and the Fair Housing Act

CRA reports must be made to a bank’s

primary federal

Community benefit plans have become common in banking mergers,

especially larger bank combinations.

National Community Reinvestment Coalition reported

that as of February 2025, it had executed 21 community benefit

plans with banking organizations for an aggregate of

$580 billion for mortgage, small business and community

development lending, investments and philanthropy in

LMI and under-resourced communities.

The pending Capital One

Financial Acquisition of Discover Financial Services includes a community

benefit plan with another community

organization valued at $265 billion, which is the largest

The Bank had a “satisfactory” CRA rating in its latest CRA public evaluation dated February

28, 2022, with satisfactory

ratings on both its lending and community development

The Federal Reserve considers the effects of a bank acquisition

proposal on the convenience and needs of the markets

served by the combining organizations.

Bank regulators

consider CRA performance in evaluating merger and acquisition

applications under the Bank Merger Act and the BHC Act, as well as other

expansion proposals, such as new branch

In the case of bank holding company applications to acquire a bank, the Federal

Reserve will assess and emphasize

CRA records of each subsidiary depository institution of the applicant

bank holding company and the target bank in

meeting the needs of their entire communities, including LMI neighborhoods,

and such records may be the basis for

denying the application.

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

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status in any aspect of a consumer or 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 to provide guidance to

financial institutions in determining whether discrimination exists, how the

agencies will respond to lending discrimination,

and what steps lenders might take to prevent discriminatory lending practices.

The DOJ has prosecuted what it regards as

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

The DoJ’s and the federal

bank regulatory agencies’ Interagency Policy Statement on Discrimination

in Lending provides guidance to financial

institutions in determining whether discrimination exists, how the agencies

will respond to lending discrimination, and what

steps lenders might take to prevent discriminatory lending practices.

The DOJ has prosecuted what it regards as violations

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

New CRA Regulations

The federal banking regulators jointly proposed (the “CRA Proposal”)

revised CRA regulations on June 3, 2022.

joint CRA regulations were adopted by the Federal Reserve, the OCC and the FDIC on October

24, 2023, and were

finalized and published in the Federal Register on February 1, 2024.

the new rules’ requirements become effective

January 1, 2026, and other requirements, including required data reporting become effective

January 1, 2027.

CRA regulations confirm that the CRA and fair lending responsibilities and compliance

are mutually reinforcing and that

these regimes recognize the importance of ensuring that the credit markets are inclusive.

The agencies are also retaining

the provision in the CRA regulations that allows downgrading a bank for discriminatory

or other illegal credit practices.

The objectives of the new CRA regulations include:

Update CRA regulations to strengthen the achievement of the core purpose of the statute;

The Federal Reserve, the OCC and the FDIC jointly adopted extensive

changes in new CRA regulations, which were

published in a 649 page adopting release in the Federal Register on February

1, 2024 (the “New CRA Regulations”).

of the New CRA Regulation’s become

effective January 1, 2026, and other requirements, including required

data reporting,

are scheduled to become effective January 1, 2027.

The New CRA Regulations confirm that the CRA and fair lending

responsibilities and compliance are mutually reinforcing and that these

regimes recognize the importance of ensuring that

the credit markets are inclusive.

The New CRA Regulations continue to allow downgrading a bank for discriminatory or

other illegal credit practices.

The New CRA Regulations’ objectives include:

Update CRA regulations to strengthen the achievement of the core purpose of

the statute and to encourage

financial inclusion;

Adapt to changes in the banking industry,

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Provide greater clarity and consistency in the application of the regulations;

Tailor performance standards

to account for differences in bank size and business models

Tailor performance

standards to account for differences in bank size and business models

and local conditions;

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Confirm that CRA and fair lending responsibilities are mutually reinforcing;

Create a consistent regulatory approach that applies to banks regulated by all three agencies.

The new CRA regulations like the old rules, is based on bank size and business model create

a new framework for

evaluating CRA performance.

Banks are classified as either “small”, “intermediate”, “large”,

or “limited purpose” banks.

Create a consistent regulatory approach that applies to banks regulated

by all three agencies.

Similar to the old rules, the New CRA Regulations are based on bank

size and business model.

These rules create a new

framework for evaluating CRA performance.

Banks are classified as either “small”, “intermediate”, “large”, or “limited

purpose” banks.

The asset size thresholds would be adjusted annually for inflation and have been increased

relative to the bank asset size

thresholds in the old CRA rule.

The Bank is currently an “intermediate small bank,”

but will become an “intermediate

bank” under the new CRA regulations because it has assets of $600 million to $2.0

billion in both of the two prior years.

relative to the

bank asset size thresholds in the old CRA rule.

The Bank is currently an “intermediate small bank,” but will become an

“intermediate bank” under the New CRA Regulations because it has assets of

$600 million to $2.0 billion in both of the two

The new performance evaluation framework establishes two tests for intermediate

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Financing Test.

Intermediate banks would be evaluated and assigned conclusions of reflecting their

performance under these tests in their

The Bank presently intends to use the Intermediate Bank Community

Development Test.

The community development

evaluation of the prior CRA rules continues.

The New CRA Regulations implement a new retail lending evaluation for

intermediate banks, and provide them the option of evaluation under

a new test for community development financing.

Intermediate banks would be evaluated and assigned conclusions reflecting

their performance under these tests in their

facility-based assessment area of “Outstanding”;

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“Substantial Noncompliance.”

These conclusions applied to each test would be weighted and combined to form a rating

“Outstanding,” “Satisfactory,”

These conclusions applied to each test would be weighted 50% each for intermediate

and combined in a resulting rating of “Outstanding,” “Satisfactory,”

“Needs to Improve,” or “Substantial Noncompliance.”

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to deposit-taking facilities, including main

offices, branches, and deposit-taking remote service facilities.

Intermediate banks could delineate facility-based areas of

part of a county.

offices, branches, and deposit-taking ATMs

and other remote service facilities.

Intermediate banks may delineate facility-

based areas of part of a county.

The banking agencies will evaluate retail lending in a bank’s

“outside retail lending area” for large banks,

as well as for intermediate banks, if the majority of their retail lending is outside their

facility-based assessment areas.

A retail lending volume screen would be used to

measure the volume of a bank’s lending relative to its deposit

facility-based assessment area and would compare that ratio to the aggregate ratio for all reporting

banks with at least one

“outside retail lending area”

for large banks, as well as for intermediate banks, if the majority of their

retail lending is outside their facility-based

assessment areas.

A retail lending volume screen will be used to measure the volume of a bank’s

lending relative to its deposit base in its

facility-based assessment area and would compare that ratio to the aggregate

ratio for all reporting banks with at least one

branch in the same facility-based assessment area.

Second, the agencies would evaluate the geographic distribution and

Second, the agencies will evaluate the geographic distribution and

borrower distribution of a bank’s

major product lines in the bank’s Retail

Lending Test Areas (i.e.,

the bank’s facility-based

assessment areas, and, as applicable, retail lending assessment areas and outside retail

lending area).

using a series of

metrics and benchmarks.

After the agency determines a recommended conclusion for Retail Lending Test

Area, the agency

would consider a list of additional factors that are intended to account for circumstances in

which the retail lending

major product lines in the bank’s

Retail Lending Test Areas (i.e., the

bank’s facility-based

assessment areas, and, if applicable, retail lending assessment areas and outside

retail lending area) using a series of metrics

and benchmarks.

After the agency determines a recommended conclusion for the Retail Lending

Test Area, the agency

would consider a list of additional factors that are intended to account for circumstances

in which the retail lending

distribution metrics and benchmarks may not accurately or fully reflect a bank’s

retail lending performance, or in which the

benchmarks may not appropriately represent the credit needs and opportunities in an area.

Banks will receive consideration for any qualified community development loans,

investments, or services, regardless of

The extent of an agency's consideration of community development loans, community development

benchmarks may not appropriately represent the credit needs and opportunities

Banks will receive consideration for any qualified community development

loans, investments, or services, regardless of

The extent of an agency's consideration of community development loans, community

development investments,

and community development services outside of the bank's facility-based

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areas and applicable performance context information.

The new CRA rules codify agency interpretations under the former

CRA regulations, and provide 11 community development

The agencies will evaluate the extent to which a

bank’s community development loans,

investments, and services are impactful and responsive in meeting community

development needs.

An intermediate bank's community development test performance is evaluated pursuant

following criteria:

The New CRA Regulations codify agency interpretations under the

former CRA regulations, and provide 11

community development categories.

The agencies will evaluate the extent to

which a bank’s community development

loans, investments, and services are impactful and responsive in meeting

community development needs.

An intermediate bank's community development test performance is evaluated

the following criteria:

the number and dollar amount of community development loans;

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the extent to which the bank provides community development services;

the bank's responsiveness through community development loans, community development

investments, and

the bank's responsiveness through community development loans, community

development investments, and

community development services to community development needs.

The banking agency's evaluation of the responsiveness of the bank's activities is informed

by information provided by the

bank, and may be informed by the impact and responsiveness review factors described

in the new regulations.

The release proposing these new CRA rules stated that “the agencies believe retail lending

remains a core part of a bank's

affirmative obligation under the CRA to meet the credit needs of their entire

The release proposing these New CRA rules stated that the agencies believe

retail lending remains a core part of a bank's

affirmative obligation under the CRA to meet the credit

needs of their entire communities.

At the same time, the agencies

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might not offer as wide a range of retail products and services,

have a more limited capacity to conduct community development activities, and

may focus on the local communities where

have a more limited capacity to conduct community development activities,

and may focus on the local communities where

their branches are located.”

The proposal reflected “the agencies’ views that banks of this size should have

capacity to conduct community development financing, as they do under

the current approach.

The proposal reflected the agencies’ views that banks of this size should have meaningful

capacity to conduct community development financing, as they

do under the current approach.

The new rule exempts small and intermediate banks from certain new data requirements

that apply to banks with assets of

at least $2 billion and limits certain new data requirements to large banks

with assets greater than $10 billion.

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, 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 de minimis amount.

Overdraft policies, processes, fees and disclosures are

frequently the subject of litigation against banks in various jurisdictions.

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.

at least $2 billion and limits certain new data requirements to large

banks with assets greater than $10 billion.

The federal bank regulators have updated their guidance several times on

overdrafts, including overdrafts incurred at ATMs

and point of sale terminals.

Overdrafts also have been a CFPB concern, which began refocusing on this issue in 2021

a view to “insure that banks continue to evolve their businesses to reduce reliance

on overdraft and not sufficient funds

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

It also encourages placing appropriate

daily limits on overdraft fees, and asks banks to consider eliminating overdraft

fees for transactions that overdraw an

account by de minimis amounts.

Overdraft policies, processes, fees and disclosures have been the subject

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 principles

for offering small-dollar loans in a responsible

manner on May 20, 2020.

CFPB Consumer Financial Protection Circular 2022-06 (Oct.

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of the Consumer Financial Protection Act.

overdraft fees assessed by financial institutions on transactions that a

Further, overdraft fees assessed by financial institutions

on transactions that a

consumer would not reasonably anticipate are likely unfair even if these comply

with these other consumer laws and

The CFPB proposed on February 6, 2019 to rescind its mandatory underwriting

standards for loans covered by

its 2017 Payday, Vehicle

Title and Certain High-Cost Installment Loans rule,

and has separately proposed delaying the

effectiveness of such 2017 rule.

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

Truth in Lending Act, the Electronic Funds Transfer

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

in CFPB enforcement actions and interpretations.

Another CFPB rule applicable to banks with over $10 billion in assets scheduled to become

effective October

1, 2025, has been challenged in Federal district court for the Southern

District of Mississippi.

Among other things, this rule

limits overdraft charges to $5 in most cases.

Residential Mortgages

CFPB regulations require that lenders determine whether a consumer has the ability to repay

a mortgage loan.

regulations establish certain minimum requirements for creditors

when making ability to repay determinations, and provide

CFPB regulations require that lenders determine whether a consumer

has the ability to repay a mortgage loan.

regulations establish certain minimum requirements for creditors when

making ability to repay determinations, and provide

certain safe harbors from liability for mortgages that are "qualified mortgages"

and are not “higher-priced.”

these CFPB regulations apply to all consumer, closed-end

loans secured by a dwelling including home-purchase loans,

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 lien.

mortgages must generally satisfy detailed

Qualified mortgages must generally satisfy detailed

requirements related to product features, underwriting standards,

and requirements where the total points and fees on a

mortgage loan cannot exceed specified amounts or percentages of the total loan amount.

mortgage loan cannot exceed specified amounts or percentages of the total

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.

are required under the law

to determine that consumers have the ability to repay mortgage loans before lenders

make those 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”

Lenders are required under the law

to determine that consumers have the ability to repay mortgage loans before

lenders make those loans.

Loans that meet

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

We focus our residential

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

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

The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018

(the “2018 Growth Act”) provides that

certain residential mortgages held in portfolio by banks with less than $10 billion in consolidated

assets automatically are

deemed “qualified mortgages.” This relieves smaller institutions from

many of the requirements to satisfy the criteria listed

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

mortgage” safe harbor may not have negative

amortization, must follow prepayment penalty limitations included in the Truth

in Lending Act, and may not have fees

certain residential mortgages held in portfolio by banks with less than $10 billion

in consolidated assets automatically are

deemed “qualified mortgages.” This relieves such institutions from many of the

requirements to satisfy the criteria listed

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

safe harbor may not have negative

amortization, must follow prepayment penalty limitations included

in the Truth in Lending Act, and may not have fees

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

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

The CFPB’s mortgage servicing standards

include requirements regarding force-placed insurance, certain notices

prior to rate adjustments on adjustable rate

The CFPB’s mortgage servicing

include requirements regarding force-placed insurance,

certain notices prior to rate adjustments on adjustable-rate

mortgages, and periodic disclosures to borrowers.

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mitigation application.

Servicers must maintain accurate and accessible

mortgage records for the life of a loan and until one

Servicers must maintain accurate and accessible mortgage

records for the life of a loan and until one

year after the loan is paid off or transferred.

These standards increase the cost and compliance

risks of servicing mortgage

loans, and the mandatory delays in foreclosures could result in loss of value on collateral or

the proceeds we may realize

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 the sale of foreclosed property.

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

The Federal Housing Finance Authority (“FHFA”)

updated, effective January 1, 2016, The Federal National Mortgage

Association’s (“Fannie Mae’s”)

and the Federal Home Loan Mortgage Corporation (“Freddie Mac’s”)

(individually and

collectively, “GSE”) repurchase

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

alternative remedies with, the mortgage loan originator or 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

been exhausted.

regulates The Federal National Mortgage Association (“Fannie Mae’s”)

and the Federal Home Loan Mortgage Corporation (“Freddie Mac”)

(individually and collectively,

are repurchase rules applicable to sales of mortgages to the GSEs.

These rules include the kinds of loan defects that could

lead the GSEs to request a mortgage loan repurchase or seek other remedies against the

mortgage loan originator or seller.

The FHFA also has updated

these GSEs’ representations and warranties framework and provided an independent

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

after the GSEs’ quality control and appeal

processes have been exhausted.

The Bank is subject to the CFPB’s integrated

disclosure rules under the Truth in Lending Act and the

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

disclosure rules under the Truth in Lending Act and

the Real Estate

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

secured by real property.

Our residential mortgage

strategy, product

offerings, and profitability may change as these regulations are interpreted

and applied in practice, and

may also change due to any restructuring of Fannie Mae and Freddie Mac as part of

the resolution of their conservatorships.

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

for a mortgage, if an additional creditor

offers a consumer a second offer with a lower annual percentage

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

the bank’s rating under the CRA for the previous

the bank’s rating under the CRA for the

two years has been at least “satisfactory.”

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

implement and clarify these requirements under the 2018 Growth Act.

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

was enacted on March 27, 2020.

Section 4013 of

the CARES Act, “Temporary

Relief From Troubled Debt Restructurings,” provides banks

the option to temporarily

suspend certain requirements under ASC 340-10 TDR classifications

for a limited period of time to account for the effects

On April 7, 2020, the Federal Reserve and the other banking agencies and

regulators issued a statement,

“Interagency Statement on Loan Modifications and Reporting for Financial Institutions

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 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.

The CFPB issued a rule to implement and clarify these provisions of the 2018

Growth Act on August 31, 2018.

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.

CARES Act Loan Modifications and Forbearance

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted

on March 27, 2020.

of that Act allowed banks to temporarily suspend certain GAAP requirements

for restructured loans in light of the effects of

the COVID-19 pandemic.

On April 7, 2020, the Federal Reserve and the other Federal bank regulators issued an

Interagency Statement and later guidance encouraging banks to work

prudently with borrowers on covered modifications.

Section 4021 of the CARES Act allows borrowers under 1-to-4 family

residential mortgage loans sold to Fannie Mae to

request forbearance up to a year if the borrower experienced financial hardships

during the pandemic.

During forbearance,

no fees, penalties or interest shall be charged beyond those applicable

if all contractual payments were fully and timely

Except for vacant or abandoned properties, Fannie Mae servicers may

not initiate foreclosures on similar procedures

or related evictions or sales until December 31, 2020.

The forbearance period

was extended to February 28, 2021 and then

again to March 31, 2021 after being extended earlier to February 28, 2021.

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.

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

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

Anti-Money Laundering and Sanctions

The International Money Laundering Abatement and Anti-Terrorism

Funding Act of 2001 specifies “know your customer”

requirements that obligate financial institutions to take actions to verify the identity of the

account holders in connection

with opening an account at any U.S.

financial institution.

Bank regulators are required to consider compliance with anti-

money laundering laws in acting upon merger and acquisition and other

expansion proposals under the BHC Act and the

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

in an amount equal to twice the sum involved in

the violating transaction, up to $1 million.

paid, and Fannie Mae servicers could not initiate foreclosures or similar procedures

or related evictions or sales until March

31, 2021, subject to up to a three-month extension.

At December 31, 2024, the Bank had approximately $328 thousand of

deferred loan amounts and $165 thousand of forbearance on loans sold to Fannie

Mae pursuant to the CARES Act and the

Interagency Statement.

Anti-Money Laundering, Countering the Financing of Terrorism

and Sanctions

Under the Uniting and Strengthening America by Providing Appropriate Tools

3 unchanged sentences

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.

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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

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

to develop a customer risk profile,

and generally monitor such matters.

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

or technical violations or

deficiencies are generally not considered the kinds of problems that would

The International Money Laundering Abatement and Anti-Terrorism

Funding Act of 2001 specifies “know your customer”

requirements that obligate financial institutions to take actions to verify

the identity of the account holders in connection

with opening an account at any U.S.

financial institution.

Bank regulators are required to consider compliance with anti-

money laundering laws in acting upon merger and acquisition

and other expansion proposals under the BHC Act and the

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

in an amount equal to twice the sum involved in

the violating transaction, up to $1 million.

Federal Financial Crimes Enforcement Network (“FinCEN”) rules

require banks to know the beneficial owners of

customers that are not natural persons, update customer information

in order to develop a customer risk profile, and

generally monitor such matters.

The Federal Reserve, the other bank regulators, the NCUA and FinCEN issued a Joint

Statement on Risk-Focused Bank

Secrecy Act/Anti-Money Laundering Supervision (July 22, 2019).

Banks that operate in compliance with applicable law,

properly manage customer relationships and effectively

mitigate risks by implementing controls commensurate with the

type and level of their risks are neither prohibited nor discouraged from providing

banking services.

Examiners review risk

management practices to evaluate and assess whether a bank has developed

and implemented effective processes to

identify, measure,

monitor, and control risks.

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

AML/BSA enforcement guidance and

clarifying that isolated or technical violations or deficiencies are

generally not considered the kinds of problems that would

result in an enforcement action.

The statement

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

Act and anti-money laundering

(“AML/BSA”) compliance program.

It describes how the agencies incorporate

the customer due diligence regulations and

recordkeeping requirements issued by the U.S.

Department of the Treasury

(“Treasury”) as part of the internal controls

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

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

rulemaking seeking public comment on a wide

range of potential regulatory amendments under the Bank Secrecy Act.

seeks comments 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

The statement addresses how the agencies evaluate violations of individual pillars of

Bank Secrecy Act and anti-money laundering (“AML/BSA”) compliance

It describes how the agencies

incorporate the customer due diligence regulations and recordkeeping

requirements issued by the United States.

of the Treasury (“Treasury”)

as part of the internal controls pillar of a financial institution's AML/BSA compliance

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 rules to transactions using convertible

virtual currencies and digital

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 rules to transactions using

convertible virtual currencies and digital

assets with legal tender status.

This rule remained a proposal in FinCEN’s

Semiannual Agenda published August 16, 2024.

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

Act of 2020 and the Corporate Transparency Act

(collectively, the “AML

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

financing programs.

(collectively, the

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

other things, the AML Act:

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

foreign entities conducting

and foreign entities conducting

business in the U.S.;

increases potential fines and penalties for BSA violations and improves whistleblower

increases potential fines and penalties for BSA violations and improves

whistleblower incentives;

codifies the risk-based approach to AML compliance;

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expands the duties and powers FinCEN;

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

emphasizes coordination and information-sharing among financial institutions,

financial regulators and

foreign financial regulators.

The Corporate Transparency Act (the”CTA”)

was adopted as Title LXIV of the William

(Mac) Thornberry National

Defense Authorization Act for Fiscal Year

FinCEN adopted a final regulation as 31 C.F.R.

101.380 on September

30, 2022 to implement the CTA.

This became effective on January 1, 2024.

These regulations require entities to report

information about their beneficial owners and the individuals who created the entity (together,

“beneficial ownership

FinCEN regulation 31 C.F.R.

101.380 implements the Corporate Transparency

Act (the “CTA”), and became

January 1, 2024.

These regulations require entities to report information about their

beneficial owners and the individuals

who created the entity (together, “beneficial ownership

information” or “BOI”).

FinCEN explained that the proposed rule would help protect the U.S.

financial system from illicit

use by making it more difficult for bad actors to conceal their financial activities

through entities with opaque ownership

FinCEN also explained that the proposed reporting obligations would provide

essential information to law

enforcement and others to help prevent corrupt actors, terrorists, and proliferators from hiding

money or other property in

the United States.”

The new rules expand financial institutions’ obligations under the Customer

Due Diligence Rule

(“CDD Rule”) to collect information and verify the beneficial ownership of legal entities.

Although the Company and the

Bank are exempt from the CTA’s

requirements to report their respective beneficial owners, the new laws are likely to

increase the Bank’s anti-money laundering

diligence activities and costs.

FinCEN explained that the rule would help

protect the U.S.

financial system from illicit use by making it more difficult

for bad actors to conceal their financial

activities through entities with opaque ownership structures.

FinCEN also explained that the proposed reporting obligations

would provide essential information to law enforcement and others to help

prevent corrupt actors, terrorists, and

proliferators from hiding money or other property in the United States.”

The new rules expand financial institutions’

obligations under the Customer Due Diligence Rule (“CDD Rule”) to collect

information and verify the beneficial

ownership of legal entities.

Although the Company and the Bank are exempt from the CTA’s

requirements to report their

own respective beneficial owners, the new laws may increase the Bank’s

anti-money laundering diligence activities and

On January 23, 2025, the Supreme Court granted the government’s

motion to stay a nationwide injunction on enforcement

of the CTA that

was issued by the U.S.

District Court of the Eastern District of Texas

Cop Shop, Inc.

Earlier, on January 7, 2025, another judge in the Eastern

District of Texas issued a separate

nationwide injunction

of the CTA and

the Beneficial

Ownership Information Reporting Rule (BOI Reporting Rule) in

of the Treasury

, which remined in effect as of January 2025.

FinCEN issued an Alert on January 24, 2025, acknowledging the continuing nationwide

This Alert confirmed

that reporting companies are not currently required to file beneficial ownership

information and are not subject to liability if

they fail to do so while the order remains in force.

Bills have been introduced in Congress to repeal the CTA,

and it is unknown whether these will pass or if the

Administration will continue to defend the litigation challenging the

Most recently, the Protect Small Business from

Excessive Paperwork Act bill was introduced, which, if enacted, would

extend the compliance deadline to December 31,

2025 for submitting BOI for entities existing before 2024.

FinCEN published a request for information and comment on December

1 unchanged sentence

the United States AML and countering the financing of terrorists.

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

such as China, Iran, North Korea, Russia

and Venezuela,

and their certain government officials and persons.

Banks are required to comply with these sanctions,

which require additional customer screening and transaction monitoring.

The United States has imposed various sanctions upon foreign

countries, including China, Iran, North Korea, Russia and

and certain of their government officials and persons.

Banks are required to comply with these sanctions, which

require additional customer screening and transaction monitoring.

Russia’s February 2022 invasion

of Ukraine has generated a significant number of new sanctions on Russia, Russian

persons and suppliers of military or dual-purpose products to Russia,

The Federal bank regulators have issued alerts that

Russia and others may step up cyber-attacks and data

intrusions following the invasion.

persons and suppliers of military or dual-purpose products to Russia, The Federal

bank regulators have issued alerts that

Russia and others may step up cyber-attacks and data intrusions following

the invasion.

FinCEN has issued four alerts on

2 unchanged sentences

institutions on potential investments in the U.S.

commercial real estate sector by sanctioned

Russian elites, oligarchs, their

commercial real estate sector by

sanctioned Russian elites, oligarchs, their

family members, and the entities through which they act.

4 unchanged sentences

Act (BSA) reporting obligations.

1164, the OFAC

Outreach and Engagement Capabilities and Enhancement

Act, was introduced in Congress on

February 24, 2023.

It would set up a review of and improve OFAC

outreach and communications to assist financial

institutions to better understand and comply with OFAC

On February 6, 2025, the DoJ ended Task

Force Klepto Capture, which was established

in March 2022 to enforce sanctions against Russian officials and oligarchs,

restrictions taken against Russian financial

institutions, including the prosecution of those who try to evade know-your-customer

and anti-money laundering measures

and efforts to use cryptocurrency to evade U.S.

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 controls as part of its

In particular,

the Company is required to report annually on internal controls as part of its

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

The Company has evaluated its controls, including compliance

with the SEC and FDIC rules on internal controls, and

expects to continue to spend significant amounts of time and money on compliance

with these rules.

If the Company fails to

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

affect its reputation, its ability to obtain

the necessary certifications to its financial statements, its relations with its regulators

and other financial institutions with

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

securities on terms and conditions

The Company has evaluated its controls, including compliance with the SEC and

FDIC rules on internal controls, and

expects to continue to spend significant amounts of time and money on

compliance with these rules.

If the Company fails

to comply with these internal control rules in the future, it may adversely

affect its reputation, its ability to obtain the

necessary certifications to its financial statements, its relations with its regulators

and other financial institutions with which

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

sell Company securities on terms and conditions

acceptable to the Company.

The Company’s

assessment of its financial reporting controls as of December 31, 2022 are

The Company’s assessment of its financial reporting

controls as of December 31, 2024 is

included in this report with no material weaknesses reported.

Bank Dividends

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

Federal Reserve Regulation Q limits “distributions,”

including discretionary bonus payments from eligible retained income” by state

member banks, such as the Bank, unless its

capital conservation buffer of common equity Tier

1 capital (“CET1”) exceeds 2.5%.

“Distributions” include dividends

declared or paid on common stock, discretionary bonuses and stock repurchases,

redemptions or repurchases of Tier 2

capital instruments (unless replaced by a capital instrument in the same quarter).

“Eligible retained income” for the Bank

and other Federal Reserve regulated institutions is the greater of:

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

tax effects not already

reflected in net income;

the average net income over the preceding four quarters.

The Company’s primary source

of cash is dividends from the Bank.

The Bank’s Call Report are used for

its calculation of

“eligible retained income.”

The Bank’s capital conservation buffer

exceeded 2.5% at December 31, 2023.

As of December 31, 2023, the Bank is “well capitalized” under the regulatory framework

for prompt corrective action.

be categorized as “well capitalized,” the Bank must maintain minimum common equity Tier

1, total risk-based, Tier

based, and Tier 1 leverage ratios as set forth in the following

Management has not received any notification from the

Bank's regulators that changes the Bank’s regulatory

capital status.

Prior regulatory approval also is required by statute 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

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

During 2023, the Bank paid total cash dividends of

approximately $3.8 million to the Company.

At December 31, 2023, the Bank had net profits for the year and its retained

net profits for the preceding two calendar years, less any required transfers to surplus, of

$8.2 million.

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 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.

See “Regulatory Capital Changes” and Note 16 to the Company’s

consolidated financial

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

as revised December 21, 2015, applies to dividend

payments, stock redemptions and stock repurchases.

Prior consultation with the Federal Reserve supervisory staff is

required before:

redemptions or repurchases of capital instruments when the bank

holding company is experiencing financial

redemptions and purchases of common or perpetual preferred stock which

would reduce such Tier 1 capital at end

of the period compared to the beginning of the period.

Bank holding company directors must consider different factors to

ensure that its dividend level is prudent relative to

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

scenarios, such as potential events

that could affect its ability to pay,

while still maintaining a strong financial position.

As a general matter,

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

consult with the Federal Reserve and

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

dividends if:

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

paid during that

period, is not sufficient to fully fund the dividends;

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

current and prospective

financial condition;

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

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

state member banks, respectively.

These guidelines required, beginning December 31, 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, totaling 10.5%.

capital includes common equity and related retained earnings and a limited amount

of qualifying preferred stock, less

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

companies and state member banks, respectively.

These guidelines required, beginning December 31, 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,

totaling 10.5%.

capital includes common equity and related retained earnings and

a limited amount of qualifying preferred stock, less

goodwill and certain core deposit intangibles.

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perpetual, and/or mandatory convertible debt,

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

holding gains on available for

sale equity securities with readily determinable market values that are prudently

valued, and a limited amount of general

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

unrealized holding gains on available for

sale equity securities with readily determinable market values that are

prudently valued, and a limited amount of general

loan loss allowance.

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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

In addition, the Federal Reserve has established minimum leverage

ratio guidelines for bank holding companies not subject

to the Small BHC Policy, and

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

However, bank regulators expect banks and bank holding

However, bank regulators expect banks and bank

companies to operate with a higher leverage ratio.

The guidelines also provide that institutions experiencing internal

growth or making acquisitions will be expected to maintain strong capital positions substantially

above the minimum

growth or making acquisitions will be expected to maintain strong capital positions

substantially above the minimum

supervisory levels without significant reliance on intangible assets.

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All bank holding companies and banks are expected to hold capital

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.

Lastly, the Federal Reserve’s

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a “tangible Tier 1

leverage ratio” (deducting all intangibles) in evaluating proposals for expansion or

new activities.

leverage ratio” (deducting all intangibles) in evaluating proposals for

expansion or new activities.

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

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 them.

Under Federal Reserve policies, bank holding companies

are generally expected to

Under Federal Reserve policies, bank holding

companies are generally expected to

operate with capital positions well above the minimum ratios.

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market and operational risks.

supervisory assessments of capital adequacy 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 (“FDICIA”), among

other things, requires the federal

banking agencies to take “prompt corrective action” regarding depository institutions that

do not meet minimum capital

supervisory assessments of capital adequacy 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

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

banking agencies to take “prompt corrective action” regarding depository

institutions that do not meet minimum capital

requirements.

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“significantly undercapitalized” and “critically undercapitalized.”

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.

A depository institution’s capital tier will depend

how its capital levels compare to various relevant capital measures and

certain other factors, as established by regulation.

“Prompt Corrective Action Rules.”

Basel III Capital Rules

The Federal Reserve and the other bank regulators adopted in June 2013 final capital rules

for bank holding companies and

banks implementing the Basel Committee on Banking Supervision’s

A Global Regulatory Framework for more

Resilient Banks and Banking Systems.”

capital rules are called the “Basel III Capital Rules,” and generally

were fully phased-in on January 1, 2019.

The Federal Reserve and the other federal bank regulators adopted

in June 2013 final capital rules for bank holding

companies and banks implementing the Basel Committee on Banking

Supervision’s “Basel III:

Framework for more Resilient Banks and Banking Systems.”

capital rules are called the “Basel III Capital

Rules,” and generally were fully phased-in on January 1, 2019.

These are included in Federal Reserve Regulation Q.

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

31, 2021 or 2022.

Basel III Capital Rules also introduced a new capital measure, “Common Equity Tier

I Capital” or “CET1.”

CET1 includes

common stock and related surplus, retained earnings,

and subject to certain adjustments, minority common equity interests

in subsidiaries.

The Basel III Capital Rules generally limit Tier

1 capital to common stock and noncumulative perpetual preferred stock.

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

Equity Tier I Capital” or “CET1.”

includes common stock and related surplus, retained earnings, and subject

to certain adjustments, minority common equity

interests in subsidiaries.

CET1 is reduced by deductions for:

Goodwill and other intangibles, other than mortgage servicing assets (“MSRs”),

which are treated separately, net

which are treated separately,

of associated deferred tax liabilities (“DTLs”);

Deferred tax assets (“DTAs”)

arising from operating losses and tax credit carryforwards net of allowances and

arising from operating losses and tax credit carryforwards net of allowances

Gains on sale from any securitization exposure;

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

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, the Company’s

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accumulated other comprehensive income (“AOCI”).

Additional “threshold deductions” of the following that are individually greater

than 10% of CET1 or collectively greater

Additional “threshold deductions” of the following that are

individually greater than 10% of CET1 or collectively greater

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

MSAs, net of associated DTLs;

DTAs arising from temporary

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

DTAs arising from

temporary differences that could not be realized through net operating

loss carrybacks, net of

any valuation allowances and DTLs;

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additional Tier I capital.

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

All other qualifying preferred stock, subordinated debt and qualifying minority

interests will be

included in Tier 2 capital.

Regulatory Capital Changes

Simplification

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

the Bank are:

Deductions from capital for certain items, such as temporary difference

DTAs, MSAs and investments

unconsolidated subsidiaries were decreased to those amounts that individually exceed

Institutions can elect to deduct investments in unconsolidated subsidiaries or subject

them to capital requirements;

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

1 capital and (iii) total 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

Any HVCRE exposure

excludes loans made before January 1, 2015.

The rules define HVCRE loans as loans secured by land or improved real

property that:

primarily 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.

The full value of any borrower contributed land (net of any liens on the

land securing HVCRE exposure) count toward the 15% capital contribution to

the appraised as completed value, which is

one of the criteria for exemption form the heightened risk weight.

Banking institutions and their holding companies are

required to assign 150% risk weight to HVCRE loans.

Capital Conservation Buffer

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

buffer” of CET1 capital of at least

2.5%, is required.

The capital conservation buffer will be calculated as the

the banking organization’s

CET1 capital ratio minus 4.5%;

the banking organization’s

tier 1 risk-based capital ratio minus 6.0%;

the banking organization’s

total risk-based capital ratio minus 8.0%.

Full compliance with the capital conservation buffer

was required beginning January 1, 2019.

Thereafter, permissible

dividends, stock repurchases and discretionary bonuses will be limited to the following

percentages based on the capital

conservation buffer as calculated above, subject to any further

regulatory limitations, including those based on risk

assessments and enforcement actions:

Capital Conservation

Buffer % Limit

More than 2.50%

> 1.875% - 2.50%

> 1.250% - 1.875%

> 0.625% - 1.250%

On 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.

This clarifying rule

revises the definition of “eligible retained income” for purposes of the maximum payout

ratio to allow banking

organizations to more freely use their capital buffers to promote

lending and other financial intermediation activities, by

making the limitations on capital distributions more gradual.

eligible retained income, as used in the Federal Reserve’s

Regulation Q capital rule, as corrected on January 13, 2021, is the greater of (i) net income

for the four preceding quarters,

net of distributions and associated tax effects not reflected in net income;

and (ii) the average of all net income over the

preceding four quarters.

Banking organizations were encouraged to

make prudent capital distribution decisions.

Basel III Capital

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

in on January 1, 2019 are:

The various capital elements and total capital requirements under

the Basel III Capital Rules are:

Fully Phased in

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conservation buffer

Minimum Total Capital

Minimum Total

conservation buffer

Changes in Risk-Weightings

The Basel III Capital Rules significantly change the risk weightings used to determine risk

weighted capital adequacy.

Basel III 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

realized through net operating loss carrybacks and significant (greater than 10%) investments

in other financial institutions.

A 150% risk-weighted category applies to “high volatility commercial real estate loans,”

or “HVCRE,” which are credit

to MSRs, DTAs that cannot

realized through net operating loss carrybacks and significant (greater

than 10%) investments in other financial institutions.

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

real estate loans,” or “HVCRE,” which are credit

facilities for the acquisition, construction or development of real property,

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properties or commercial real estate projects where:

(i) the loan-to-value ratio is

not in excess of interagency real estate

(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 “as

and (ii) the borrower has contributed capital equal

to not less than 15% of the real estate’s “as

completed” value before the loan was made.

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

-weighted capital adequacy.

The Basel III Capital Rules 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;

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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,

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

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

In December 2019 the federal bank regulators revised their definition of HVCRE and related

capital requirements

consistent with Section 214 of the 2018 Growth Act.

Increased the risk weight for exposures to qualifying securities firms from

HVCRE Risk Weight

In December 2019, the federal banking regulators published a final rule,

effective April 1, 2020, to implement Section 214

of the 2018 Growth Act.

This law restricted the bank regulators from assigning a heightened risk to a HVCRE loan

an acquisition construction or development loan.

The rules define HVCRE loans as loans secured by land or improved real

property made after December 31, 2014 that:

primarily 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.

The full value of any borrower contributed land (net of any liens on the

land securing HVCRE exposure) count toward the 15% capital contribution

to the appraised as completed value, which is

one of the criteria for exemption form the heightened risk weight.

HVCRE loans are assigned a 150% risk weight.

Capital Conservation Buffer

Full compliance with the capital conservation buffer

was required beginning January 1, 2019.

Thereafter, permissible

dividends, stock repurchases and discretionary bonuses will be

limited to the following percentages based on the capital

conservation buffer as calculated above, subject to

any further regulatory limitations, including those based on risk

assessments and enforcement actions:

Capital Conservation

Buffer % Limit

More than 2.50%

> 1.875% - 2.50%

> 1.250% - 1.875%

> 0.625% - 1.250%

On March 20, 2020, the Federal Reserve and the other federal banking regulators

adopted an interim final rule that

amended the capital conservation buffer.

This clarifying rule revises the definition of “eligible retained income”

purposes of the maximum payout ratio to allow banking organizations

to more freely use their capital buffers to promote

lending and other financial intermediation activities, by making the

limitations on capital distributions more gradual.

eligible retained income, as used in the Federal Reserve’s

Regulation Q capital rule, as corrected on January 13, 2021, is the

greater of (i) net income for the four preceding quarters, net of

distributions and associated tax effects not reflected in net

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

Banking organizations were encouraged to

make prudent capital distribution decisions.

Regulatory Capital Changes

Simplification

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

capital rules.

The last of these changes

become effective on April 1, 2020.

The principal changes for standardized approaches institutions, such

the Company and

the Bank are:

Deductions from capital for certain items, such as temporary difference

DTAs, MSAs and investments

unconsolidated subsidiaries were decreased to those amounts that individually

exceed 25% of CET1;

Institutions can elect to deduct investments in unconsolidated subsidiaries or subject

them to capital requirements;

Minority interests are included up to 10% of (i) CET1 capital, (ii) Tier

1 capital and (iii) total capital.

Effects of CECL Accounting Changes

The Financial Accounting Standards Board’s

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Instruments – Credit Losses (Topic

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

Measurement of Credit Losses on Financial Instruments” on

June 16, 2016, which

changed the loss model to take into account current expected credit losses (“CECL”)

in place of the incurred loss method.

The Federal Reserve and the other federal banking agencies adopted rules effective

on April 1, 2019 that allows banking

organizations to phase in the regulatory capital effect of a reduction

in retained earnings upon adoption of CECL over a

three-year period.

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

using the CECL methodology,

and updated concepts and practices in existing supervisory guidance that remain

CECL became effective for the Company beginning January 1,

Federal Reserve Capital Review

The Federal Reserve’s Vice

Chair for Supervision has indicated he is considering a holistic review of regulatory capital

requirements, which are expected to focus on banking organizations larger

than the Company.

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.

adopted CECL effective beginning January 1, 2023

and the Company recognized all effects on its regulatory capital

year of adoption.

Prompt Corrective Action Rules

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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.

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:

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greater, a Common equity tier 1 capital ratio

of 6.5% or greater, a leverage capital ratio of 5% or greater

of 6.5% or greater, a leverage capital ratio of

5% or greater and is not

subject to any written agreement, order,

capital directive or prompt corrective action directive by a federal bank

regulatory agency to maintain a specific capital level for any capital

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

“adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater,

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of 6.0% or greater, a Common Equity Tier

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

1 capital ratio of 4.5% or greater, and generally

has a leverage capital

ratio of 4.0% or greater;

“undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier

1 risk-based capital ratio of less

“undercapitalized” if it has a total risk-based capital ratio of less than 8.0%,

a Tier 1 risk-based capital ratio of less

than 6.0%, 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 6.0%, a Tier

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

6.0%, a Tier 1 risk-based

capital ratio of less than 6.0%, a Common Equity Tier

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less than 3.0%;

“critically undercapitalized” if its tangible equity is equal to or less than 2.0% to total assets.

The federal bank regulatory agencies have authority to require additional capital

where they determine it is necessary,

including where a bank is unsafe or unsound condition or where the bank is determined

to have less than a satisfactory

“critically undercapitalized” if its tangible equity is equal to or less than 2.0%

to total assets.

The federal bank regulatory agencies have authority to require additional

capital where they determine it is necessary,

including where a bank is unsafe or unsound condition or where the

bank is determined to have less than a satisfactory

rating on any of its CAMELS ratings.

The regulators have confirmed that higher capital levels

may be required in light of

The regulators have confirmed 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

FDICIA generally prohibits a depository institution from making any capital

distribution, including paying

dividends or any management fee to its holding company,

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“undercapitalized”.

Institutions that are “undercapitalized” are subject to growth limitations and are required

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 capital

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

compliance with applicable capital standards.

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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

files (or has filed against it) a petition under the federal Bankruptcy Code,

the claim against the holding company’s

restoration obligation would be entitled to a priority in such bankruptcy

proceeding over third-party creditors of the bank

holding company.

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to a number of requirements and restrictions,

including orders to sell sufficient voting stock to become “adequately capitalized”,

requirements to reduce total assets, and

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.

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Because the Company and the Bank exceed applicable capital requirements,

Company and Bank management do not believe that the prompt corrective action provisions

of FDICIA have had or are

expected to have any material effect on the Company and the Bank or

their respective operations.

Company and Bank management do not believe that the prompt corrective

action provisions of FDICIA have had or are

expected to have any material effect on the Company

and the Bank or their respective operations.

Dividends and Distributions

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

Federal Reserve Regulation Q limits “distributions,”

including discretionary bonus payments from eligible retained

income” by state member banks, such as the Bank, unless its

capital conservation buffer of common equity Tier

1 capital (“CET1”) exceeds 2.5%.

“Distributions” include dividends

declared or paid on common stock, discretionary bonuses and stock

repurchases, redemptions or repurchases of Tier 2

capital instruments (unless replaced by a capital instrument in the same quarter).

“Eligible retained income” for the Bank

and other Federal Reserve regulated institutions is the greater of:

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

tax effects not already

reflected in net income;

the average net income over the preceding four quarters.

The Company’s primary source

of cash is dividends from the Bank.

The Bank’s Call Report are used for its calculation

“eligible retained income.”

The Bank’s capital conservation

buffer exceeded 2.5% at December 31, 2024.

As of December 31, 2024, the Bank is “well capitalized” under the regulatory

framework for prompt corrective action.

be categorized as “well capitalized,” the Bank must maintain minimum common

equity Tier 1, total risk-based, Tier

based, and Tier 1 leverage ratios as set forth in the

following table.

Management has not received any notification from the

Bank's regulators, which changes the Bank’s

regulatory capital status.

Prior regulatory approval also is required by statute 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

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

During 2024, the Bank paid total cash dividends of

approximately $3.8 million to the Company.

At December 31, 2024, the Bank had net profits for the year and retained net

profits for the preceding two calendar years, less any required transfers to surplus,

of $9.7 million.

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

policies and requirements relating to the

payment of dividends, including requirements to maintain capital above

regulatory minimums.

The appropriate federal and

state regulatory authorities are authorized to determine when the payment

of dividends would be an unsafe or unsound

practice, and may prohibit such dividends.

The Federal Reserve has indicated

that paying dividends that deplete a state

member bank’s capital base

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

The Federal Reserve

has indicated that depository institutions and their holding companies should

generally pay dividends only out of current

year’s operating earnings.

See “Regulatory Capital Changes” and Note 15 to the Company’s

consolidated financial

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

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

payments, stock redemptions and stock repurchases.

Prior consultation with the Federal Reserve supervisory staff is

required before:

redemptions or repurchases of capital instruments when the bank

holding company is experiencing financial

redemptions and purchases of common or perpetual preferred stock

which would reduce such Tier 1 capital at end

of the period compared to the beginning of the period.

Bank holding company directors must consider different

factors to ensure that its dividend level is prudent relative to

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

scenarios, such as potential events

that could affect its ability to pay,

while still maintaining a strong financial position.

As a general matter,

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

should consult with the Federal Reserve and

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

dividends if:

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

previously paid during that

period, is not sufficient to fully fund the dividends;

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

current and prospective

financial condition;

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

adequacy ratios.

Community Bank Leverage Ratio Framework

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 as part of the

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 as part of the

community bank leverage ratio framework (“CBLR”).

The federal banking agencies have the discretion to determine that

The federal banking agencies have the discretion to determine

an institution does not qualify for such treatment due to its risk profile.

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risk profile may be assessed by

its off-balance sheet exposure, trading of assets and liabilities, notional derivatives’

exposure, and other methods.

The CBLR framework which became effective January 1,

2020, allows qualifying CBOs to adopt a simple leverage ratio to

its off-balance sheet exposure, trading of assets and liabilities, notional

derivatives’ exposure, and other methods.

The CBLR framework which became effective

January 1, 2020, allows qualifying CBOs to adopt a simple leverage ratio to

measure capital adequacy.

The CBLR may be elected by depository institutions and their holding companies

intended to reduce regulatory burdens for qualifying community banking organizations

that do not use advanced

intended to reduce regulatory burdens for qualifying community

banking organizations that do not use advanced

approaches capital measures, and otherwise qualify.

Eligible institutions

Eligible institutions must have:

less than $10 billion of assets;

a leverage ratio greater than 9%;

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

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

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 CBLR leverage ratio is Tier 1 capital divided

by average total consolidated asset for the latest quarter, taking into

account the capital simplification discussed above and the CECL related capital transitions.

by average total consolidated asset for the latest quarter,

account the capital simplification discussed above and the CECL related capital

A CBLR banking organization with a ratio above the requirement

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requirements.

If elected by a banking organization, The CBLR leverage ratio

will be the sole capital measure, and electing

institutions will not have to calculate or use any other capital measure for regulatory purposes.

If elected by a banking organization, The CBLR leverage

ratio will be the sole capital measure, and electing

institutions will not have to calculate or use any other capital measure for regulatory

The Company has not

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Management believes that

current risk-based capital measures are useful and reflect the risks of the Company’s

earning assets in a manner most

comparable to other banking organizations and which may be useful to investors.

current risk-based capital measures are useful and reflect the risks of the

Company’s earning assets in a manner

comparable to other banking organizations and which

may be useful to investors.

It may consider the CBLR in the future.

FDICIA directs that each federal bank regulatory agency prescribe standards for depository

institutions and depository

institution holding companies relating to internal controls, information systems,

internal audit systems, loan documentation,

credit underwriting, interest rate exposure, asset growth composition, a

maximum ratio of classified assets to capital,

minimum earnings sufficient to absorb losses, a minimum ratio

of market value to book value for publicly traded shares,

safety and soundness, and such other standards as the federal bank regulatory agencies deem

FDICIA directs that each federal bank regulatory agency prescribe standards

for depository institutions and depository

institution holding companies relating to internal controls, information

systems, internal audit systems, loan documentation,

credit underwriting, interest rate exposure, asset growth composition,

a maximum ratio of classified assets to capital,

minimum earnings sufficient to absorb losses, a minimum

ratio of market value to book value for publicly traded shares,

safety and soundness, and such other standards as the federal bank

regulatory agencies deem appropriate.

Enforcement Policies and Actions

The Federal Reserve and the Alabama Superintendent examine and regulate our compliance

with laws and regulations,

The Federal Reserve and the Alabama Superintendent examine and

regulate our compliance with laws and regulations,

including the CFPB’s regulations.

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applicable to consumer financial products and services.

Violations of laws and regulations,

including those administered by

the CFPB, or other unsafe and unsound practices, may result in the Federal Reserve and the

Alabama Superintendent

Violations of laws and regulations, including

those administered by

the CFPB, or other unsafe and unsound practices, may result in the Federal

Reserve and the Alabama Superintendent

imposing fines, penalties and/or restitution, cease and desist orders,

or taking other formal or informal enforcement actions.

Under certain circumstances, these agencies may enforce these remedies directly against

officers, directors, employees and

others participating in the affairs of a bank or bank holding company,

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

Under certain circumstances, these agencies may enforce

these remedies directly against officers, directors, employees and

others participating in the affairs of a bank or bank holding

company, in the form of fines, penalties,

or the recovery, or

claw-back, of compensation.

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Banking is a business that depends on interest rate differentials.

In general, the difference between the interest paid by a

bank on its deposits and its other borrowings, and the interest received by a bank on its loans and

securities holdings,

constitutes the major portion of a bank’s earnings.

In general, the difference between the interest paid by

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 as

the values of, and earnings on, its assets and the costs of its deposits and other liabilities are

subject to the influence of

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 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

means, including open market dealings in United States government

securities, the setting of discount rate at which banks

may borrow from the Federal Reserve, and the reserve requirements

The Federal Reserve has been paying interest on depository institutions required

and excess reserve balances since October

The payment of interest on excess reserve balances was expected to give the

Federal Reserve greater scope to use its

lending programs to address conditions in credit markets while also maintaining

the federal funds rate close to the target

rate established by the Federal Open Market Committee.

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in the event of inflation or the threat of inflation.

In April 2010, the Federal Reserve Board amended Regulation D (Reserve Requirements

of Depository Institutions)

authorizing the Reserve Banks to offer term deposits to certain institutions.

Term deposits,

which are deposits with

In April 2010, the Federal Reserve Board amended Regulation D (Reserve

Requirements of Depository Institutions)

authorizing the Reserve Banks to offer term deposits to

certain institutions.

Term deposits, which

are deposits with

specified maturity dates, will be offered through a Term

Deposit Facility.

Term deposits will be

one of several tools that

the Federal Reserve could employ to drain reserves when policymakers judge that it is appropriate

to begin moving to a less

Term deposits will be one

of several tools that

the Federal Reserve could employ to drain reserves when policymakers

judge that it is appropriate to begin moving to a less

accommodative stance of monetary policy.

In 2011, the Federal Reserve repealed its historical Regulation

Q to permit banks to pay interest on demand deposits.

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

stress in U.S.

In 2011, the Federal Reserve repealed its historical

Regulation Q to permit banks to pay interest on demand deposits.

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

and the stress in U.S.

financial markets,

the Federal Reserve, Congress and the Department of the Treasury took

a host of fiscal and monetary measures to minimize

the economic effect of COVID-19.

On March 3, 2020,

the Federal Reserve reduced the Federal Funds rate target by 50

basis points to 1.00-1.25%.

The Federal Reserve further reduced the Federal Funds Rate target

by an additional 100 basis

points to 0-0.25% on March 16, 2020.

The Federal Reserve established various liquidity

facilities pursuant to section 13(3)

of the Federal Reserve Act to help stabilize the financial system and purchased large

amounts of government and

the Federal Reserve, Congress and the Department of the Treasury

took a host of fiscal and monetary measures.

2020, the Federal Reserve reduced the federal funds rate target

twice to 0-0.25%.

The Federal Reserve established various

liquidity facilities pursuant to section 13(3) of the Federal Reserve Act to

help stabilize the financial system and purchased

large amounts of government and government agency

mortgaged backed securities.

The CARES Act provided a $2 trillion stimulus package and various measures to

provide relief from the COVID-19

pandemic, including:

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

guaranteed loans,

forgivable loans and other relief to small businesses affected

A new $500 billion federal stimulus program for air carriers and other companies in severely

distressed sectors of

the American economy.

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

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

The creation of rapid tax rebates and expansion of unemployment benefits to

provide relief to individuals.

Substantial federal spending and significant changes for health care companies,

providers, and patients.

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

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

Act (the “Economic Aid

Act”) was signed into law.

Economic Aid Act provided a second $900 billion stimulus package,

including $325 billion

in additional PPP loans, changed the eligibility rules to focus more on smaller business, further

enhances other Small

Business Association programs.

During 2021 and at the beginning of 2022, the Federal Reserve described inflation as “transitory,”

but as inflation

During 2021 and at the beginning of 2022, the Federal Reserve described

inflation as “transitory,” but

continued at increasing rates the Federal Reserve’s

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The Federal Reserve announced a 25 basis point

increase in the target federal funds range on March 17, 2022, the first change

since March 2020 when the target was set to

increase in the target federal funds range on March 17,

2022, the first change since March 2020 when the target was set to

Further increases were announced in 2022:

50 basis points on May 4, 75 basis points on each of June 15,

September 21, and November 2, and 50 basis points on December 14, 2022.

50 basis points on May 4, 75 basis points on

each of June 15, July 27,

21, and November 2, and 50 basis points on December 14, 2022.

During 2023, the Federal Reserve announced

additional target rate increases of 25 basis points on each of February 1,

2023, March 2022, May 3 and July 26, 2023.

federal funds target rate range remains at 5.25-5.50% at March 12, 2024.

The Federal Reserve’s securities holdings in

its System Open Market Account (“SOMA”) increased from $4.1 trillion on

December 30, 2019 to $9.0 trillion at April 11, 2021,

additional target rate increases of 25 basis points on

each of February 1, 2023, March 2022, May 3 and July 26, 2023.

federal funds target rate range was 5.25-5.50% from May 4, 2023

until September 19, 2024, when it was reduced to 4.75%

Two other reductions in November

and December resulted in a target range of 4.25%-4.50%.

The Federal Reserve’s securities

holdings in its System Open Market Account (“SOMA”) increased

from $3.9 trillion in

early March 2020 to $9.0 trillion at April 11,

2021, largely as a result of securities purchases as the Federal Reserve

injected liquidity as a result of the COVID-19 pandemic.

On May 4, 2022, the Federal Reserve announced its plan to

reduce its securities holdings in an effort to reduce inflation:

Reinvestments of principal of maturing Treasury securities

would be reduced by $30 billion per month for three

On May 4, 2022, the Federal Reserve announced its plan to reduce

its securities holdings in an effort to reduce inflation:

Reinvestments of principal of maturing Treasury

securities would be reduced by $30 billion per month for three

months and thereafter would be $60 billion per month.

Reinvestments of principal of maturing agency debt and mortgage-backed securities

would be reduced by $17.5

billion per month for three months and thereafter would be $35 billion per month.

Reinvestments of principal of maturing agency debt and agency mortgage

-backed securities would be reduced by

$17.5 billion per month for three months and thereafter would be $35 billion

These declines would slow and then stop when the Federal Reserve’s

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balance it deemed ample.

The Federal Reserve’s SOMA

was $7.0 trillion on February 28, 2024 compared to $8.4 trillion on February 13, 2023.

The Federal Reserve seeks to target longer term inflation of 2%

based on annual changes in the personal consumption

expenditures.

The Federal Reserve stated on February 1, 2023 that its Federal Open Market Committee is highly attentive

to inflation risks and the war in Ukraine is contributing to elevated global uncertainty.

Inflation remained above that rate

through February 2023.

The Chairman of the Federal Reserve’s testimony

to the Senate Banking Committee on March 7,

2023 that inflation remains well above the target, gross domestic product

in 2022 was 0.9%, below the trend.

have adversely affected the housing sector and combined with slower output

growth, “appear to be weighing on business

fixed investment.”

The labor market is “extremely tight.”

The Chairman concluded:

“We continue to anticipate

that ongoing increases in the target range for the federal funds rate

will be appropriate in order

to attain a stance of monetary policy that is sufficiently restrictive to return inflation

to 2% over time.

In addition, we are

continuing the process of significantly reducing the size of our balance sheet.

Although inflation has been moderating in

recent months, the process of getting inflation back down to 2% has a long

way to go and is likely to be bumpy.

mentioned, the latest economic data have come in stronger than expected,

which suggests that the ultimate level of interest

rates is likely to be higher than previously anticipated.

If the totality of the data

were to indicate that faster tightening is

warranted, we would be prepared to increase the pace of rate hikes.

Restoring price

stability will likely require that we

maintain a restrictive stance of monetary policy for some time.”

Although the Federal Reserve Chairman continues to maintain the 2% long term target

inflation, he has indicated that the

Federal Reserve

is “data dependent” and that it could cut rates depending on the data and

whether recent declines in

inflation appear sustained, and alternatively,

raise rates if appropriate in pursuit of its long term target inflation.

and timing of these ongoing changes in monetary policies and their effects

on the Company and the Bank cannot be

On May 4, 2024, the Federal Reserve’s

Federal Open Market Committee (“FOMC”) announced that beginning

2024, it would slow the pace of decline of its securities holdings by

reducing the monthly redemption cap on Treasury

securities from $60 billion to $25 billion.

The Committee maintained the monthly redemption cap on agency debt

agency mortgage-backed securities at $35 billion and will reinvest any

remaining principal amounts of maturing securities

in Treasury securities.

The Federal Reserve’s SOMA was $6.4

trillion on February 5, 2025 compared to $7.0 trillion on

February 28, 2024.

The Federal Reserve seeks to maintain maximum employment and

targets longer term inflation of 2% based on annual

changes in the personal consumption expenditures.

The FOMC stated on January 29, 2024 that the FOMC judges that the

risks to achieving its employment and inflation goals are roughly in balance.

The economic outlook is uncertain, and the

Committee is attentive to the risks to both sides of its dual mandate.

remained above that rate through February

The Federal Reserve Chairman has indicated that the FOMC is not in a hurry

to reduce its target federal funds rate

further at this time.

On March 12, 2023, as a result of unrealized securities losses resulting from increased

market rates, liquidity issues at two

banks with over $100 billion of assets which failed, the Federal Reserve established

a new Bank Term Funding Program

The BTFP offered loans of up to one year to banks, savings associations, credit

unions, and other eligible

banks with over $100 billion of assets which failed, the Federal Reserve established a new

Bank Term Funding

The BTFP offered 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

These assets were valued at par and the margin was 100%

The BTFP expires March 11,

2024, except for

agency debt and mortgage-backed securities, and other qualifying

These assets were valued at par and the margin was 100% of par.

The BTFP expires March 11, 2024, except for

loans outstanding prior to its expiration.

The Company did not participate in the BTFP in 2023.

The Federal Reserve on March 12, 2023 stated that depository institutions also may obtain

liquidity against a wide range of

collateral through the Federal Reserve’s discount

window, which was available

with the same collateral margins as the

The Federal Reserve on March 12, 2023 stated that depository institutions also may

obtain liquidity against a wide range of

collateral through the Federal Reserve’s

discount window,

which was available with the same collateral margins as the

but which offers loans of up to 90 days.

Collateral is valued under the discount window is based on fair market

collateral margins subsequently have been reduced to less than 100%

of collateral fair market value, with the

values, collateral margins subsequently have been reduced

to less than 100% of collateral fair market value, with the

amount of discount depending on the type of collateral.

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

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

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”)

accordance with changes mandated by the Dodd-Frank Act.

The FDIC changed its assessment rates which shifted part of

the burden of deposit insurance premiums toward depository institutions relying on funding

sources other than deposits.

In 2016, the FDIC again changed its deposit insurance pricing and eliminated all risk categories

and now uses “financial

ratios method” based on CAMELS composite ratings to determine assessment rates

for small established institutions with

the burden of deposit insurance premiums toward depository institutions relying

on funding sources other than deposits.

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

all risk categories and now uses “financial

ratios method” based on CAMELS composite ratings to determine assessment

rates for small established institutions with

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

The financial ratios method sets a maximum assessment for CAMELS 1

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

The financial ratios method sets (i) a maximum assessment for CAMELS 1

and 2 rated banks, and (ii) minimum assessments for lower rated institutions.

All basis points are annual amounts.

The following table shows the FDIC assessment schedule for Small Banks, such as the

Bank, for the first assessment period

The following table shows the FDIC assessment schedule for Small Banks, such

as the Bank, for the first assessment period

of 2023 to be billed in June 2023, which is the latest available:

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For example, Small Banks, with

CAMELS ratings of 1 or 2, have a current total assessment rate of 2.5 to 18 basis points for

the period to be billed in June

CAMELS ratings of 1 or 2, have a current total assessment rate of 2.5 to 18 basis points

for the period to be billed in June

The FDIC issued a special assessment of 3.36 basis points for a projected eight quarters on large

banks with more than $5

billion of uninsured deposits as a result of the systemic risk determination to insure all depositors

in connection with the

billion of uninsured deposits as a result of the systemic risk determination

to insure all depositors in connection with the

March 2023 failures of Silicon Valley

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These special assessments do not apply to the Bank.

The minimum FDIC’s DIF reserve ratio

is 1.35%, which was set by the Dodd-Frank Act.

The minimum FDIC’s DIF reserve

ratio is 1.35%, which was set by the Dodd-Frank Act.

The FDIC Board of directors is

required by the Federal Deposit Insurance Act to designate a reserve ratio before

the beginning of each calendar year.

required by the Federal Deposit Insurance Act (the “FDI Act”) to designate

a reserve ratio before the beginning of each

calendar year.

There is no upper limit on the reserve ratio and thus, no statutory limit on the size of the fund.

FDI Act provides for

dividends from the fund when the reserve ratio exceeds 1.5 percent, but grants the Board

sole discretion in determining

whether to suspend or limit the declaration or payment of dividends.

The reserve ratio reached 1.36% on September 30,

2018, exceeding the minimum requirement.

As a result, deposit insurance surcharges on Large Banks ceased,

banks received credits against their deposit assessments from the FDIC for

their portion of assessments that contributed to

the growth in the reserve ratio from 1.15% to 1.35%.

The Bank’s credit was $0.2

million, and was received and applied

against the Bank’s deposit insurance assessments

during 2019 and 2020.

provides for dividends from the fund when the reserve ratio exceeds 1.5 percent, but

grants the Board sole discretion in

determining whether to suspend or limit the declaration or payment of dividends.

The reserve ratio reached 1.36% on

September 30, 2018, exceeding the minimum requirement.

As a result, deposit insurance surcharges on Large

ceased, and smaller banks received credits against their deposit assessments from

the FDIC for their portion of assessments

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

The Bank’s credit was $0.2 million, and was

received and applied against the Bank’s

deposit insurance assessments during 2019 and 2020.

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

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The FDIC issued a restoration plan on September

2020 designed to restore the reserve ratio to at least the statutory minimum of 1.35%

within 8 years.

2020 designed to restore the reserve ratio to at least the statutory minimum

of 1.35% within 8 years.

Although the FDIC, at

maintained its then current assessment rates, the FDIC may increase deposit assessment

rates by up to two basis

that time, maintained its then 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,

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reserve ratio has been 2% since 2010, and was set at this same level for 2025.

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 (the “PPPLF”) established by the Federal

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 to assessments for the increase in assessment base rates attributed

to participation in the PPP and

liquidity facilities.

This had a limited effect on the Bank since it had only one PPP

loan of approximately $0.1 million

outstanding on December 31, 2023, and because the Bank never participated in the PPPLF.

The Company recorded FDIC insurance premiums expenses of $0.5 and $0.3

million in 2023 and 2022, respectively, which

reflects the FDIC’s amended restoration

plan increases in the initial base deposit insurance assessment rate schedules

The Company recorded FDIC insurance premiums expenses of $0.5 million

for both 2024 and 2023, respectively,

reflects the FDIC’s amended

restoration plan increases in the initial base deposit insurance assessment rate schedules

uniformly by 2 basis points, beginning with the first quarterly assessment period of 2023.

Lending Practices

CRE and Leveraged Loans

The federal bank regulatory agencies released guidance in 2006

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(the “CRE Guidance”).

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

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

The CRE 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

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

developers that closely correlate to the inherent risks in CRE markets

would also be considered CRE loans under the CRE

developers that closely correlate to the inherent risks in CRE markets would

also be considered CRE loans under the CRE

Loans on owner occupied CRE are generally excluded.

In December 2015, the Federal Reserve and other bank

regulators issued an interagency statement to highlight prudent risk management

practices from existing guidance that

regulators issued an interagency statement to highlight prudent risk

management practices from existing guidance that

regulated financial institutions and made recommendations regarding

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level and nature of their CRE concentration risk.

The CRE Guidance requires that banks have appropriate processes be in place to identify,

monitor and control risks

The CRE Guidance requires that banks have appropriate processes be in

place to identify, monitor

and control risks

associated with real estate lending concentrations.

This could include enhanced strategic planning, CRE underwriting

policies, risk management, internal controls, portfolio stress testing and risk exposure

limits as well as appropriately

policies, risk management, internal controls, portfolio stress testing and

risk exposure limits as well as appropriately

designed compensation and incentive programs.

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The CRE Guidance is triggered when either:

Total reported

loans for construction, land development, and other land of 100% or more of a bank’s

Total reported loans

for construction, land development, and other land of 100% or more of a bank’s

total capital;

Total reported

loans secured by multifamily and nonfarm nonresidential properties and loans

for construction, land

Total reported loans

secured by multifamily and nonfarm nonresidential properties and loans for

construction, land

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

total risk-based capital.

This CRE Guidance was supplemented by the Interagency Statement on Prudent Risk

Management for Commercial Real

This CRE Guidance was supplemented by the Interagency Statement on

Prudent Risk Management for Commercial Real

Estate Lending (December 18, 2015).

The CRE 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.

See “Management’s

Discussion and Analysis

has significant concentrations of CRE secured by a particular property

See “Management’s Discussion and Analysis

of Financial Condition and Results of Operations - Balance Sheet Analysis” for

concentrations of the various types of CRE

At December 31, 2023, the Bank had outstanding $68.3 million in construction and land

development loans and $293.0

million in total CRE loans (excluding owner occupied properties), which represent approximately

62% and 264%,

respectively, of the Bank’s

total risk-based capital at December 31, 2023.

At December 31, 2024, the Bank had outstanding $82.8 million in construction

and land development loans and $324.0

million in total CRE loans (excluding owner occupied properties), which represent

approximately 73% and 286%,

respectively, of

the Bank’s total risk-based capital at December

The Company has always had significant

exposures to loans secured by commercial real estate due to the nature of its markets and the

loan needs of both its retail

exposures to loans secured by commercial real estate due to the nature of its markets

and the loan needs of both its retail

and commercial customers.

The Company believes its long-term experience in CRE lending, underwriting

The Company believes its long-term experience in CRE lending, underwriting policies,

internal controls, and other policies currently in place, as well as its loan and credit

monitoring and administration

procedures, are generally appropriate to manage its concentrations as required under

the Guidance.

The Federal Reserve joined the other depository institution regulators in issuing a Policy Statement

on Prudent Commercial

procedures, are generally appropriate to manage its concentrations as required

under the Guidance.

The Federal Reserve joined the other depository institution regulators in issuing

a Policy Statement on Prudent Commercial

Real Estate Loan Accommodations and Workouts

on June 30, 2023.

(June 30, 2023).

This Policy Statement builds on and updates existing

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to CRE short term loan

accommodations and longer term workouts in all business cycles, particularly in challenging

economic environments.

accommodations and longer-term workouts in all

business cycles, particularly in challenging economic environments.

states that the regulatory agencies expect their examiners to take a balanced approach

in assessing the adequacy of a

financial institution's risk management practices for loan accommodation and

workout activities.

financial institution's risk management practices for loan accommodation

and workout activities.

Financial institutions that

implement prudent CRE loan accommodation and workout arrangements after

performing a comprehensive review of a

borrower's financial condition will not be subject to criticism for engaging in these efforts,

even if these arrangements result

implement prudent CRE loan accommodation and workout arrangements

after performing a comprehensive review of a

borrower's financial condition will not be subject to criticism for engaging in

these efforts, even if these arrangements result

in modified loans that have weaknesses that result in adverse classification.

modified loans to borrowers who

have the ability to repay their debts according to reasonable terms will not be subject

to adverse classification solely

because the value of the underlying collateral has declined to an amount that is less than the

outstanding loan balance.

Policy Statement also describes the classifications of CRE loan accommodations and

workouts and addresses regulatory

have the ability to repay their debts according to reasonable terms will not be

subject to adverse classification solely

because the value of the underlying collateral has declined to an amount that

is less than the outstanding loan balance.

Policy Statement also describes the classifications of CRE loan accommodations

and workouts and addresses regulatory

accounting and reporting in such situations, including CECL.

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

managing leveraged portfolios, as well as requiring banks

Leveraged Loans

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

Guidance on Leveraged Lending”

highlighting standards for originating leveraged transactions and managing

leveraged portfolios, as well as requiring banks

to identify their highly leveraged transactions, or HLTs.

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Review Act, which provides

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

by the President disapproving it.

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

11, 2018 “Statement Reaffirming the

Role of Supervisory Guidance.”

This Statement indicated that guidance does not have the force or effect of law or

the basis for enforcement actions, but this guidance can outline supervisory agencies’

views of supervisory expectations and

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

shared national credits.

The Bank did not have any loans at year-end 2023 or 2022

that were leveraged loans subject to the Interagency Guidance

on Leveraged Lending or that were shared national credits.

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

2024 or 2023 subject to the Interagency Guidance on Leveraged

Lending or that were shared national credits.

Other Dodd-Frank Act Provisions

In addition to the capital, liquidity and FDIC deposit insurance changes discussed above,

some of the provisions of the

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

Executive Compensation, etc.

The Dodd-Frank Act provides shareholders of all public companies with a say on 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

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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

named executive officers and their financial performance, taking into

account any change in the value of the shares of a

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

disclose in proxy materials for annual

shareholders meetings, information that shows the relationship between

executive compensation actually paid to their

named executive officers and their financial performance,

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

company’s stock and dividends or

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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

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

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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

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

compensation in certain circumstances.

of an accounting restatement due to material noncompliance with a financial

reporting requirement under the federal

securities laws, the policy must require that the company recover from

any current or former executive officer,

incentive-based compensation (including stock options) received

during the three-year period preceding the date of the

restatement, which is in excess of what would have been paid based on the restated

financial statements.

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

mandatory and applies to all executive officers.

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

CFO to return any bonus or other

incentive- or equity-based compensation received during the 12

months following the date of similarly inaccurate financial

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

if the restatement was due

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

or equity-based compensation received during the 12 months following the date

of similarly inaccurate financial

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

the period, if the restatement was due

to misconduct.

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

-Frank Act requires the

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, effective January 27, 2023, Commission Rule 10D-1 under the Exchange

Act, which requires each

The SEC adopted, effective January 27, 2023, Commission Rule 10D

-1 under the Exchange Act, which requires each

national securities exchange to adopt listing standards for the recovery of erroneously

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Under Rule 10D-1, listed companies

must recover from current and former executive officers’ incentive-based

compensation received during the three

must recover from current and former executive officers’

incentive-based compensation received during the three

completed fiscal years preceding the date on which the issuer is required to prepare

an accounting restatement.

Under these SEC and Nasdaq rules, the recovery of erroneously awarded compensation

is required on a “no fault” basis,

Under these SEC and Nasdaq rules, the recovery of erroneously awarded

compensation is required on a “no fault” basis,

without regard to whether any misconduct occurred or an executive officer’s

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circumstances and existing judicial and administrative interpretations.

proposed Nasdaq Rule requires recovery for

restatements that correct errors that are material to previously issued financial statements (commonly

referred to as “Big R”

restatements), as well as for restatements that correct errors that are not

material to previously issued financial statements

The proposed Nasdaq Rule requires recovery for

restatements that correct errors that are material to previously issued financial statements

(commonly referred to as “Big R”

restatements), as well as for restatements that correct errors that are not material

to previously issued financial statements

but would result in a material misstatement if the errors were left uncorrected

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are required to recover the amount of incentive-based compensation

received by an executive officer that exceeds the amount the executive officer

would have received had the incentive-based

compensation been determined based on the accounting restatement, computed

without regard to any taxes paid.

received by an executive officer that exceeds the amount the executive

officer would have received had the incentive-based

compensation been determined based on the accounting restatement,

computed without regard to any taxes paid.

defines “incentive-based compensation” as any compensation that is granted,

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Incentive-based compensation is deemed received on or after October

2, 2023 and in the fiscal period during which the financial reporting measure specified in

the incentive-based compensation

award is attained, even if the grant or payment of the incentive-based compensation

occurs after the end of that period.

2, 2023 and in the fiscal period during which the financial reporting measure

specified in the incentive-based compensation

award is attained, even if the grant or payment of the incentive-based

compensation occurs after the end of that period.

The Company adopted an Erroneously Awarded

Executive Incentive Based Compensation Policy effective December

Executive Incentive Based Compensation Policy effective

2023 to comply with these rules.

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of the Dodd-Frank Act comparing

their CEO’s total compensation to the median compensation

of all other employees.

their CEO’s total compensation to

the median compensation of all other employees.

These rules applied beginning to fiscal

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are exempted from

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

disclose in the proxy materials

for its annual meetings whether an employee or board member is permitted to purchase

financial instruments designed to

hedge or offset decreases in the market value of equity securities granted

as compensation or otherwise held by the

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

that each company disclose in the proxy materials

for its annual meetings whether an employee or board member is permitted

to purchase financial instruments designed to

hedge or offset decreases in the market value of equity

securities granted as compensation or otherwise held by the

employee or board member.

The SEC adopted

changes to its Reg.

The SEC adopted changes to its Reg.

S-K Item 407(i) implementing this Section.

Company expects to adopt appropriate policies upon shareholder

approval an equity incentive plan at the Annual

Stockholders’ meeting in 2024.

The Company’s has had no equity-based compensation

plans or arrangements, but expects to seek stockholder approval of

an equity incentive plan at the Annual Stockholders’ meeting in 2024.

The Company adopted its 2024 Incentive Plan in May 2024, but had not granted

any awards under that Plan as of February

The Company’s insider trading policy,

applies to all Company and Bank directors, officers, employees and certain independent

contractors and specified related

persons (collectively,

which applies to all Company and Bank directors, officers, employees

and certain independent contractors and specified related persons (collectively,

“Covered Persons”).

This Policy prohibits Covered Persons, from short-selling Company securities

or engaging in transactions involving Company “Derivative Securities.”

This prohibition includes, without limitation,

trading in Company-based put option contracts, including straddles, and the like.

Derivative Securities include options,

warrants, restricted stock units, stock appreciation rights or similar rights whose value is derived

from the value of an

equity or other security, including

Company Securities.

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

that encourage inappropriate risk

This Policy prohibits

Covered Persons, from short-selling Company securities or engaging in

transactions involving Company “Derivative

This prohibition includes, without limitation, trading in Company-based

put option contracts, including

straddles, and the like.

Derivative Securities include options, warrants, restricted stock units, stock appreciation

similar rights whose value is derived from the value of an equity or other

security, including Company Securities.

Company’s Insider Trading

Policy is included as an exhibit to its annual report on SEC Form 10-K.

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

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In June 2010, the

federal bank regulators adopted Guidance on Sound Incentive Compensation Policies,

which, although targeted to larger,

federal bank regulators adopted Guidance on Sound Incentive Compensation

Policies, which, although targeted to larger,

more complex organizations than the Company,

includes principles that have been applied to smaller organizations

includes principles that have been applied to smaller organizations similar

to the Company.

This Guidance applies to incentive compensation to executives as well

as employees, who, “individually

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

material amounts of risk.”

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:

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Be compatible with effective controls and risk-management;

Be supported by strong corporate governance, including active and effective

oversight by the organization’s

Be supported by strong corporate governance, including active and

effective oversight by the organization’s

of directors.

The federal bank regulators stated that this Guidance is expected to generally have

less effect on smaller banking

organizations, which typically are less complex and

make less use of incentive compensation arrangements than larger

The federal bank regulators stated that this Guidance is expected to generally

have less effect on smaller banking

organizations, which typically are less complex and make

less use of incentive compensation arrangements than larger

banking organizations.

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

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