AUBURN NATIONAL BANCORPORATION, INC 10-K

ITEM 1. BUSINESS Auburn National Bancorporation, Inc. (the “Company”) is a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). The Company was incorporated in Delaware in 1990, and in 1994 it succeeded its Alabama predecessor as the bank holding company controlling AuburnBank, an Alabama state member bank with its principal office in Auburn, Alabama (the “Bank”). The Company and its predecessor have controlled the Bank since 1984. As a bank holding company, the Company may diversify into a broader range of financial services and other business activities than currently are permitted to the Bank under applicable laws and regulations. The holding company structure also provides greater financial and operating flexibility than is presently permitted to the Bank. The Bank has operated continuously since 1907 and currently conducts its business primarily in East Alabama, including Lee County and surrounding areas. The Bank has been a member of the Federal Reserve Bank of Atlanta (the “Federal Reserve Bank”) since April 1995. The Bank’s primary regulators are the Federal Reserve and the Alabama Superintendent of Banks (the “Alabama Superintendent”). The Bank has been a member of the Federal Home Loan Bank of Atlanta (the “FHLB-Atlanta”) since 1991. General 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 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 number at such address is (334) 821-9200. The Company maintains an Internet website at www.auburnbank.com . The Company’s website and the information appearing on the website are not included or incorporated in, and are not part of, this report. The Company files annual, quarterly and current reports, proxy statements, and other information with the SEC. You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for more information on the operation of the public reference rooms. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy, and other information, where SEC filings are available to the public free of charge. Table of Contents 6 Services The Bank operates its main office and 7 branches in Auburn, Opelika, Notasulga, and Valley, Alabama and a loan production office in Phenix City, Alabama. We 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. The Bank’s Visa Checkcards can be used internationally through the Plus ® network. 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. See “Risk Factors – Our information systems may experience interruptions and security breaches.” The Bank has not offered any services related to any Bitcoin or other digital or crypto instruments, stablecoins or businesses. Competition 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 services. Lee County is served by 19 banks, 10 of which are headquartered outside of Alabama. Other banks have 35 offices in Lee County. National and regional competitors that have offices in our market include J.P. Morgan Chase, Wells Fargo, Truist, PNC, Regions, Valley 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. 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 highest yield in locations with the greatest demand. Many of the major commercial banks or their affiliates operating in the 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. Banks also have experienced significant competition for deposits from mutual funds, insurance companies and other investment companies and from money center banks’ offerings of high-yield investments and deposits, including CDs and savings accounts. Certain of these competitors are not subject to the same regulatory restrictions as the Bank. Selected Economic Data Our market is Lee County, Alabama, including Auburn, Opelika and part of Phenix City, Alabama. Lee County and Macon County form the Auburn-Opelika MSA. The U.S. Census Bureau estimates Lee County’s 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 and Opelika City Schools, Auburn City Schools, Wal -Mart Distribution Center, Aptar CSP Technologies, 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 Auburn. Kia Motors has a large automobile factory in nearby West Point, Georgia, and Hyundai Motors has a large automobile factory near Montgomery, Alabama. Various suppliers to the automotive industry have facilities in Lee County. 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 Statistics. Table of Contents 7 Between 2010 and 2022, the Auburn-Opelika MSA was the second fastest growing MSA in Alabama. The Auburn- Opelika MSA population is estimated to grow 6.6% from 2023 to 2028. During the same time, household income is estimated to increase 14.25%, to $69,213. Loans and Loan Concentrations The Bank makes loans for commercial, financial and agricultural purposes, as well as for real estate mortgages, real estate acquisition, construction and development and consumer purposes. While there are certain risks unique to each type of lending, management believes that there is more risk associated with commercial, real estate acquisition, construction and development, agricultural and consumer lending than with residential real estate mortgage loans. To help manage these risks, the Bank has established underwriting standards used in evaluating each extension of credit on an individual basis, which are substantially similar for each type of loan. These standards include a review of the economic conditions affecting the borrower, the 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 throughout the life of the loan. See “Lending Practices” for a discussion of regulatory guidance on commercial real estate lending. 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). Our regulators’ CRE Guidance excludes loans on owner occupied property from CRE. Excluding our owner-occupied loans, our CRE loans were $234.8 million (42% of total loans) at year end 2023. See “Lending Practices – CRE. ” 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. For example, the auto 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. 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 gage loans are originated outside the primary service area, and the Bank from time to time has purchased loan participations from outside its primary service area. We also may make loans to other borrowers outside these areas, especially where we have a relationship with the borrower, or its business or owners. Table of Contents 8 Human Capital 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 years. 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 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 experience and flexibility to meet other disruptive events and conditions, and still provide our customers and communities continuity of service. 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. Our MSA was the second fastest growing MSA in Alabama from 2010 to 2022. Auburn University is a major employer that attracts talented students and employee families. We had a successful 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 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 offer competitive compensation and benefits. We provide 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. 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. Our employees are encouraged to be active in our communities as part of our commitment to these communities and our employees. Statistical Information Certain statistical information is included in 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 and banks. The supervision, regulation and examination of the Company and the Bank and their respective subsidiaries by the bank regulatory agencies are primarily intended to maintain the safety and soundness of depository institutions and the federal deposit insurance system, as well as the protection of depositors, rather than holders of Company capital stock and other securities. Any change in applicable law or regulation may have a material effect on the Company’s business, and our results of operations and financial condition. The following discussion is qualified in its entirety by reference to the particular laws and rules referred to below. Table of Contents 9 Bank Holding Company Regulation The Company, as a bank holding company, is subject to supervision, regulation and examination by the Federal Reserve under the BHC Act. Bank holding companies generally are limited to the business of banking, managing or controlling banks, and certain related activities. The Company is required to file periodic reports and other information with the Federal Reserve. The Federal Reserve examines the Company and its subsidiaries. The State of Alabama currently does not regulate bank holding companies. The BHC Act requires prior Federal Reserve approval for, among other things, the acquisition by a bank holding company of direct or indirect ownership or control of more than 5% of the voting shares or substantially all the assets of any bank, or for a merger or consolidation of a bank holding company with another bank holding company. The BHC Act generally prohibits a bank holding company from acquiring direct or indirect ownership or control of voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in any activity other than banking or managing or controlling banks or performing services for its authorized 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 thereto. 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 Regulation Y, and whose insured depository institution subsidiaries maintain “satisfactory” or better ratings under the Community Reinvestment Act of 1977 (the “CRA”), may elect to become “financial holding companies.” Financial holding companies and their subsidiaries are permitted to acquire or engage in activities such as insurance underwriting, securities underwriting, travel agency activities, broad insurance agency activities, merchant banking and other activities that the Federal Reserve determines to be financial in nature or complementary thereto. In addition, under the BHC Act’s merchant banking authority and Federal Reserve regulations, financial holding companies are authorized to invest in companies that engage in activities that are not financial in nature, as long as the financial holding company makes its investment, subject to limitations, including a limited investment term, no day-to-day management, and no cross-marketing with any depositary institutions controlled by the financial holding company. The Federal Reserve recommended repeal of the merchant banking powers in 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. 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 by the SEC. 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”. Bank mergers are also subject to the approval of the resulting bank’s primary federal regulator pursuant to the Bank Merger Act. The BHC Act and the Bank Merger Act provide various generally similar statutory factors. Under the Alabama Banking Code, with the prior approval of the Alabama Superintendent, an Alabama bank may acquire and operate one or more banks in other states pursuant to a transaction in which the Alabama bank is the surviving bank. In addition, one or more Alabama banks may enter into a merger transaction with one or more out-of-state banks, and an out-of-state bank resulting from such transaction may continue to operate the acquired branches in Alabama. Banks, including Alabama banks, may branch anywhere in the United States. See “Bank Regulation”. Table of Contents 10 The Company is a legal entity separate and distinct from the Bank. Various legal limitations restrict the Bank from lending or otherwise supplying funds to the Company. The Company and the Bank are subject to Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W thereunder. Section 23A defines “covered transactions,” which include extensions of credit and other transactions with affiliates, and limits a bank’s covered transactions with any affiliate to 10% of such bank’s capital and surplus. All covered and exempt transactions between a bank and its affiliates must be on terms and conditions consistent with safe and sound banking practices, and banks and their subsidiaries are prohibited from purchasing low-quality assets from the 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 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. 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 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.” 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 assets. Proposed legislation, entitled the “Small Bank Holding Company Relief Act” would direct the Federal Reserve raise the permitted consolidated asset level to $10 billion. Such legislation is among various bills highlighted in February 2025 by House Financial Services Committee hearings. The Federal Reserve treats the Company as a small banking holding company under the Small BHC Policy. As a result, unless and until the Company fails to qualify under the Small BHC Policy, the Company’s capital adequacy will continue to be evaluated on a bank only basis. See “Capital.” Bank Regulation 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. The Bank’s 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. See “FDIC Insurance Assessments.” Alabama law permits statewide branching by banks. The Alabama Banking Code has provisions designed to ensure Alabama banks have competitive equality with national banks. Table of Contents 11 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 based on an evaluation and rating of six essential components of an institution’s financial condition and operations: C apital Adequacy, A sset Quality, M anagement, E arnings, L iquidity and S ensitivity to market risk, as well as the quality of risk management practices. For most institutions, the FFIEC has indicated that market risk primarily reflects exposures to changes in interest rates. When regulators evaluate this component, consideration is expected to be given to management’s ability to identify, measure, monitor and control market risk; the institution’s size; the nature and complexity of its activities and its risk profile; and the adequacy of its capital and earnings in relation to its level of market risk exposure. Market risk is rated based upon, but not limited to, an assessment of the sensitivity of the financial institution’s earnings or the 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 interest rate risk exposure arising from non-trading positions. Composite ratings are based on evaluations of an institution’s managerial, operational, financial and compliance performance. The composite CAMELS rating is not an arithmetical formula or rigid weighting of numerical component ratings. Elements of subjectivity and examiner judgment, especially as these relate to qualitative assessments, are important elements in assigning ratings. The Federal Reserve is maintaining a heightened focus on bank funding pressures based on risk profiles and management’s ability to manage their liquidity positions. 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 in assets. This guidance states that principles of sound management should apply to all risk confronting a banking organization, including credit, market, liquidity, operational, 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 regulator. The Federal Reserve and the Alabama Superintendent must approve mergers and 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. The FDIC 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. 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.” Executive Order 14036 apparently has not been rescinded as of February 17, 2025. 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 (“DoJ”) 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 OCC. Table of Contents 12 The Bank Merger Act and the BHC Act require evaluation, among other factors, of the effects of the transaction on competition. 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. The bank 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 Guidelines. 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. A variety of federal and state privacy laws govern the collection, safeguarding, sharing and use of customer information, and require that financial institutions have policies regarding information privacy and security. Some state laws also protect the privacy of information of state residents and require adequate security of such data, and certain state laws may, in some circumstances, require us to notify affected individuals of security breaches of computer databases that contain their personal information. These laws may also require us to notify law enforcement, regulators or consumer reporting agencies in the event of a data breach, as well as businesses and governmental agencies that own data. The Data Privacy Act of 2023 was introduced in Congress on February 24, 2023. 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. Other 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 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, 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 CRA regulations. 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. The CRA 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, 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 any FDIC-insured institution that has applied to: (i) charter a national bank; (ii) obtain deposit insurance coverage for all new- banks; (iii) establish a new branch office that accepts deposits; (iv) relocate an office; or (v) merge or consolidate with, or acquire the assets or assume the liabilities of, an FDIC-insured financial institution. 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 federal CRA regulations require that evidence of discriminatory, illegal or abusive lending practices be considered in the CRA evaluation. 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 rating. Table of Contents 13 CRA agreements with private parties must be disclosed and annual CRA reports must be made to a bank’s primary federal regulator. Community benefit plans have become common in banking mergers, especially larger bank combinations. The 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 ever. 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. 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 offices. 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 color, religion, national origin, sex and familial status in any aspect of a consumer or commercial credit or residential real estate transaction. 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 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”). Most 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, including the expanded role of mobile and online banking; ● Provide greater clarity and consistency in the application of the regulations; ● Tailor performance standards to account for differences in bank size and business models and local conditions; ● Tailor data collection and reporting requirements and use existing data whenever possible; ● Promote transparency and public engagement; ● Confirm that CRA and fair lending responsibilities are mutually reinforcing; and ● 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. Table of Contents 14 The new performance evaluation framework establishes two tests for intermediate banks: • the Retail Lending Test; and • the Intermediate Bank Community Development Test, or if elected by the Bank, the Community Development Financing Test. 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”; “High Satisfactory”; “Low Satisfactory”; “Needs to Improve”; or “Substantial Noncompliance.” These conclusions applied to each test would be weighted 50% each for intermediate banks and combined in a resulting rating of “Outstanding,” “Satisfactory,” “Needs to Improve,” or “Substantial Noncompliance.” A “facility-based assessment area” is an area that encompasses or is adjacent to deposit-taking facilities, including main 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 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 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, 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 location. 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 assessment areas will depend on the adequacy of the bank's responsiveness to community development needs and opportunities within the bank's facility-based assessment areas and applicable performance context information. 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 pursuant to the following criteria: • the number and dollar amount of community development loans; • the number and dollar amount of community development investments; • the extent to which the bank provides community development services; and • the bank's responsiveness through community development loans, community development investments, and community development services to community development needs. 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 recognize that, compared to large banks, intermediate banks 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 their branches are located.” 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. Table of Contents 15 Overdrafts 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 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 to limit the use of overdrafts by customers as a form of short-term, high-cost credit, including, for example, giving customers who overdraw their accounts on more than six occasions where a fee is charged in a rolling 12-month period, a reasonable opportunity to choose a less costly alternative and decide whether to continue with fee-based overdraft coverage. It also encourages placing appropriate daily limits on overdraft fees, and asks banks to consider eliminating overdraft fees for transactions that overdraw an account by de minimis amounts. Overdraft policies, processes, fees and disclosures have been the subject of various 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. 26, 2022) concluded that overdraft fee practices must comply with Regulation Z, Regulation E, and the prohibition against unfair, deceptive, and abusive acts or practices in Section 1036 of the Consumer Financial Protection Act. 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 regulations. 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. These regulations establish certain minimum requirements for creditors when making ability to repay determinations, and provide certain safe harbors from liability for mortgages that are "qualified mortgages" and are not “higher-priced.” Generally, these CFPB regulations apply to all consumer, closed-end loans secured by a dwelling including home-purchase loans, refinancing and home equity loans—whether first or subordinate lien. Qualified mortgages must generally satisfy detailed requirements related to product features, underwriting standards, and requirements where the total points and fees on a mortgage loan cannot exceed specified amounts or percentages of the total loan amount. Qualified mortgages must have: (1) a term not exceeding 30 years; (2) regular periodic payments that do not result in negative amortization, deferral of principal repayment, or a balloon payment; (3) and be supported with documentation of the borrower and its credit. On December 10, 2020, the CFPB issued final rules related to “qualified mortgage” loans. Lenders are required under the law to determine that consumers have the ability to repay mortgage loans before lenders make those loans. Loans that meet standards for QM loans are presumed to be loans for which consumers have the ability to repay. 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 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 mortgages, and periodic disclosures to borrowers. Servicers are prohibited from processing foreclosures when a loan modification is pending, and must wait until a loan is more than 120 days delinquent before initiating a foreclosure action. Servicers must provide borrowers with direct and ongoing access to its personnel, and provide prompt review of any loss mitigation application. Servicers must maintain accurate and accessible mortgage records for the life of a loan and until one year after the loan is paid off or transferred. These standards increase the cost and compliance risks of servicing mortgage loans, and the mandatory delays in foreclosures could result in loss of value on collateral or the proceeds we may realize from the sale of foreclosed property. We focus our residential mortgage origination on qualified mortgages and those that meet our investors’ requirements, but we may make loans that do not meet the safe harbor requirements for “qualified mortgages.” Table of Contents 16 The Federal Housing Finance Authority (“FHFA”) regulates The Federal National Mortgage Association (“Fannie Mae’s”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (individually and collectively, “GSE”). Among these, 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 dispute resolution (“IDR”) process to allow a neutral third party to resolve demands after the GSEs’ quality control and appeal processes have been exhausted. The Bank is subject to the CFPB’s integrated disclosure rules under the Truth in Lending Act and the Real Estate Settlement Procedures Act, referred to as “TRID”, for credit transactions secured by real property. Our residential mortgage strategy, product offerings, and profitability may change as these regulations are interpreted and applied in practice, and may also change due to any restructuring of Fannie Mae and Freddie Mac as part of the resolution of their conservatorships. The 2018 Growth Act reduced the scope of TRID rules by eliminating the wait time for a mortgage, if an additional creditor offers a consumer a second offer with a lower annual percentage rate. Congress encouraged federal regulators to provide better guidance on TRID in an effort to provide a clearer understanding for consumers and bankers alike. The law also provides partial exemptions from the collection, recording and reporting requirements under Sections 304(b)(5) and (6) of the Home Mortgage Disclosure Act (“HMDA”), for those banks with fewer than 500 closed-end mortgages or less than 500 open-end lines of credit in both of the preceding two years, provided the bank’s rating under the CRA for the previous two years has been at least “satisfactory.” 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. Section 4013 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 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 Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), financial institutions are subject to prohibitions against specified financial transactions and account relationships, as well as to enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers. The USA PATRIOT Act requires financial institutions to establish anti-money laundering programs, and sets forth minimum standards, or “pillars” for these programs, including: ● the development of internal policies, procedures, and controls; ● the designation of a compliance officer; ● an ongoing employee training program; ● an independent audit function to test the programs; and ● ongoing customer due diligence and monitoring. Table of Contents 17 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 United States. Department of the Treasury (“Treasury”) as part of the internal controls pillar of a financial institution's AML/BSA compliance program. 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 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. Among other things, the AML Act: ● specifies uniform disclosure of beneficial ownership information for all U.S. and foreign entities conducting business in the U.S.; ● increases potential fines and penalties for BSA violations and improves whistleblower incentives; ● codifies the risk-based approach to AML compliance; ● modernizes AML systems; ● expands the duties and powers FinCEN; and ● emphasizes coordination and information-sharing among financial institutions, U.S. financial regulators and foreign financial regulators. FinCEN regulation 31 C.F.R. 101.380 implements the Corporate Transparency Act (the “CTA”), and 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 information” or “BOI”). 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 costs. Table of Contents 18 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 in Texas Top Cop Shop, Inc. v. Garland . 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 Smith v. U.S. Department of the Treasury , which remined in effect as of January 2025. FinCEN issued an Alert on January 24, 2025, acknowledging the continuing nationwide injunction. 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 CTA. 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 15, 2021 seeking ways to streamline, modernize the United States AML and countering the financing of terrorists. The United States has imposed various sanctions upon foreign countries, including China, Iran, North Korea, Russia and Venezuela, 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. FinCEN has issued four alerts on potential Russian illicit financial activity since February 2022. On January 25, 2023, FinCEN issued an alert to financial institutions on potential investments in the U.S. commercial real estate sector by sanctioned Russian elites, oligarchs, their family members, and the entities through which they act. The alert listed potential red flags and typologies involving attempted sanctions evasion in the commercial real estate sector, and reminds financial institutions of their Bank Secrecy Act (BSA) reporting obligations. 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. sanctions. Other Laws and Regulations The Company is also required to comply with various corporate governance and financial reporting requirements under the Sarbanes-Oxley Act of 2002, as well as related rules and regulations adopted by the SEC, the Public Company Accounting Oversight Board and Nasdaq. 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 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, 2024 is included in this report with no material weaknesses reported. Table of Contents 19 Capital 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%. Tier 1 capital includes common equity and related retained earnings and a limited amount of qualifying preferred stock, less goodwill and certain core deposit intangibles. Voting common equity must be the predominant form of capital. Tier 2 capital consists of non–qualifying preferred stock, qualifying subordinated, perpetual, and/or mandatory convertible debt, term subordinated debt and intermediate term preferred stock, up to 45% of pretax unrealized holding gains on available for sale equity securities with readily determinable market values that are prudently valued, and a limited amount of general loan loss allowance. Tier 1 and Tier 2 capital equals total capital. In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies not subject to the Small BHC Policy, and state member banks, which provide for a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets (“leverage ratio”) equal to 4%. However, bank regulators expect banks and bank holding companies to operate with a higher leverage ratio. The guidelines also provide that institutions experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Higher capital may be required in individual cases and depending upon a bank holding company’s risk profile. All bank holding companies and banks are expected to hold capital commensurate with the level and nature of their risks including the volume and severity of their problem loans. Lastly, the Federal Reserve’s guidelines indicate that the Federal Reserve will continue to consider a “tangible Tier 1 leverage ratio” (deducting all intangibles) in evaluating proposals for expansion or new activities. The level of Tier 1 capital to risk-adjusted assets is becoming more widely used by the bank regulators to measure capital adequacy. The Federal Reserve has not advised the Company or the Bank of any specific minimum leverage ratio or tangible Tier 1 leverage ratio applicable to them. Under Federal Reserve policies, bank holding companies are generally expected to operate with capital positions well above the minimum ratios. The Federal Reserve believes the risk-based ratios do not fully take into account the quality of capital and interest rate, liquidity, market and operational risks. Accordingly, supervisory assessments of capital adequacy may differ significantly from conclusions based solely on the level of an organization’s risk-based capital ratio. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, requires the federal banking agencies to take “prompt corrective action” regarding depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository 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. See “Prompt Corrective Action Rules.” Basel III Capital Rules 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: A Global Regulatory Framework for more Resilient Banks and Banking Systems.” These U.S. 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 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.” CET1 includes common stock and related surplus, retained earnings, and subject to certain adjustments, minority common equity interests in subsidiaries. CET1 is reduced by deductions for: ● Goodwill and other intangibles, other than mortgage servicing assets (“MSRs”), which are treated separately, net of associated deferred tax liabilities (“DTLs”); ● Deferred tax assets (“DTAs”) arising from operating losses and tax credit carryforwards net of allowances and DTLs; ● Gains on sale from any securitization exposure; and ● 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 CET1 is not adjusted for certain accumulated other comprehensive income (“AOCI”). Table of Contents 20 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, net of any valuation allowances and DTLs; and ● Significant common stock investments in unconsolidated financial institutions, net of associated DTLs. Noncumulative perpetual preferred stock and Tier 1 minority interest not included in CET1, subject to limits, will qualify as additional Tier I capital. All other qualifying preferred stock, subordinated debt and qualifying minority interests will be included in Tier 2 capital. The various capital elements and total capital requirements under the Basel III Capital Rules are: Fully Phased in January 1, 2019 Minimum CET1 4.50% CET1 Conservation Buffer 2.50% Total CET1 7.0% Deductions from CET1 100% Minimum Tier 1 Capital 6.0% Minimum Tier 1 Capital plus conservation buffer 8.5% Minimum Total Capital 8.0% Minimum Total Capital plus conservation buffer 10.5% Table of Contents 21 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 cannot be 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, excluding one-to-four family residential properties or commercial real estate projects where: (i) the loan-to-value ratio is not in excess of interagency real estate lending standards; and (ii) the borrower has contributed capital equal to not less than 15% of the real estate’s “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. 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 preferred CDOs and asset backed securities; ● Retained existing risk weights for residential mortgages, but assign a 100% risk weight to most commercial real estate loans and a 150% risk-weight for HVCRE; ● Assigned a 150% risk weight to past due exposures (other than sovereign exposures and residential mortgages); ● Assigned a 250% risk weight to DTAs, to the extent not deducted from capital (subject to certain maximums); ● Retained the existing 100% risk weight for corporate and retail loans; and ● Increased the risk weight for exposures to qualifying securities firms from 20% to 100%. 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 that is 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 property; and ● the repayment of the loan must depend on the future income or sales proceeds from, or refinancing of, such real property. Various 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. Table of Contents 22 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 % Buffer % Limit More than 2.50% None > 1.875% - 2.50% 60.0% > 1.250% - 1.875% 40.0% > 0.625% - 1.250% 20.0% ≤ 0.625 - 0 - 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” 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. The 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. 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 in 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; and ● 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 (“FASB”) Accounting Standards Update (“ASU”) No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” on June 16, 2016, which changed the loss model to take into account current expected credit losses (“CECL”) in place of the incurred loss method. 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. The Company adopted CECL effective beginning January 1, 2023 and the Company recognized all effects on its regulatory capital in the year of adoption. Table of Contents 23 Prompt Corrective Action Rules All of the federal bank regulatory agencies’ regulations establish risk-adjusted measures and relevant capital levels that implement the “prompt corrective action” standards. The relevant capital measures are the total risk-based capital ratio, Tier 1 risk-based capital ratio, Common equity tier 1 capital ratio, as well as the leverage capital ratio. Under the regulations, a state member bank will be: ● well capitalized if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 8% or greater, a Common equity tier 1 capital ratio of 6.5% or greater, a leverage capital ratio of 5% or greater and is not subject to any written agreement, order, capital directive or prompt corrective action directive by a federal bank regulatory agency to maintain a specific capital level for any capital measure; ● “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a Common Equity Tier 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 than 6.0%, a Common Equity Tier 1 capital ratio of less than 4.5% or generally has a leverage capital ratio of less than 4.0%; ● “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 1 capital ratio of less than 3%, or a leverage capital ratio of less than 3.0%; or ● “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 market conditions and risk. Depository institutions that are “adequately capitalized” for bank regulatory purposes must receive a waiver from the FDIC prior to accepting or renewing brokered deposits, and cannot pay interest rates or brokered deposits that exceeds market rates by more than 75 basis points. Banks that are less than “adequately capitalized” cannot accept or renew brokered deposits. FDICIA generally prohibits a depository institution from making any capital distribution, including paying dividends or any management fee to its holding company, if the depository institution thereafter would be “undercapitalized”. Institutions that are “undercapitalized” are subject to growth limitations and are required to submit a capital restoration plan for approval. A depository institution’s parent holding company must guarantee that the institution will comply with such 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 compliance with applicable capital standards. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized”. If the controlling holding company fails to fulfill its obligations under FDICIA and files (or has filed against it) a petition under the federal Bankruptcy Code, the claim against the holding company’s capital restoration obligation would be entitled to a priority in such bankruptcy proceeding over third-party creditors of the bank holding company. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized”, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator. Because the Company and the Bank exceed applicable capital requirements, Company and Bank management do not believe that the 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. Table of Contents 24 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; or ● 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, 2024. As of December 31, 2024, the Bank is “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Bank must maintain minimum common equity Tier 1, total risk-based, Tier 1 risk- 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 statements. 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 weakness; and ● 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. Table of Contents 25 Bank holding company directors must consider different factors to ensure that its dividend level is prudent relative to maintaining a strong financial position, and is not based on overly optimistic earnings scenarios, such as potential events that could affect its ability to pay, while still maintaining a strong financial position. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should consult with the Federal Reserve and eliminate, defer or significantly reduce the bank holding 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; or ● 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 community bank leverage ratio framework (“CBLR”). The federal banking agencies have the discretion to determine that an institution does not qualify for such treatment due to its risk profile. An institution’s risk profile may be assessed by its off-balance sheet exposure, trading of assets and liabilities, notional derivatives’ exposure, and other methods. The 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 and is intended to reduce regulatory burdens for qualifying community banking organizations that do not use advanced approaches capital measures, and otherwise qualify. 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 assets; and ● trading assets plus trading liabilities of less than 5% of total consolidated assets. 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. A CBLR banking organization with a ratio above the requirement will not be subject to other capital and leverage 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. The Company has not adopted the CBLR, although it believes it is eligible to elect to use the CBLR framework. 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. It may consider the CBLR in the future. FDICIA 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. Table of Contents 26 Enforcement Policies and Actions The Federal Reserve and the Alabama Superintendent examine and regulate our compliance with laws and regulations, including the CFPB’s regulations. The CFPB issues regulations, interpretations and enforcement actions under the laws 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 imposing fines, penalties and/or restitution, cease and desist orders, or taking other formal or informal enforcement actions. Under certain circumstances, these agencies may enforce these remedies directly against officers, directors, employees and others participating in the affairs of a bank or bank holding company, in the form of fines, penalties, or the recovery, or claw-back, of compensation. Fiscal and Monetary Policies 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. Thus, the earnings and growth of the Company and the Bank, as well as the values of, and earnings on, its assets and the costs of its deposits and other liabilities are subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve. The Federal Reserve regulates the supply of money through various means, including open market dealings in United States government securities, the setting of discount rate at which banks may borrow from the Federal Reserve, and the reserve requirements on deposits. The Federal Reserve has been paying interest on depository institutions required and excess reserve balances since October 2008. The payment of interest on excess reserve balances was expected to give the Federal Reserve greater scope to use its lending programs to address conditions in credit markets while also maintaining the federal funds rate close to the target rate established by the Federal Open Market Committee. The Federal Reserve has indicated that it may use this authority to implement a mandatory policy to reduce excess liquidity, in the event of inflation or the threat of inflation. In April 2010, the Federal Reserve Board amended Regulation D (Reserve Requirements of Depository Institutions) authorizing the Reserve Banks to offer term deposits to certain institutions. Term deposits, which are deposits with specified maturity dates, will be offered through a Term Deposit Facility. Term deposits will be one of several tools that the Federal Reserve could employ to drain reserves when policymakers judge that it is appropriate to begin moving to a less accommodative stance of monetary policy. In 2011, the Federal Reserve repealed its historical Regulation Q to permit banks to pay interest on demand 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. In March 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. During 2021 and at the beginning of 2022, the Federal Reserve described inflation as “transitory,” but as inflation continued at increasing rates the Federal Reserve’s policy changed. 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 0-0.25%. Further increases were announced in 2022: 50 basis points on May 4, 75 basis points on each of June 15, July 27, September 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. The 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% -5.00%. Two other reductions in November and December resulted in a target range of 4.25%-4.50%. Table of Contents 27 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 months and thereafter would be $60 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 per month. ● These declines would slow and then stop when the Federal Reserve’s balance sheet was somewhat above the balance it deemed ample. On May 4, 2024, the Federal Reserve’s Federal Open Market Committee (“FOMC”) announced that beginning in June 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 and 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. Inflation remained above that rate through February 2024. 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 (“BTFP”). 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 collateral. 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 BTFP, but which offers loans of up to 90 days. Collateral is valued under the discount window is based on fair market 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. FDIC Insurance Assessments The Bank’s deposits are insured by the FDIC’s DIF, 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 accordance with changes mandated by the Dodd-Frank Act. The FDIC changed its assessment rates which shifted part of the burden of deposit insurance premiums toward depository institutions relying on funding sources other than deposits. In 2016, the FDIC again changed its deposit insurance pricing and eliminated all risk categories and now uses “financial ratios method” based on CAMELS composite ratings to determine assessment rates for small established institutions with less than $10 billion in assets (“Small Banks”). The financial ratios method sets (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. Table of Contents 28 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: Established Small Institution CAMELS Composite 1 or 2 3 4 or 5 Initial Base Assessment Rule 5 to 18 basis points 8 to 32 basis points 18 to 32 basis points Unsecured Debt Adjustment. Cannot exceed the lesser of 5 basis points or 50% of the bank’s initial FDIC assessment rate -5 to 0 basis points -5 to 0 basis points -5 to 0 basis points Brokered Deposit Adjustment N/A N/A N/A Total Base Assessment Rate 2.5 to 18 basis points 4 to 32 basis points 13 to 32 basis points As shown above. these assessments are adjusted based on the bank’s CAMELS rating. 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 2023. 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 March 2023 failures of Silicon Valley Bank and Signature Bank. 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 FDIC Board of directors is 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. The 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, 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 due to the pandemic and government stimulus, the DIF’s reserve ratio declined below 1.35% to 1.30%. The FDIC issued a restoration plan on September 15, 2020 designed to restore the reserve ratio to at least the statutory minimum of 1.35% within 8 years. Although the FDIC, at 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, to meet the required reserve ratio. The designated reserve ratio has been 2% since 2010, and was set at this same level for 2025. The Company recorded FDIC insurance premiums expenses of $0.5 million for both 2024 and 2023, respectively, which 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. Table of Contents 29 CRE and Leveraged Loans CRE The federal bank regulatory agencies released guidance in 2006 on “Concentrations in Commercial Real Estate Lending” (the “CRE Guidance”). 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 property where the primary or a significant source of repayment is derived from rental income associated with the property (that is, loans for which 50% or more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of this property. Loans to REITs and unsecured loans to developers that closely correlate to the inherent risks in CRE markets would also be considered CRE loans under the CRE Guidance. 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 regulated financial institutions and made recommendations regarding maintaining capital levels commensurate with the 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 associated with real estate lending concentrations. This could include enhanced strategic planning, CRE underwriting policies, risk management, internal controls, portfolio stress testing and risk exposure limits as well as appropriately designed compensation and incentive programs. Higher allowances for loan losses and capital levels may also be required. The 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 capital; or ● 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 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 of Financial Condition and Results of Operations - Balance Sheet Analysis” for concentrations of the various types of CRE loans. 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 31, 2024. The Company has always had significant exposures to loans secured by commercial real estate due to the nature of its markets and the loan needs of both its retail and commercial customers. The Company believes its long-term experience in CRE lending, underwriting policies, internal controls, and other policies currently in place, as well as its loan and credit monitoring and administration procedures, are generally appropriate to manage its concentrations as required under the Guidance. The Federal Reserve joined the other depository institution regulators in issuing a Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts (June 30, 2023). This Policy Statement builds on and updates existing guidance to enable financial institutions to work prudently and constructively with creditworthy borrowers during times of financial stress. The Policy Statement provides a broad set of risk management principles relevant to CRE short term loan accommodations and longer-term workouts in all business cycles, particularly in challenging economic environments. It 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 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 in modified loans that have weaknesses that result in adverse classification. In addition, 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. The Policy Statement also describes the classifications of CRE loan accommodations and workouts and addresses regulatory accounting and reporting in such situations, including CECL. Table of Contents 30 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. The Government Accountability Office issued a statement on October 23, 2017 that this guidance constituted a “rule” for purposes of the Congressional Review Act, which provides Congress with the right to review the guidance and issue a joint resolution for signature by the President disapproving it. No such action was taken, and instead, the federal bank regulators issued a September 11, 2018 “Statement Reaffirming the Role of Supervisory Guidance.” This Statement indicated that guidance does not have the force or effect of law or provide the basis for enforcement actions, but this guidance can outline supervisory agencies’ views of supervisory expectations and priorities, and appropriate practices. The federal bank regulators continue to identify elevated risks in leveraged loans and 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 The Dodd-Frank Act provides shareholders of all public companies with a say on executive compensation. Under the Dodd-Frank Act, each company must give its shareholders the opportunity to vote on the compensation of its executives, on a non-binding advisory basis, at least once every three years. The Dodd-Frank Act also adds disclosure and voting requirements for golden parachute compensation that is payable to named executive officers in connection with sale transactions. The SEC is required under the Dodd-Frank Act to issue rules obligating companies to disclose in proxy materials for annual shareholders meetings, information that shows the relationship between executive compensation actually paid to their named executive officers and their financial performance, taking into account any change in the value of the shares of a company’s stock and dividends or distributions. The Dodd-Frank Act also provides that a company’s compensation committee may only select a consultant, legal counsel or other advisor on methods of compensation after taking into consideration factors to be identified by the SEC that affect the independence of a compensation consultant, legal counsel or other advisor. Section 954 of the Dodd-Frank Act added section 10D to the Exchange Act. Section 10D directs the SEC to adopt rules prohibiting a national securities exchange or association from listing a company unless it develops, implements, and discloses a policy regarding the recovery or “claw-back” of executive compensation in certain circumstances. In the event 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, any incentive-based compensation (including stock options) received during the three-year period preceding the date of the restatement, which is in excess of what would have been paid based on the restated financial statements. There is no requirement of wrongdoing by the executive, and the claw-back is mandatory and applies to all executive officers. Section 954 augments section 304 of the Sarbanes-Oxley Act, which requires the CEO and CFO to return any bonus or other incentive- or equity-based compensation received during the 12 months following the date of similarly inaccurate financial statements, as well as any profit received from the sale of employer securities during the period, if the restatement was due to misconduct. Unlike section 304, under which only the SEC may seek recoupment, the Dodd-Frank Act requires the Company to seek the return of compensation. The SEC adopted, 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 awarded executive compensation. The Commission approved Nasdaq Listing Rule 5608 (“Rule 5608”) on June 9, 2023. Under Rule 10D-1, listed companies 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. Table of Contents 31 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 responsibility for the erroneous financial statements. A restatement due to material noncompliance with any financial reporting requirement under the securities laws triggers application of the recovery policy. The determination regarding materiality of an error should be based on facts and circumstances and existing judicial and administrative interpretations. 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 in the current report or the error correction was recognized in the current period (commonly referred to as “little r” restatement). Nasdaq-listed companies, such as the Company, 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. Nasdaq defines “incentive-based compensation” as any compensation that is granted, earned or vested based wholly or in part upon the attainment of any “financial reporting measure.” 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. The Company adopted an Erroneously Awarded Executive Incentive Based Compensation Policy effective December 1, 2023 to comply with these rules. The SEC adopted a rule in August 2013 to implement pay ratios pursuant to Section 953 of the Dodd-Frank Act comparing their CEO’s total compensation to the median compensation of all other employees. These rules applied beginning to fiscal year 2017 annual reports and proxy statements. Smaller reporting companies, such as the Company, are exempted from this rule. The Dodd-Frank Act, Section 955, requires the SEC, by rule, to require that each company disclose in the proxy materials for its annual meetings whether an employee or board member is permitted to purchase financial instruments designed to hedge or offset decreases in the market value of equity securities granted as compensation or otherwise held by the employee or board member. The SEC adopted changes to its Reg. S-K Item 407(i) implementing this Section. The Company adopted its 2024 Incentive Plan in May 2024, but had not granted any awards under that Plan as of February 12, 2025. The Company’s insider trading policy, 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. The 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 may lead to material losses. In June 2010, the federal bank regulators adopted Guidance on Sound Incentive Compensation Policies, which, although targeted to larger, more complex organizations than the Company, includes principles that have been applied to smaller organizations similar to the Company. 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.” Incentive compensation should: ● Provide employees incentives that appropriately balance risk and reward; ● Be compatible with effective controls and risk-management; and ● Be supported by strong corporate governance, including active and effective oversight by the organization’s board 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 banking organizations. Table of Contents 32 The federal bank regulators, the SEC and other regulators proposed regulations implementing Section 956 in April 2011, which would have been applicable to, among others, depository institutions and their holding companies with $1 billion or more in assets. An advance notice of a revised proposed joint rulemaking under Section 956 was published by the financial services regulators in May 2016, but these rules have not been adopted. Following the failures of Silicon Valley Bank and Signature Bank in early March 2023, Senator Elizabeth Warren and co- sponsors, filed S.1045 “Failed Bank Executives Clawback Act.” This bill provides that when a bank is placed into FDIC receivership, all or part of the compensation paid the previous five years to an institution-affiliated party responsible for the condition of the institution must be paid to FDIC to prevent unjust enrichment and to assure that the party bears losses consistent with their responsibility. Compensation includes salary, bonuses, awards, and profits from buying or selling securities. The bill also expands the FDIC’s authority to claw back compensation of parties responsible for financial losses incurred by a financial company regardless of the process by which FDIC is appointed receiver. Debit Card Interchange Fees The “Durbin Amendment” to the Dodd-Frank Act and implementing Federal Reserve regulations provide that interchanged transaction fees for electronic debit transactions be “reasonable” and proportional to certain costs associated with processing the transactions. The Durbin Amendment and the Federal Reserve rules thereunder are not applicable to banks with assets less than $10 billion. Such smaller banks, however, compete with banks that are subject to the Durbin Amendment, and therefore may have to limit their interchange fees, also. Other Legislative and Regulatory Changes Various legislative and regulatory proposals, including substantial changes in banking, and the regulation of banks, thrifts and other financial institutions, compensation, and the regulation of financial markets and their participants, and financial instruments and securities, and the regulators of all of these, as well as the taxation of these entities, are being considered by the executive branch of the federal government, Congress and various state governments, including Alabama. The 2018 Growth Act, which was enacted on May 24, 2018, amended the Dodd-Frank Act, the BHC Act, the Federal Deposit Insurance Act and other federal banking and securities laws to provide regulatory relief in these areas: ● consumer credit and mortgage lending; ● capital requirements; ● Volcker Rule compliance; ● stress testing and enhanced prudential standards; ● increased the asset threshold under the Federal Reserve’s Small BHC Policy from $1 billion to $3 billion; and ● capital formation. The following provisions of the 2018 Growth Act are helpful to banks of our size, and we have benefitted from the Growth Act’s changes to the deposit rules: ● “qualifying community banks,” defined as institutions with total consolidated assets of less than $10 billion, which meet a “community bank leverage ratio, which is currently 9.0%, may be deemed to have satisfied applicable risk- based capital requirements as well as the capital ratio requirements; ● section 13(h) of the BHC Act, or the “Volcker Rule,” is amended to exempt from the Volcker Rule, banks with total consolidated assets valued at less than $10 billion (“community banking organizations”), and trading assets and liabilities comprising not more than 5.00% of total assets; and ● “reciprocal deposits” will not be considered “brokered deposits” for FDIC purposes, provided such deposits do not exceed the lesser of $5 billion or 20% of the bank’s total liabilities. On July 9, 2019, the federal banking agencies, together with the SEC and the Commodities Futures Trading Commission (“CFTC”), issued a final rule excluding qualifying community banking organizations from the Volcker Rule pursuant to the 2018 Growth Act. The Volcker Rule change may enable us to invest in certain collateralized loan obligations that are treated as “covered funds” and other investments prohibited to banking entities by the Volcker Rule. The FDIC announced on December 19, 2018, a final rule allows reciprocal deposits to be excluded from “brokered deposits” up to the lesser of $5 billion or 20% of their total liabilities. Institutions that are not both well capitalized and well rated are permitted to exclude reciprocal deposits from brokered deposits in certain circumstances. Table of Contents 33 The FDIC issued comprehensive changes to its brokered deposit rules effective April 1, 2021. The revised rules establish new standards for determining whether an entity meets the statutory definition of “deposit broker,” and identifies a number of businesses that automatically meet the “primary purpose exception” from a “deposit broker.” The revisions also provide an application process for entities that seek a “primary purpose exception,” but do not meet one of the designated exceptions.” The new rules provide us greater flexibility, but we have limited our brokered deposits. Reciprocal deposits have expanded our funding and liquidity sources without being subjected to FDIC limitations on depositor FDIC insurance coverage and potential federal deposit insurance assessment increases for brokered deposits. The applicable agencies also issued final rules simplifying the Volcker Rule’s proprietary trading restrictions effective January 1, 2020. On June 25, 2020, the agencies adopted a final rule simplifying the Volcker Rule’s covered fund provisions effective October 1, 2020. Certain of these new rules, and proposals, if adopted, could significantly change the regulation or operations of banks and the financial services industry. New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of the nation’s financial institutions. Recent Developments – New Administration Donald J. Trump became President on January 20, 2025. The President has issued numerous Executive Orders, and he and his designees have taken a number of actions that affect financial institutions, and their regulation and regulators, including: • Issued an Executive Order “Regulatory Freeze Pending Review” (January 20, 2025); • Issued Executive Order 14192 “Unleashing Prosperity Through Deregulation” (January 31, 2025); • Issued a Presidential Memorandum dated January 20, 2025 freezing the hiring of Federal civilian employees in all executive departments and agencies • Issued Executive Order Implementing the President’s “Department of Government Efficiency” (“DOGE”) (January 20, 2025); • Issued Executive Order 14158 “Establishing and Implementing the President’s ‘Department of Government Efficiency’ Workforce Optimization Initiative” (February 11, 2025); • Removed the CFPB Director and appointing acting directors, most recently the Director (the “OMB Director”) of the Office of Management and Budget (the “OMB”), who will also serve as Acting CFPB Director; • Replaced the Acting Comptroller of the Currency with a new Acting Comptroller of the Currency, and nominated a successor Comptroller of the Currency and a CFPB Director, each subject to Senate confirmation; • Issued Executive Order 14178 “Strengthening American Leadership in Digital Financial Technology” (January 23, 2025); • Ordered and withdrew (subject to restoration) various tariffs on China, Canada and Mexico, a 25% tariff on all imported steel and aluminum, and is expected to order “reciprocal” tariffs, which would raise rates on imported goods to equal foreign levies on U.S. goods and has threatened other tariffs; • Issued an Executive Order “Reforming the Federal Workforce to Better Serve Americans” (February 11, 2025); • Issued an Executive Order “Restoring Democracy and Accountability in Government” (February 11, 2025); and • Issued an Executive Order “Ensuring Lawful Governance and Implementing the President’s ‘Department of Government Efficiency’ Deregulatory Initiative” (February 19, 2025). The regulatory freeze order directs all executive department agencies to not propose or issue any rule until a department or agency head appointed or designated by President Trump reviews and approves the rule. Any rule or proposed rule sent to the Office of Federal Register shall be withdrawn until the above review is made. Any substantive action by an agency (normally published in the Federal Register) that promulgates or is expected to lead to the promulgation of a final rule or regulation, including notices of inquiry, advance notices of proposed rulemaking, and notices of proposed rulemaking. This shall also apply to any agency statement of general applicability and future effect that sets forth a policy on a statutory, regulatory, or technical issue or an interpretation of a statutory or regulatory issue. This order applies to any substantive action by an agency (normally published in the Federal Register) that promulgates or is expected to lead to the promulgation of a final rule or regulation, including notices of inquiry, advance notices of proposed rulemaking, and notices of proposed rulemaking. This shall also apply to any agency statement of general applicability and future effect that sets forth a policy on a statutory, regulatory, or technical issue or an interpretation of a statutory or regulatory issue. Table of Contents 34 Executive Order 14192 seeks to “significantly reduce the private expenditures required to comply with Federal regulations.” For the current fiscal year 2025, for each new regulation, at least 10 existing regulations shall be identified for repeal. Agencies are directed to ensure that the total incremental cost of all new regulations, including repealed regulations, being finalized this year, shall be significantly less than zero, as determined by the OMB Director. The OMB Director shall provide agencies with guidance on implementation, including measuring regulatory costs. No regulation shall be added to or removed from the Unified Regulatory Agenda without the approval of the OMB Director. Regulations and rules are broadly defined as: …an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or to describe the procedure or practice requirements of an agency, including, without limitation, regulations, rules, memoranda, administrative orders, guidance documents, policy statements, and interagency agreements, regardless of whether the same were enacted through the processes in the Administrative Procedure Act The hiring freeze provides that no Federal civilian position that is vacant at noon on January 20, 2025, may be filled, and no new position may be created, subject to certain exceptions. The hiring freeze apparently has resulted in the rescission of offers to 200 new FDIC examiners. In addition to the hiring freeze, the Office of Personnel Management started the Voluntary Separation Incentive Payment Authority (the “buyout authority”), which allows agencies that are downsizing or restructuring to offer employees lump-sum payments up to $25,000 as an incentive to voluntarily separate. It has been reported that over 2 million federal workers may be eligible to accept such retirement buyouts. The program is subject to litigation, and deadlines for acceptance by employees were temporarily stayed by a federal court. DOGE or the “USDS” is in the Executive Office of the President and is headed by an Administrator. Its purpose is to “implement the President’s DOGE Agenda, by modernizing Federal technology and software to maximize governmental efficiency and productivity.” The Executive Order includes a U.S. DOGE Service Temporary Organization, which shall be dedicated to advancing the President’s 18-month DOGE agenda. The U.S. DOGE Service Temporary Organization shall terminate on July 4, 2026. The Executive Order also directs each agency head, in consultation with the USDS administrator, to establish a “DOGE team” of at least four employees within each agency. These teams will “typically include” a team lead, an engineer, a human resources specialist, and an attorney. According to the Executive Order, agency team members may include current agency personnel or new hires designated as “special government employees.” Each agency’s team is directed to coordinate with USDS and advise its agency head on implementing the DOGE agenda, with an apparent focus on information technology and human resource management. Among other things, the USDS Administrator shall work with Agency Heads to promote inter-operability between agency networks and systems, ensure data integrity, and facilitate responsible data collection and synchronization. Agency Heads are directed to take all necessary steps, in coordination with the USDS Administrator, and to the maximum extent consistent with law, provide USDS full and prompt access to all unclassified agency records, software systems, and information technology systems. USDS must adhere to rigorous data protection standards. The Executive Order “Establishing and Implementing the President’s ‘Department of Government Efficiency’ Workforce Optimization Initiative” requires the OMB Director to submit a plan to reduce the size of the Federal government's workforce through efficiency improvements and attrition (Plan). The Plan shall require that each agency, subject to certain exceptions, hire no more than one employee for every four employees that depart. Each Agency Head is required, in consultation with its DOGE Team Lead, among other things, to (i) hire in the highest need areas, (ii) fill vacancies unless the DOGE Team Lead determines such positions need to be filled. Agency Heads shall promptly prepare to initiate large- scale reductions in force (RIFs) to separate from Federal service temporary employees and reemployed annuitants working in areas that will likely be subject to the RIFs. All offices that perform functions not mandated by statute or other law shall be prioritized in the RIFs, including all agency diversity, equity, and inclusion () initiatives. Within 30 days, each Agency Head shall submit a report to the OMB Director that that identifies any statutes that establish the agency, or subcomponents of the agency, as statutorily required entities. The report shall discuss whether the agency or any of its subcomponents should be eliminated or consolidated. The new Acting Comptroller of the Currency and Acting CFPB Director will serve on the five person FDIC Board of Directors. The FDIC is currently headed by an Acting Chairman. No person has been nominated to serve as the FDIC Chair. FDIC director Jonathan McKernan resigned on February 11, 2025, and was nominated to be CFPB Director. Jonathan Gould was nominated to be Comptroller of the Currency on the same day. These nominations are subject to Senate confirmation. Table of Contents 35 The current Acting CFPB Director, on February 8, 2025, ordered all CFPB employees to suspend substantially all activities, including all supervision, examination and stakeholder engagement activities, and closed the agency's headquarters for the week of February 10, 2025. The Acting CFPB Director also said the CFPB had excessive funding on hand and would not take the next scheduled drawdown of funds from the Federal Reserve. Executive Order 14178 states the Administration’s policy “to support the responsible growth and use of digital assets, blockchain technology, and related technologies across all sectors of the economy.” “Digital assets” include “any digital representation of value that is recorded on a distributed ledger, including cryptocurrencies, digital tokens, and stablecoins.” This order revoked Executive Order 14067 “Ensuring Responsible Development of Digital Assets” (March 9, 2022) and directed the Secretary of the Treasury is directed to immediately revoke the Department of the Treasury's “Framework for International Engagement on Digital Assets,” (July 7, 2022). These new policies include the following that are applicable to banks: • protecting and promoting fair and open access to banking services for all law-abiding individual citizens and private-sector entities alike; and • providing regulatory clarity and certainty built on technology-neutral regulations, frameworks that account for emerging technologies, transparent decision making, and well-defined jurisdictional regulatory boundaries, all of which are essential to supporting a vibrant and inclusive digital economy and innovation in digital assets, permissionless blockchains, and distributed ledger technologies The Executive Order Reforming the Federal Workforce to Better Serve Americans requires: • Agency Heads to coordinate and consult with DOGE to shrink the size of the federal workforce and limit hiring to essential positions; • The Office of Personnel Management to initiate a rulemaking to ensure federal employees are held to the highest standards of conduct; • Upon expiration of the Day 1 hiring freeze and implementation of the hiring plan, agencies to hire no more than one employee for every four employees that depart from federal service (with appropriate immigration, law enforcement, and public safety exceptions); • Agencies to plan for large-scale reductions in force and determine which agency components (or agencies themselves) may be eliminated or combined because their functions aren’t required by law. The Executive Order “Restoring Democracy and Accountability in Government” requires all agencies to submit draft regulations for White House review with no carveout for so-called independent agencies, except for the monetary policy functions of the Federal Reserve; and consult with the White House on their priorities and strategic plans. The White House will set their performance standards. The Office of Management and Budget will adjust so-called independent agencies’ apportionments of funds. The President and the Attorney General (subject to the President’s supervision and control) will interpret the law for the executive branch, instead of having separate agencies adopt conflicting interpretations. The Executive Order “Ensuring Lawful Governance and Implementing the President’s ‘Department of Government Efficiency’ Deregulatory Initiative” requires Agency Heads, in coordination with their DOGE Team Leads and the OMB Director, to initiate a process to review, with priority on “significant regulatory actions,” as defined in Executive Order 12866 (Sept. 30, 1993) (“E.O. 19866”), all regulations subject to their sole or joint jurisdiction for consistency with law and Administration policy and within 60 days: 1. Identify the following classes of regulations: • unconstitutional regulations and regulations that raise serious constitutional difficulties, such as exceeding the scope of the power vested in the Federal Government by the Constitution; • regulations that are based on unlawful delegations of legislative power; • regulations that are based on anything other than the best reading of the underlying statutory authority or prohibition; • regulations that implicate matters of social, political, or economic significance that are not authorized by clear statutory authority • regulations that impose significant costs upon private parties that are not outweighed by public benefits; Table of Contents 36 • regulations that harm the national interest by significantly and unjustifiably impeding technological innovation, infrastructure development, disaster response, inflation reduction, research and development, economic development, energy production, land use, and foreign policy objectives; and • regulations that impose undue burdens on small business and impede private enterprise and entrepreneurship. 2. Provide OMB a list of all regulations identified by the above classes and consult with the OMB to develop a Unified Regulatory Agenda that seeks to rescind or modify these regulations. Agency Heads shall determine whether ongoing enforcement of any regulations identified in their regulatory review is compliant with law and Administration policy. Agency Heads shall de-prioritize (i) actions to enforce regulations that are based on anything other than the best reading of a statute and (ii) enforcement of regulations that go beyond the powers vested in the Federal Government by the Constitution. Agency heads, in consultation with the OMB Director, shall, on a case-by-case basis, as appropriate, direct the termination of all such enforcement proceedings that do not comply with law or Administration policy. Agency Heads shall consult with their DOGE Team Leads and OMB on potential new regulations in accordance with E.O. 19866’s processes. Tariffs generally make goods more expensive, and therefore may have inflationary effects that would be expected to slow consumer spending. Changes in tariffs may also cause changes in supply chains to reduce the effects of the tariffs and such changes may result in disruptions to the supply chains away from countries and producers to alternatives with higher costs but more advantageous tariff rates. As of February 12, 2025, the 25% tariffs on all imported steel and aluminum may have the most immediate effects, especially on the automobile industry and its suppliers. This industry and its suppliers are large employers in Lee County and nearby areas served by the Bank.