AUBURN NATIONAL BANCORPORATION, INC 10-K

ITEM 1A. RISK FACTORS Any of the following risks could harm our business, results of operations and financial condition and an investment in our stock. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. Risk Factor Summary The following summarizes the risks provided after this summary and is qualified by the more detailed discussion of “Risk Factors” that follows this Summary, and which should be read in their entirety. Our risks include operational risks, financial risks and legal and regulatory risks, which are related and intertwined as discussed more fully in the Risk Factors that follow this summary. Operational risks are inherent in our business, and include: ● The effects of local, national and regional market and economic conditions and cyclicality, including the levels and rates of change in inflation and interest rates, and the effects on depositors, borrowers and markets, including the real estate and securities markets; ● Our allowance for credit losses is based on estimates and judgments and may prove to be inadequate to our credit risks; ● The risks and costs of nonperforming assets ● The soundness of other financial institutions and perceptions regarding our industry, especially when other banks experience difficulties or fail; ● Our concentrations in commercial real estate loans in our market; ● We operate in a highly competitive market and compete against a number of larger national and regional competitors, as well as smaller institutions, nonbanks and credit unions; ● Our ability to attract and retain key people; ● Inflation and strong labor markets may affect our non-interest expenses; ● Technological changes affect our business, and we may have fewer resources than our larger regulated and unregulated competitors, both in and outside our market area, which may increase the competition we face; ● Potential gaps in our risk management, including managing the risks related to maintaining our data security and cybersecurity and those of our third-party service providers; Table of Contents 37 ● Continuity risks to us and our service providers due to power, information technology and telecommunication disruptions and outages, could affect our customer service, reputation and our results of operations, financial condition, customer relationship and reputation; ● Risks of severe weather, natural disasters, climate changes, epidemics and severe health issues in the population, wars and acts of terrorism and other events; and ● Future acquisitions may disrupt our business, dilute shareholder value and adversely affect our operating results and financial condition, among other risks. Financial risks result in part from our operational risks and the risk of our business, and include: ● Increases in costs of funds due to inflation, monetary and fiscal policies, changes in costumer behaviors and competitive pressures; ● Our results of operations and financial condition, including the values of our assets and liquidity, may be affected by changes in interest rates and interest rate levels, the shape of the yield curve and economic conditions; ● Liquidity risks, including the costs and availability of funding, and the liquidity of our assets, including our investment securities portfolio, and institutional lending sources; ● Changes in accounting and tax rules; ● The adequacy of our capital and availability of capital, if needed; ● Potentially excessive risk taking by our associates; ● Our ability to pay dividends depends on our earnings, liquidity and regulatory requirements related to our capital and our risks; and ● Our common stock trades in limited volumes. Legal and regulatory risks include: ● The Company is a legal entity separate and distinct from the Bank, and transactions between the Bank and the Company are limited by law; ● The Company is required to be a source of financial and managerial strength to the Bank, even in circumstances where further investment in the Bank may not be warranted; ● Privatization of Fannie Mae and Freddie Mac incident to the ending of their conservatorships and the resulting effects on the costs and availability of mortgage loans and the mortgage markets, generally, and the Company as a mortgage originator, and seller and servicer of residential mortgage loans; ● The scope, volume, complexity and clarity of regulations and regulatory and legal changes affect us, increase the time and costs of compliance and may limit our business and adversely affect our financial condition and results of operations; ● The pace and volume of regulatory changes and interpretations, especially by the bank regulators, the CFPB and the SEC, and well as numerous Executive Orders, and changes in government leadership, personnel and policies. Even where changes ultimately will benefit the Company, changes in regulation and policies require time and attention, and involve costs to implement; ● Litigation, investigations and other claims by government agencies and private parties and regulatory actions, including those related to assertions of compliance failures; ● The amounts and changes in the capital we are required to maintain in respect of our business and risks, and regulatory perceptions of us and our industry; and ● Liquidity requirements and changes in rules that affect brokered and reciprocal deposits and other sources and measures of liquidity. Additional Executive Orders and Administration and regulatory decisions, directives and actions, including modifications or changes to those discussed in this report, may occur at any time with currently unpredictable effects. Operational Risks Market conditions and economic cyclicality may adversely affect our industry. We believe the following, among other things, may affect us in 2025: Table of Contents 38 ● Extraordinary monetary and fiscal stimulus in 2020 and in early 2021 offset certain of the COVID-19 pandemic’s adverse economic effects, but together with supply chain disruptions, continued consumer demand, Russia’s war in Ukraine and its effects on energy and food prices, and tight labor markets, resulted in inflation. Inflation began running at levels unseen in decades and well above the Federal Reserve’s long term inflation goal of 2.0% annually. Beginning in March 2022, the Federal Reserve raised its target federal funds interest rates and reduced its securities holdings in an effort to reduce inflation. Inflation subsided in 2024. In February 2025 inflation remains above the Federal Reserve’s target rate, the labor market remains strong and the Federal Reserve cut its target federal funds rate in September through December 2024 100 basis points from 5.25-5.50% to 4.25%-4.50%, and reduced the rate of decline in reinvestments of maturing securities proceeds. ● The new presidential Administration that took office in January 2025 has established DOGE to increase government efficiency and reduce fiscal expenditures, imposed and threatened tariffs, and proposed tax cuts and tax cut extensions, the net effect of which is unknown. The nature and timing of any future changes in monetary and fiscal policies, government policies and their administration and personnel, and their effects on us cannot be predicted. ● Market developments, including unemployment, inflation and price levels, stock and bond market volatility, and changes, including those resulting from Russia’s war in Ukraine and governmental fiscal, operational and monetary policies affect consumer confidence levels, economic activity and interest rates. Increases in market interest rates and inflation, and adverse changes in consumer and business confidence may change customers’ savings and payment behaviors, including potential increases in loan delinquencies and default rates. These could affect our credit quality, and our results of operations and financial condition. ● Our ability to assess the creditworthiness of our customers and those we do business with, and the values of our assets and loan collateral may be adversely affected and less predictable as a result of inflation and fluctuating market interest rates and changes in monetary and fiscal policies. We adopted CECL on January 1, 2023 as required by generally accepted accounting principles (“GAAP”). CECL changed the loss model to take into account current expected credit losses in place of the incurred loss method used historically under GAAP, and how to estimate losses inherent in our credit exposures. The process for estimating expected losses requires difficult, subjective, and complex judgments, including forecasts of economic conditions, unemployment levels in Alabama, and how those economic predictions might affect the ability of our borrowers to repay their loans or the value of assets. Changes in economic conditions and factors used in our CECL models may increase the variability of our provisions for loan losses and our earnings. ● Changes in market interest rates and the shape of the yield curve affect the value of our investment securities and our other accumulated other comprehensive income or “AOCI.” Our allowance for loan losses may prove inadequate or we may be negatively affected by credit risk exposures. We periodically review the allowance for loan losses for adequacy considering economic conditions and trends, collateral values and credit quality indicators, including past charge-off experience and levels of past due loans and nonperforming assets. We cannot be certain that our allowance for loan losses will be adequate over time to cover credit losses in our portfolio because of unanticipated adverse changes in the economy, including fiscal and monetary policy changes, inflation, market conditions or events adversely affecting specific customers, industries or markets, including disruptions of supply chains, the war in Ukraine, changes in taxes and regulations and changes in borrower behaviors. Certain borrowers and their businesses and real estate and commercial projects and businesses may be adversely affected by inflation and higher interest rates, and economic slowdowns arising from tighter monetary policies, and may request or need loan modifications and deferrals. Various businesses will be unable to fully pass on increased costs due to inflation, supply chain disruptions and changes and other factors, and their profits may shrink. If the credit quality of our customer base materially decreases, if the risk profile of the market, industry or group of customers changes materially or weaknesses in the real estate markets worsen, borrower payment behaviors change, or if our allowance for loan losses is not adequate, our business, financial condition, including our liquidity and capital, and results of operations could be materially adversely affected. CECL, the accounting standard for estimating expected future loan losses, became effective for the Company beginning January 1, 2023, and its effects upon the Company over a full business cycle are unknown. The CECL model incorporates various economic condition factors, where changes in fiscal and monetary policy, as well as market interest rates and unemployment rates in our markets, among other factors, could result in more volatility in our provisions for loan losses under CECL, which could adversely affect our net income. See Note 1 to our Financial Statements – “Allowance for Credit Losses – Loans.” Table of Contents 39 Nonperforming and similar assets take significant time to resolve and may adversely affect our results of operations and financial condition. Our nonperforming loans were 0.09% of total loans as of December 31, 2024, and we had no other real estate owned as result of foreclosures or otherwise in full or partial payments in respect of loans (“OREO”). Non-performing assets may adversely affect our net income in various ways. We do not record interest income on nonaccrual loans or OREO and these assets require higher loan administration and other costs, thereby adversely affecting our income. Decreases in the value of these assets, or the underlying collateral, or in the related borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires commitments of time from management, which can be detrimental to the performance of their other responsibilities. Loan deferrals and modifications made to help resolve borrower issues and avoid foreclosures may not be successful. There can be no assurance that we will not experience increases in nonperforming loans in the future, much of which is affected by the economy and the levels of interest rates, generally. Changes in the real estate markets, including the secondary market for residential mortgage loans, may continue to adversely affect us. Beginning in March 2022, inflation and the Federal Reserve increases in interest rates to fight inflation have caused mortgage rates to increase significantly. Higher interest rates and the increased level of housing costs since 2020 have slowed housing sales. Although short term interest rates decreased in last half of 2024, longer term rates, including mortgage rates, have remained elevated. Inventories of existing homes for sale have remained generally low, and many believe that higher mortgage rates discourage potential sellers from selling their existing houses and incurring higher mortgage costs on replacement homes. These conditions have adversely affected housing affordability and increased monthly mortgage payments. These conditions adversely affect our mortgage loan production and may affect the value of residential mortgage collateral. Commercial real estate projects’ economic assumptions may be adversely affected by higher interest rates, and certain projects with short term and/or unhedged variable rate debt may be especially affected by increased interest rates and/or a slower economy. The CFPB’s mortgage and servicing rules, including TRID rules for closed end credit transactions, enforcement actions, reviews and settlements, affect the mortgage markets and our mortgage operations. The Tax Cuts and Jobs Act’s (the “2017 Tax Act”) limitations on the deductibility of residential mortgage interest and state and local property and other taxes often called “SALT,” could adversely affect consumer behaviors and the volumes of housing sales, mortgage and home equity loan originations, as well as the value and liquidity of residential property held as collateral by lenders such as the Bank, and the secondary markets for single and multi-family loans. Acquisition, construction and development loans for residential development may be similarly adversely affected. The new Trump administration has indicated it is considering increasing the amount of SALT permitted to be deducted for federal income taxes. Unless extended, many provisions of the 2017 Tax Act, including the cap on SALT deductions expire at the end of 2025, and the marginal individual tax brackets will increase. Fannie Mae and Freddie Mac have been in conservatorship since September 2008. The newly appointed Secretary of Housing and Urban Development has stated that coordinating the effort to privatize these GSEs would be his priority. Since these GSEs dominate the residential mortgage markets, any changes in their operations and requirements, as well as their respective restructurings and capital and the costs of their borrowings as private institutions, could adversely affect the primary and secondary mortgage markets, and our residential mortgage businesses, our results of operations and the returns on capital deployed in these businesses. Resolution of these extremely large GSEs will be complex, and the timing and effects of such resolution and the effects on mortgage originators and the mortgage markets and their participants, including the Company, cannot be predicted. We may be contractually obligated to repurchase mortgage loans we sold to third parties on terms unfavorable to us. As part of its routine business, the Company originates mortgage loans that it subsequently sells in the secondary market, generally to Fannie Mae. In connection with such loan sales, the Company makes customary representations and warranties, the breach of which may result in the Company being required to repurchase the loan or loans. Furthermore, the amount paid may be greater than the fair value of the loan or loans at the time of the repurchase. Although mortgage loan repurchase requests made to us have been limited historically, if these increased, we may have to establish reserves for possible repurchases and adversely affect our results of operation and financial condition. Table of Contents 40 Mortgage servicing rights requirements may change and require us to incur additional costs and risks. The CFPB’s residential mortgage servicing standards may adversely affect our costs to service residential mortgage loans. Reduced mortgage activity due to higher market interest rates has decreased our generation of new mortgage loans and related MSRs. This may be offset partially by decreases in mortgage prepayments and refinancings, and corresponding increases in the duration of our existing MSRs and their values. This net effect could reduce our aggregate income from servicing these types of loans and make it more difficult and costly to timely realize the value of collateral securing such loans upon a borrower default. The Basel III Capital Rules relating to MSRs may also increase the potential capital required as a result of MSRs, when considered with other capital rule adjustments and deductions. The soundness of other financial institutions could adversely affect us. We routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, central clearinghouses, banks, including our correspondent banks and other financial institutions. Our ability to engage in routine investment and banking transactions, as well as the quality and values of our investments in holdings of obligations of other financial institutions such as the FHLB-Atlanta, could be adversely affected by the actions, financial condition, profitability and regulation of such other financial institutions, including the FHLB-Atlanta and our correspondent banks. Financial services institutions are interrelated as a result of shared credits, trading, clearing, counterparty and other relationships. The failures of Silicon Valley Bank, Signature Bank and First Republic Bank in March and May 2023 due to concentrations of deposits and depositors holding large amounts of deposits in excess of FDIC insurance limits, as well as flawed business models and management, adversely affected the financial system and public confidence. These resulted in increased regulatory scrutiny of bank liquidity, funding and capital, depressed bank stock values generally, and higher FDIC deposit insurance premiums on the largest banks. The federal bank regulators have been advocating more use of the Federal Reserve discount window to improve bank liquidity. At the same time, the 2023 bank failures have also led to calls to reduce Federal Home Loan Bank lending to banks. Traditionally, the Federal Home Loan Banks have been stable sources of liquidity and funding for banks. The Federal Housing Finance Agency (“FHFA) regulates the Federal Home Loan Banks. The FHFA’s FHLBank System at 100: Focusing on the Future (Nov. 2023) indicates less traditional Federal Home Loan Bank lending to banks, especially banks experiencing financial stress. Sandra Thompson, the FHFA Director retired on January 19, 2025 and Bill Pulte has been nominated to succeed her, subject to Senate confirmation. Mr. Pulte’s views on Federal Home Loan Bank lending to banks are unknown. These changes, together with any exposures that other institutions may have to crypto or digital assets, or cybersecurity and data breaches, could cause disruption and unexpected changes in the industry. The Trump Administration has issued Executive Order “Strengthening American Leadership in Digital Financial Technology” and Congressional hearings on “debanking” may increase the use of digital assets and the volume of digital asset transactions with, and the risks to, banks. Any losses, defaults by, or failures of, the institutions we do business with could adversely affect our holdings of the equity in such other institutions, our participation interests in loans originated by other institutions, and our business, including our liquidity, financial condition and earnings. Failures of several banks in 2023 resulted in increased market volatility for financial service companies’ securities and in changes in regulatory views and emphases that may adversely affect us and may not be disclosable under law. The failures of Silicon Valley Bank, Signature Bank, First Republic and Heartland Tri-State Bank in 2023 caused significant market volatility for bank stocks, and uncertainty in the investor community and among bank customers, generally, greater bank regulatory scrutiny of banking organizations, especially those experiencing rapid growth and regional banks with $100 billion or more in assets. Similarly, concerns about credit quality and capital adequacy at New York Community Bank following two acquisitions raised market concerns and led to replacement of management and a dilutive equity capital raise. Table of Contents 41 These failures have resulted in bank regulators focusing supervisory activities, generally, on capital adequacy and liquidity in light of growth; asset, liability and customer concentrations and risks; CRE; levels of uninsured deposits; crypto businesses and customers; third-party vendors or “partners” providing digital, electronic and other services known as banking as a service (“BaaS”) and fintech relationships; strategic, capital and liquidity plans and contingency plans; and vendor diligence and risk management. Such enhanced scrutiny is often applied as part of the regulatory examination processes, as well as through a variety of nonpublic supervisory actions such as “matters requiring attention,” board of director resolutions, memoranda of understanding, and other regulatory criticism, and formal, public enforcement actions. The bank and bank holding examination processes, as well as any nonpublic supervisory actions, are “confidential supervisory information” for regulatory purposes, whose existence and terms, if any, may not be disclosed by banking organizations. Changes in regulations have been proposed as part of the Basel III endgame to the capital, liquidity, long term debt and resolution planning of banking organizations with over $100 billion in assets. Our concentration of commercial real estate loans could result in further increased loan losses, and adversely affect our business, earnings, and financial condition. Commercial real estate, or CRE, is cyclical and poses risks of possible loss due to concentration levels and the risks of the assets being financed, which include loans for the acquisition and development of land and residential construction. The federal bank regulatory agencies’ issued guidance on “Concentrations in Commercial Real Estate Lending” in 2006 (the “CRE Guidance”). The CRE Guidance defines CRE loans as exposures secured by raw land, land development and construction loans (including 1-4 family residential construction loans), multi-family property, and non-farm non- residential property, where the primary or a significant source of repayment is derived from rental income associated with the property (that is, loans for which 50% or more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. Loans to REITs and unsecured loans to developers that closely correlate to the inherent risks in CRE markets are also CRE loans. Loans on owner occupied commercial real estate are generally excluded from CRE for purposes of this guidance. Excluding owner occupied commercial real estate, we had 42% of our loan portfolio in CRE loans at year-end 2024 compared to 40% at year-end 2023. The bank regulators continue to scrutinize CRE lending and require banks with elevated CRE under the CRE Guidance, to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as higher levels of allowances for possible losses and capital levels as a result of CRE lending growth and exposures. Increases in interest rates beginning in March 2022 and reduced market transactions may adversely affect the assumptions and performance of CRE, especially for projects financed with short term or unhedged variable rate debt, and the ability of CRE borrowers to refinance on terms that their projects can support. Lower demand for CRE and fewer CRE purchase and sale transactions, and reduced availability of, and higher interest rates and costs for, CRE loans could adversely affect CRE values and liquidity, our CRE loans and sales of OREO, and therefore our earnings and financial condition, including our capital and liquidity. Our future success is dependent on our ability to compete effectively in highly competitive markets. The East Alabama banking markets where we operate are highly competitive and our future growth and success will depend on our ability to compete effectively in these markets. This MSA is served by 19 banks, 10 of which are headquartered outside of Alabama. Other banks have 35 offices in our MSA. 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. We compete for loans, deposits and other financial services and products with local, regional and national commercial banks, thrifts, credit unions, mortgage lenders, and securities and insurance brokerage firms. Various non-local competitors offer services through the mail, by telephone and over the Internet. The national and regional financial banks and financial services companies we compete with have substantially greater resources, and numerous offices and affiliates operating over wide geographic areas. Lenders operating nationwide over the internet are growing rapidly. Many of our competitors offer products and services different from ours, and have substantially greater resources, name recognition and advertising than we do, which helps them attract business. In addition, larger competitors may be able to price loans and deposits more aggressively than we are able to and have broader and more diverse customer and geographic bases to draw upon. Out of state banks may branch into our markets. Fintech and other non-bank competitors also compete for our customers, and may partner with other banks and/or seek to enter the payments system. The failures or sales of other banks with offices in our markets could also lead to the entrance of new, stronger competitors in our markets. Table of Contents 42 Our success depends on local economic conditions. Our success depends on the general economic conditions in East Alabama, including Lee County, Alabama. Local economic conditions in our markets have a significant effect on our commercial, real estate and construction loans, the ability of borrowers to repay these loans and the value of the collateral securing these loans. Adverse changes in the economic conditions of the Southeastern United States in general, or in one or more of our local markets, including the effects of higher market interest rates and inflation, supply chain disruptions, changes in customer behaviors and in the workforce and demand for space since the COVID-19 pandemic, and the timing and magnitude of future inflation and interest rates, as well as federal healthcare and education funding, could negatively affect our results of operations and our profitability. Our local economy is also affected by the growth of automobile manufacturing and related suppliers located in our markets and nearby. Auto sales and housing sales are cyclical and generally are affected adversely by higher sticker prices and interest rates, and may be adversely affected by tariffs, especially the 25% tariffs on imported steel and aluminum and autos, as well as threatened (i) tariffs on automaker suppliers in Canada and Mexico and (ii) reciprocal tariffs on countries that impose tariffs on U.S. goods. Major employers in our market include education and healthcare, which may be adversely affected by changes in Federal government policies and funding. Attractive acquisition opportunities may not be available to us in the future. While we seek continued organic growth, including loan growth, we also may consider the acquisition of other businesses. We expect that other banking and financial companies, many of which have significantly greater resources, will compete with us to acquire financial services businesses. This competition could increase prices for potential acquisitions that we believe are attractive. Also, acquisitions are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests, and regulatory approvals could contain conditions or commitments that reduce the anticipated benefits of any transaction. Among other things, our regulators consider our capital, liquidity, profitability, regulatory compliance and levels of goodwill and intangibles when considering acquisition and expansion proposals. Any acquisition could be dilutive to our earnings and shareholders’ equity per share of our common stock. The regulatory agencies carefully review and analyze financial institution mergers, and the merger application process has lengthened. Future acquisitions and expansion activities may disrupt our business, dilute shareholder value and adversely affect our operating results and financial condition. We regularly evaluate potential acquisitions and expansion opportunities, including new branches and other offices. To the extent that we grow through acquisitions, we cannot assure you that we will be able to adequately or profitably manage this growth. Acquiring other banks, branches, or businesses, as well as other geographic and product expansion activities, involve various risks including: ● risks of unknown or contingent liabilities, and potential asset quality issues; ● unanticipated costs and delays, including the regulatory application process; ● risks that acquired new businesses will not perform consistently with our growth and profitability expectations; ● risks of entering new markets or product areas where we have limited experience; ● risks that growth will strain our infrastructure, staff, internal controls and management, which may require additional personnel, time and expenditures; ● difficulties, expenses and delays of integrating the operations and personnel of acquired institutions, including the desirability of closing duplicative or overlapping facilities; ● potential disruptions to our business; ● possible loss of key employees and customers of acquired institutions; ● potential short-term decreases in profitability; and ● diversion of our management’s time and attention from our existing operations and business. Table of Contents 43 Technological changes affect our business, and we may have fewer resources than many competitors to invest in technological improvements. The financial services industry is undergoing rapid technological changes with frequent introductions of new technology- driven products and services and growing demands for mobile and user-based banking applications. The effective use of technology may help us better analyze our customers and their needs better, and the effective use of technology may increase efficiency and reduce our operating costs. At the same time the initial costs of acquiring and implementing technology may be material, and such technology may entail fraud, compliance with the AML/CFT anti-money laundering laws and rules, among others, and various operational and other risks. Largely unregulated “fintech” businesses have increased their participation in the lending and payments businesses, and have increased competition in these businesses. Our future success will depend, in part, upon our ability to use technology effectively to provide products and services that meet our customers’ preferences and create additional efficiencies in operations, while avoiding cyber-attacks and disruptions, data breaches, violations of AML/CFT laws, and other potential violations of law. Remote work has accelerated electronic banking activity and the need for increased operational efficiencies and data security in our electronic and mobile banking services. We may need to make significant additional capital investments in technology, including artificial intelligence, cyber and data security, and we may not be able to effectively implement new technology-driven products and services, or such technology may prove less effective and/or more costly than anticipated. Many larger competitors have substantially greater resources to invest in technological improvements and, increasingly, non-banking firms are using technology to compete for loans, payments, and other banking services. As a result, our competition from service providers not located in our markets has increased. Operational risks are inherent in our businesses. Operational risks and losses can result from internal and external fraud; gaps or weaknesses in our risk management or internal audit procedures; errors by employees or third parties, including our vendors, failures to document transactions properly or obtain proper authorizations; failure to comply with applicable regulatory requirements in the various jurisdictions where we do business or have customers; failures in our estimates or the models that we rely on; equipment failures, including those caused by natural disasters, or by electrical, telecommunications or other essential utility outages; business continuity and data security system failures, including those caused by computer viruses, cyberattacks, unforeseen problems encountered while implementing major new computer systems or upgrades, failures to timely and properly upgrade and patch existing systems or inadequate access to data or poor response capabilities in light of business continuity plans in the event of data security system failures; or the inadequacy or failure of systems and controls, including those of our vendors or counterparties. The COVID-19 pandemic presented operational challenges to maintaining continuity of operations of customer services while protecting our employees’ and customers’ safety, and similar situations may occur in the future. In addition, we face certain risks inherent in the ownership and operation of our bank premises and other real- estate, including liability for accidents on our properties. Although we have implemented risk controls and loss mitigation actions, and substantial resources are devoted to developing efficient procedures, identifying and rectifying weaknesses in existing procedures and training staff, it is not possible to be certain that such actions have been or will be effective in controlling these various operational risks that evolve continuously. Table of Contents 44 Potential gaps in our risk management policies and internal audit procedures may leave us exposed to unidentified or unanticipated risk, which could negatively affect our business. Our enterprise risk management and internal audit program are designed to mitigate material risks and losses to us. We have developed and continue to develop risk management and internal audit policies and procedures to reflect the ongoing review of our risks and expect to continue to do so in the future. Nonetheless, our policies and procedures may not be comprehensive and may not anticipate and identify timely every risk to which we are exposed, and our internal audit process may fail to detect such weaknesses or deficiencies timely in our risk management framework. Many of our risk management models and estimates use observed historical market behavior to model or project potential future exposure. The models used by our business, including our CECL models, are based on assumptions and projections. These models may not operate properly, or our inputs and assumptions may be inaccurate, or changes in economic and market conditions, customer behaviors or regulations may adversely affect the accuracy or usefulness of the models. As a result, these methods may not fully or timely predict future exposures, which can be significantly greater and/or faster than historically. Other risk management methods depend upon the evaluation of information regarding markets, clients, or other matters that are publicly available or otherwise accessible to us. This information may not always be accurate, complete, up-to-date or properly evaluated. Furthermore, there can be no assurance that we can effectively review and monitor all risks or that all of our employees will closely follow our risk management policies and procedures, nor can there be any assurance that our risk management policies and procedures will enable us to accurately identify all risks and limit our exposures based on our assessments. In addition, we may have to implement more extensive and perhaps different risk management policies and procedures as our regulation and technology uses changes. All of these could adversely affect our costs, and our financial condition and results of operations. Any failure to protect the confidentiality of customer information could adversely affect our reputation and have a material adverse effect on our business, financial condition and results of operations . Various laws enforced by the bank regulators and other agencies protect the privacy and security of customers’ non-public personal information. Many of our employees have access to, and routinely process personal information of clients through a variety of media, including information technology systems. Our internal processes, policies and controls are designed to protect the confidentiality of customer information we hold and that is accessible to us and our employees. It is possible that an employee could, intentionally or unintentionally, disclose or misappropriate confidential client information or our data could be the subject of a cybersecurity attack. Such personal data could also be compromised via intrusions into our systems or those of our service providers or other persons we do business with such as credit bureaus, data processors and merchants who accept credit or debit cards for payment. If we fail to maintain adequate internal controls, or if our employees fail to comply with our policies and procedures, misappropriation or inappropriate disclosure or misuse of client information could occur. Such internal control inadequacies or non-compliance could materially damage our reputation, lead to remediation costs and civil or criminal penalties. These could have a material adverse effect on our business, financial condition and results of operations. See Item 1C. of this report for more information about cybersecurity and our management and strategies. Our information systems may experience interruptions and security breaches. We rely heavily on communications and information systems, including those of third-party service providers, to conduct our business. Any failure, interruption, or security breach of these systems could result in failures or disruptions which could affect our business, our customers’ privacy and our customer relationships, generally. Our business continuity plans, including those of our service providers, for back-up and service restoration, may not be effective in the case of widespread outages due to severe weather, natural disasters, pandemics, or power, communications and other failures. See Item 1C. of this report for more information about cybersecurity and our management and strategies. Table of Contents 45 Our systems and networks, as well as those of our third-party service providers, are subject to security risks and could be susceptible to disruption through cyber-attacks, such as denial of service attacks, hacking, terrorist activities, or identity theft. Cybercrime risks have increased as electronic and mobile banking activities have increased, and may increase further as a result of the Russia’s war in Ukraine, tensions with mainland China and other countries, and foreign government sponsored cybercrime and theft. Other financial service institutions and their service providers have reported material security breaches in their websites or other systems, some of which have involved sophisticated and targeted attacks, including use of stolen access credentials, malware, ransomware, phishing and distributed denial-of-service attacks, among other means. Such cyber-attacks may also seek to disrupt the operations of public companies or their business partners, effect unauthorized fund transfers, obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems. Any of these, including hacking and identity theft risks, could cause serious reputational harm. Despite our cybersecurity policies and procedures and our Board of Directors and management’s efforts to monitor and ensure the integrity of the systems we and our third-party service providers use, we may not be able to anticipate the rapidly evolving security threats, nor may we be able to implement preventive measures effective against all such threats. The techniques used by cyber criminals change frequently, may not be recognized until launched and can originate from a wide variety of sources, including external service providers, organized crime affiliates, terrorist organizations or hostile foreign governments. These risks may increase in the future as the use of mobile banking, other internet electronic banking. While artificial intelligence may be useful generally, it may be used by cyber criminals and may require us to seek additional defenses. Security breaches or failures may have serious adverse financial and other consequences, including significant legal and remediation costs, disruptions to operations, misappropriation of confidential information, damage to systems operated by us or our third-party service providers, as well as damages to our customers and our counterparties. In addition, these events could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. The SEC adopted rules, effective June 15, 2024 for smaller reporting companies, such as the Company, which require reporting companies to disclose material cybersecurity incidents they experience on SEC Form 8-K within four business days, including the nature, scope, and timing of the incident, and the material impact or reasonably likely material impact on the registrant, including its financial condition and results of operations. Annually, reporting companies are required to disclose material information regarding their cybersecurity risk management, strategy, and governance. We may be unable to attract and retain key people to support our business. Our success depends, in large part, on our ability to attract and retain key people. We compete with other financial services companies for people primarily on the basis of compensation and benefits, support services and financial position. Intense competition exists for key employees with demonstrated ability, and we may be unable to hire or retain such employees. Effective succession planning is also important to our long-term success. The unexpected loss of services of one or more of our key persons and failure to ensure effective transfer of knowledge and smooth transitions involving such persons could have a material adverse effect on our business due to loss of their skills, knowledge of our business, their years of industry experience and the potential difficulty of promptly finding qualified replacement employees. Proposed rules implementing the executive compensation provisions of the Dodd-Frank Act may limit the type and structure of compensation arrangements and prohibit the payment of “excessive compensation” to our executives. These restrictions could negatively affect our ability to compete with other companies in recruiting and retaining key personnel. Severe weather and natural disasters, including as a result of climate change, pandemics, epidemics, acts of war or terrorism or other external events could have significant effects on our business. Severe weather and natural disasters, including hurricanes, tornados, drought and floods, epidemics and pandemics, acts of war or terrorism or other external events could have a significant effect on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. Although management has established disaster recovery and business continuity policies and procedures, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations. Table of Contents 46 The COVID-19 pandemic, trade wars, tariffs, supply chain disruptions and changes, wars, sanctions and similar events and disputes, domestic and international, have adversely affected, and may continue to adversely affect economic activity globally, nationally and locally. Market interest rates have changed significantly and suddenly. The Federal Reserve’s target federal funds rates declined to 0-0.25% in March 2020, where these remained until March 17 2022. The Federal Reserve increased the target federal funds rates 11 from March 17, 2022 through July 27, 2023 to 5.25-5.50% due to inflation. After three rate cuts during the last four months of 2024, this range was 4.25-4.50% at December 31, 2024, but such target rates and inflation remain above the Federal Reserve’s target rate of 2%. Such events also may adversely affect business and consumer confidence, generally. We and our customers, and our respective suppliers, vendors and processors may be adversely affected by shortages of needed equipment and supplies, rising prices and tight labor markets. The continuation or worsening of these conditions may adversely affect our profitability, growth asset quality and financial condition. Financial Risks Our cost of funds may increase as a result of general economic conditions, interest rates, inflation and changes in customer behaviors and competitive pressures. Our costs of funds have increased as a result of general economic conditions, increased market interest rates and competitive pressures, and inflation, and anticipated future changes in target short-term interest rates by the Federal Reserve to reduce inflation. Traditionally, we have obtained funds principally through local deposits and borrowings from other institutional lenders such as the FHLB-Atlanta. We believe deposits are a cheaper and more stable source of funds than other borrowings, generally. Increases in interest rates have caused consumers to shift their funds to more interest- bearing instruments and to increase the competition for and costs of deposits. If customers move money out of bank deposits and into other investment assets or from transaction deposits to higher cost, interest-bearing time deposits, we could lose relatively low-cost sources of funds, increasing our funding costs and potentially reducing our net interest income and net income. Additionally, any such loss of funds could result in lower loan originations and growth, which could materially and adversely affect our results of operations and financial condition. See “Supervision and Regulation – Fiscal and Monetary Policy.” Our profitability and liquidity may be affected by changes in interest rates and interest rate levels, the shape of the yield curve and economic conditions. Our profitability depends upon net interest income, which is the difference between interest earned on interest-earning assets, such as loans and investments, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Our income is primarily driven by the spread between these rates. Net interest income will be adversely affected if market interest rates and the interest we pay on our deposits and borrowings increase faster than the interest earned on loans and investments. Interest rates, and consequently our results of operations, are affected by general economic conditions (national, international and local) and fiscal and monetary policies, as well as expectations regarding interest rate changes, fiscal and monetary policies and the shape of the yield curve. As a result, a steeper yield curve, meaning long-term interest rates are significantly higher than short-term interest rates, would provide the Bank with a better opportunity to increase net interest income. Conversely, a flattening yield curve could further pressure our net interest margin as our cost of funds increases relative to the spread we can earn on our assets. In addition, net interest income could be affected by asymmetrical changes in the different interest rate indexes, given that not all of our assets or liabilities are priced with the same index. Higher market interest rates and continuing run-off of maturing securities held by the Federal Reserve in its SOMA in furtherance of its quantitative tightening policy to fight inflation, generally reduce economic activity and may reduce loan demand and growth. Conversely, the slowing of the run-off of maturing Treasury securities held in SOMA from $60 billion per month to $25 billion that commenced in June 2024, may reduce the tightening effect of such decreases in SOMA. The production of mortgages and other loans and the value of collateral securing our loans are dependent on demand within the markets we serve, as well as interest rates. Lower interest rates typically increase mortgage originations, decrease MSR values and promote economic growth. Increases in market interest rates tend to decrease mortgage originations, increase MSR values, decrease the value and liquidity of collateral securing loans, result in unrealized losses on our investment securities and accumulated other comprehensive losses, and potentially increase net interest spread depending upon the yield curve and the magnitude and duration of interest rate increase, and constrain economic growth, generally. Reductions in short term target interest rates by the Federal Reserve in the second half of 2024 did not have much effect on reducing longer term mortgage rates. Table of Contents 47 Increases in market interest rates also have caused unrealized losses in our investment securities, all of which are held as available for sale and carried at fair market values. Market prices of our investment securities holdings decline as market interest rates increase for comparable securities and maturities. Although these unrealized losses do not adversely affect our regulatory capital, these do reduce our reported income and GAAP tangible stockholders’ equity. Sales of securities with unrealized losses would result in realized losses for GAAP, regulatory capital and tax purposes. Increases in interest rates may also change depositor behaviors as customers seek higher yielding deposits. This may adversely affect our costs of funds, growth, net interest income and net income, and may also adversely affect our liquidity, results of operations and financial condition. Liquidity risks could affect operations and jeopardize our financial condition. The COVID-19 pandemic and related monetary and fiscal stimuli generally increased our bank deposits, including at the Bank, while reducing the interest rates earned on loans and securities. Such excess liquidity and the resulting balance sheet growth reduced returns on assets and equity. The growth in deposits exceeded our loan growth, and the difference was invested in high-quality, marketable U.S. government and government agency securities, including agency mortgage- backed securities. Inflation and tightening monetary policies beginning in early 2022 have partially reversed these trends. Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, proceeds from loan repayments or sales proceeds from maturing loans and securities, and other sources could have a negative effect on our liquidity. Our funding sources include deposits (primarily core deposits), federal funds purchased, securities sold under repurchase agreements, and short- and long-term debt. We maintain a portfolio of marketable high-quality securities that are all held as available for sale, and can be used as a source of liquidity. As market interest rates rose prior to Fall 2024, however, we have experienced unrealized losses on such securities, which would become realized losses upon the sale of such securities, and such sales at a loss would reduce our net income and our regulatory capital. We are also members of the FHLB-Atlanta and the Federal Reserve Bank of Atlanta, and we can obtain advances from them collateralized with eligible assets, and maintain uncommitted federal funds lines of credit with other banks. Other sources of liquidity available to the Company or the Bank, if needed, include our ability to acquire additional non- core deposits. We may be able, depending upon market conditions, to borrow money or issue and sell debt and preferred or common securities in public or private transactions. Our access to funding sources in amounts adequate to finance or capitalize our activities on terms which are acceptable to us could be impaired by factors that affect us specifically, or the financial services industry, the economy, market interest rates and fiscal and monetary policies. General conditions that are not specific to us, such as disruptions in the financial markets, failures of other bank, such as Silicon Valley Bank, Signature Bank and First Republic Bank in 2023, or negative views and expectations about the prospects for the financial services industry could adversely affect us and our liquidity. Our ability to realize our deferred tax assets may be reduced in the future if our estimates of future taxable income from our operations and tax planning strategies do not support this amount, and the amount of net operating loss carry-forwards realizable for income tax purposes may be reduced under Section 382 of the Internal Revenue Code by sales of our capital securities. We are allowed to carry-back losses for two years for Federal income tax purposes. As of December 31, 2024, we had a net deferred tax asset of $10.2 compared to $10.3 million one year earlier. These and future deferred tax assets may be further reduced in the future if our estimates of future taxable income from our operations and tax planning strategies do not support the amount of the deferred tax asset. The amount of net operating loss carry-forwards realizable for income tax purposes potentially could be further reduced under Section 382 of the Internal Revenue Code by a significant offering and/or other sales of our capital securities. Current bank capital rules also reduce the regulatory capital benefits of deferred tax assets. Changes in accounting and tax rules applicable to banks could adversely affect our financial conditions and results of operations. From time to time, the FASB and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in us restating prior period financial statements . Table of Contents 48 We may need to raise additional capital in the future, but that capital may not be available when it is needed or on favorable terms. We anticipate that our current capital resources will satisfy our capital requirements for the foreseeable future under currently effective rules. We may, however, need to raise additional capital to support our growth or currently unanticipated losses, or to meet the needs of our communities, resulting from failures or cutbacks by our competitors. Our ability to raise additional capital, if needed, will depend, among other things, on conditions in the capital markets at that time, which are limited by events outside our control, and on our financial performance. If we cannot raise additional capital on acceptable terms when needed, our ability to further expand our operations through internal growth and acquisitions could be limited. Our associates may take excessive risks which could negatively affect our financial condition and business. Banks are in the business of accepting certain risks. Our executive officers and other members of management, sales intermediaries, investment professionals, product managers, and other associates, make decisions and choices that may expose us to risk. We endeavor, in the design and implementation of our compensation programs and practices, to avoid giving our associates incentives to take excessive risks; however, associates may nonetheless take such risks. Similarly, although we employ controls and procedures designed to prevent misconduct, to monitor associates’ business decisions and prevent them from taking excessive risks, these controls and procedures may not be effective. If our associates take excessive risks, risks to our reputation, financial condition and results of operations could be materially and adversely affected. Our ability to continue to pay dividends to shareholders, repurchase stock and pay discretionary bonuses in the future is subject to our profitability, capital, liquidity and regulatory requirements and these limitations may prevent or limit future dividends. Cash available to pay dividends to our shareholders is derived primarily from dividends paid to the Company by the Bank. The ability of the Bank to pay dividends, as well as our ability to pay dividends to our shareholders, will continue to be subject to and limited by laws limiting dividend payments by the Bank, the results of operations of our subsidiaries and our need to maintain appropriate liquidity and capital at all levels of our business consistent with regulatory requirements and the needs of our businesses. We can only pay dividends, repurchase stock and pay discretionary bonuses, if our capital conservation buffer exceeds 2.5% and from our eligible retained income over the last four calendar quarters. See “Supervision and Regulation - Dividends and Distributions.” The Federal Reserve expects bank holding companies to inform and consult with Federal Reserve supervisory staff sufficiently in advance of (i) declaring and paying a dividend that could raise safety and soundness concerns, such as declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid); (ii) redeeming or repurchasing regulatory capital instruments when the bank holding company is experiencing financial weaknesses; or (iii) redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction as of the end of a quarter in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. Further, the Company is also required to maintain sufficient capital, liquidity and resources to serve as a source of managerial and financial strength to the Bank, which may limit its capacity to pay dividends on Company common stock. The Federal Reserve may require the Company to commit resources to the Bank, even where it is not otherwise in the interests of the Company or its shareholders or creditors. Our common stock trades in limited volumes, which could result in price volatility. Your ability to sell or purchase common shares depends upon the existence of an active trading market for our common stock. Although our common stock is quoted on the Nasdaq Global Market under the trading symbol “AUBN,” our trading volume has been limited historically. The limited trading volume of our common stock may cause fluctuations in the market value of our common stock to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading market. As a result, you may be unable to sell or purchase shares of our common stock at the volume, price and time that you desire. Additionally, whether the market prices of our common stock reflect a reasonable valuation of our common stock also is affected by the limited market volumes, and thus the price you receive may not reflect its true or intrinsic value. Table of Contents 49 Legal and Regulatory Risks The Company is an entity separate and distinct from the Bank. The Company is an entity separate and distinct from the Bank. Company transactions with the Bank are limited by Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W. We depend upon the Bank’s earnings and dividends from the Bank paid to the Company, which are limited by law and regulatory policies and actions, for cash to pay the Company’s corporate obligations, and to pay dividends to our shareholders. If the Bank’s ability to pay dividends to the Company was terminated or limited, the Company’s liquidity and financial condition could be materially and adversely affected. Legislative and regulatory changes generally The Biden Administration and its heads of various government agencies, including the bank regulators, CFPB and SEC, implemented numerous changes to bank and other regulation, SEC rules and corporate tax changes that could have an adverse effect on our results of operations and financial condition. The new Trump Administration has taken a number of actions to freeze and reduce new regulations, and may take action in the future to reverse or ameliorate the effects of various Biden Administration and other policies and regulations. See “Supervision and Regulation - Recent Developments -New Administration.” New Executive Orders may be issued at any time and from time to time, which make additional changes, or modify prior action by the current Administration. Such changes in regulations, potential consolidation or reorganization of regulators, hiring freezes and reductions in force at the government agencies, including the bank regulators, the CFPB and SEC that directly affect us, and changes in tariffs and trade rules, are unpredictable. Such changes, and their administration and potential litigation challenging, modifying or rescinding such changes, create uncertainty and may adversely affect us, our customers and markets, and the economy, generally. The bank regulators, the CFPB and the SEC have actively developed a broad range of new and changed rules over the last several years, many of which are complex and lengthy, such as the new CRA regulations and various SEC rules, including the cybersecurity rule adopted in September 2023 and climate change rules adopted on March 6, 2024. Some rules, such as the SEC share repurchase modernization rules, have been struck down by the courts and have been withdrawn, creating more compliance uncertainty during the pendency of the litigation. Ten states’ attorney generals immediately challenged the Enhancement and Standardization of Climate-Related Disclosures for Investors rule adopted by the SEC on March 6, 2024, and the SEC stayed that rule’s effectiveness. On February 11, 2025, Acting SEC Chairman Uyeda announced that in light of the change in Administrations and the Regulatory Freeze Executive Order, the SEC was notifying the United States Court of Appeals for the Eighth Circuit and requesting that Court not to schedule the case for argument to provide time for the SEC to deliberate and determine the appropriate next steps. Compliance with the volume and complexity of these rule changes, and the potential reversal of various Biden-era rules is costly and imposes material time and personnel burdens on financial services companies, especially on smaller companies, such as the Company. Increasing litigation on regulatory rules and whether these exceed the agencies’ statutory authority or have been improperly adopted, which result from recent court decisions, also creates further uncertainty and risks as to the final timing, content and scope of new rules, and the business changes needed to be made to comply with the effective dates of the new or changed rules. Regulatory actions and policies can affect the markets’ outlook, and the valuations and volatility of bank securities generally, including our common stock. Changes in taxes and federal budgets Major tax and budget legislation is pending at the beginning of 2025, which have unpredictable effects on the economy and on us and our customers. If the 2017 Tax Act is extended, it would result in an estimated $4.5 trillion of continued and new tax cuts over the next 10 years. Tax and budget legislation contemplates an estimated increase of approximately $2.8 trillion over the next 10 years and seeks a $4 trillion increase in the debt limit. Such tax cuts and increased federal government spending may adversely effect the federal government’s credit ratings and interest rates on and costs of the national debt, to the extent not offset by tariffs. The additional debt could crowd the debt markets and increase interest rates, generally. Table of Contents 50 Unless extended or amended, many provisions of the 2017 Tax Act, including the cap on SALT deductions, expire at the end of 2025, and the marginal individual tax brackets will increase. The 2017 Tax Act’s reduction in corporate tax rates to 21% do not expire at the end of 2025, absent new legislation. Except to the extent offset by a restoration of uncapped SALT deductions, increases in marginal individual tax rates may adversely affect consumer confidence, and may reduce the cash available for deposits and debt service. We are subject to extensive regulation that could limit or restrict our activities and adversely affect our earnings and the market value of our common stock. We and our subsidiaries are regulated by several regulators, including the Federal Reserve, the Alabama Superintendent, the SEC and the FDIC. Although not regulated or supervised by the CFPB, we are subject to the CFPB’s regulations and interpretations regarding the offering and provision of consumer financial products or services under the Federal consumer financial law; and the Federal Reserve’s supervision and examination of our compliance with such CFPB regulations and pronouncements. Our success is affected by state and federal laws and regulations affecting banks and bank holding companies, and the securities markets, and our costs of compliance could adversely affect our earnings. Banking regulations are primarily intended to protect depositors, and the FDIC’s DIF, not shareholders. The financial services industry also is subject to frequent legislative and regulatory changes and proposed changes, especially following changes of presidential administrations which most recently occurred on January 20, 2025. In addition, the interpretations of regulations by regulators may change and statutes may be enacted with retroactive impact. From time to time, regulators raise issues during examinations of us which, if not determined satisfactorily, could have a material adverse effect on us. Compliance with applicable laws and regulations is time consuming and costly and may affect our profitability. Changes in regulations applicable to us and in our regulators could have a material adverse effect on financial services regulation, generally, and on our financial condition and results of operations. See “Supervision and Regulation - Recent Developments- New Administration.” Litigation and regulatory actions could harm our reputation and adversely affect our results of operations and financial condition. A substantial legal liability or a significant regulatory action against us, as well as regulatory inquiries, investigations or enforcement actions, could harm our reputation, result in material fines or penalties, result in significant legal and other costs, divert management resources away from our business, and otherwise have a material adverse effect on our financial condition and results of operations and our ability to expand on our existing business. Even if we ultimately prevail in such proceedings, our ability to attract new customers, retain our current customers and recruit and retain employees could be materially and adversely affected. Regulatory inquiries and proceedings may also adversely affect the prices, volatility or outlook for our common stock or other securities specifically, or bank securities, generally. As a participating lender in the PPP, the Bank is subject to additional risks of litigation from the Bank’s customers or other parties regarding the Bank’s processing of loans for the PPP and risks of potential SBA or bank regulatory claims. The Bank participated as a lender in the PPP and made a total of $56.7 million of PPP loans in 2020 and 2021, generally to support existing customers in the Bank’s markets. All PPP loans made by the Bank have been forgiven by the SBA, except for one credit where the borrower is voluntarily repaying the loan. Since the beginning of the PPP, various banks have been subject to litigation regarding the processes and procedures used in processing applications for the PPP, and greater governmental attention is directed at preventing fraud. We may be exposed to similar litigation risks, from both customers and non-customers that approached the Bank regarding PPP loans that we extended. The SBA, the Department of Justice and the bank regulators are investigating various PPP lenders and borrowers with respect to potential fraud or improper activities under the PPP loan programs. Although the SBA has not indicated any issues with the Bank’s participation in the PPP program and honored all PPP forgiveness requests, the Bank could have potential liability if the SBA later determines deficiencies in the manner in which PPP loans were originated, funded or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, or its forgiveness of a PPP properly, including those related to the ambiguities in the laws, rules and guidance regarding the PPP’s operation. The Bank is unaware of any such investigation or claims. If any such claims are made against the Bank and are not resolved favorably to the Bank, it may result in financial liability or adversely affect our reputation. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse effect on our business, financial condition and results of operations. Table of Contents 51 We are required to maintain capital to meet regulatory requirements, and if we fail to maintain sufficient capital, our financial condition, liquidity and results of operations would be adversely affected. We and the Bank must meet regulatory capital requirements and maintain sufficient liquidity, including liquidity at the Company, as well as the Bank. If we fail to meet these capital and other regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected. Our failure to remain “well capitalized” and “well managed”, including meeting the Basel III capital conservation buffers, for bank regulatory purposes, could adversely affect us. See “Supervision and Regulation—Basel III Capital Rules.” Although we currently have capital ratios that exceed all these minimum levels and a strategic plan to maintain these levels, we or the Bank may be unable to continue to satisfy the capital adequacy requirements and/or maintain our liquidity for various reasons, which may include: ● losses and/or increases in the Bank’s credit risk assets and expected losses resulting from the deterioration in the creditworthiness of borrowers and the issuers of investment securities we hold; ● difficulty in refinancing or issuing instruments upon redemption or at maturity of such instruments to raise capital under acceptable terms and conditions; ● declines in the value of our securities portfolios or sales of securities for losses; ● revisions to the regulations or their application by our regulators that increase our capital or liquidity requirements; ● reduced total earnings on our assets will reduce our internal generation of capital available to support our balance sheet growth; ● reductions in the value of our MSRs and DTAs; and other adverse developments; and ● unexpected growth and an inability to increase capital timely. A failure to remain “well capitalized,” for bank regulatory purposes, including meeting the Basel III Capital Rule’s conservation buffer, could adversely affect customer confidence, and our: ● ability to grow; ● the costs of and availability of funds; ● FDIC deposit insurance premiums; ● ability to raise or replace brokered deposits; ● ability to pay or increase dividends on our capital stock. ● Ability to repurchase our common stock ● ability to make discretionary bonuses to attract and retain quality personnel; ● ability to make acquisitions or engage in new activities; ● flexibility if we become subject to prompt corrective action restrictions; and ● ability to make payments of principal and interest on any of our capital instruments that may be then outstanding. The Federal Reserve may require us to commit capital resources to support the Bank. As a matter of policy, the Federal Reserve expects a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. The Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank. In addition, the Dodd-Frank Act amended the FDI Act to require that all companies that control a FDIC-insured depository institution serve as a source of financial strength to their depository institution subsidiaries. Under these requirements, we could be required to provide financial assistance to the Bank should it experience financial distress, even if further investment was not otherwise warranted. See “Supervision and Regulation.” Table of Contents 52 Our operations are subject to risk of loss from unfavorable fiscal, monetary, regulatory and political developments in the U.S. Our businesses and earnings are affected by the fiscal, monetary and other policies and actions of various U.S. governmental and regulatory authorities. Changes in these are beyond our control and are difficult to predict and, consequently, changes in these policies could have negative effects on our activities and results of operations. Failures of the executive and legislative branches to agree on spending plans and budgets previously have led to Federal government shutdowns, which may adversely affect the U.S. economy. Additionally, any prolonged government shutdown or reductions in force at various governmental and regulatory authorities may inhibit our ability to evaluate the economy, generally, and affect government workers who are not paid during such events, and where the absence of government services and data could adversely affect consumer and business sentiment, our local economy, and business our customers and our business. The numerous Executive Orders and other actions taken by the Trump Administration in its first month and future changes, and their uncertain effects on the economy, the markets, our regulators and regulation, our local markets, customers and others are unpredictable, and may adversely affect our business, results of operations and financial condition. Litigation and regulatory investigations are increasingly common in our businesses and may result in significant financial losses and/or harm to our reputation. We face risks of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including the risk of class action lawsuits. Plaintiffs in class action and other lawsuits against us may seek very large and/or indeterminate amounts, including punitive and treble damages. Due to the vagaries of litigation, the ultimate outcome of litigation and the amount or range of potential loss at particular points in time may be difficult to ascertain. We do not have any material pending litigation or regulatory matters affecting us at December 31, 2024. Failures to comply with the fair lending laws, CFPB regulations or the Community Reinvestment Act, or CRA, could adversely affect us. The Bank is subject to, among other things, the provisions of the Equal Credit Opportunity Act, or ECOA and the Fair Housing Act, which prohibit discrimination based on race or color, religion, national origin, sex and familial status in any aspect of a consumer, commercial credit or residential real estate transaction. The DOJ’s and the federal bank regulators’ Interagency Policy Statement on Discrimination in Lending provides guidance to financial institutions to evaluate whether discrimination exists, ways to prevent discriminatory lending practices and how the government agencies will respond to lending discrimination. Failures to comply with ECOA, the Fair Housing Act and other fair lending laws and regulations, including CFPB regulations or interpretations, could subject us to enforcement actions or litigation, and could have a material adverse effect on our business financial condition and results of operations. Our Bank is also subject to the CRA and periodic CRA examinations. The CRA requires us to serve our entire communities, including low- and moderate-income (“LMI”) neighborhoods. Our CRA ratings could be adversely affected by actual or alleged violations of the fair lending or consumer financial protection laws. The CRA and fair lending responsibilities are related and mutually reinforcing. Even though we have maintained a “satisfactory” CRA rating since 2000, we cannot predict our future CRA ratings. Violations of fair lending laws or if our CRA rating falls to less than “satisfactory” could adversely affect our business, including expansion through branching or acquisitions. The Federal Reserve and the other federal bank regulators adopted comprehensive revisions to its CRA regulations published in the Federal Register on February 1, 2024. We are evaluating and working on implementing the new rules, which could significantly affect our compliance costs and activities. See “Supervision and Regulation - Community Reinvestment Act and Consumer Laws.” Table of Contents 53 COVID-19 and Similar Risks The Company’s assessment of risks related to COVID-19 and its effects on the Company applicable during the pandemic are discussed in the Company‘s Annual Report on Form 10-K filed with the SEC on March 8, 2022 under the caption “Risk Factors-COVID 19 Risks” and in our Annual and Quarterly Reports on Forms 10-K and 10-Q through September 30, 2024. The President terminated the COVID-19 national emergencies effective May 11, 2023. Remaining effects of the COVID- 19 pandemic and other epidemics and pandemics are discussed herein, including under “Supervision and Regulation -- Bank Regulation -- Residential Mortgages and -- Fiscal and Monetary Policies; Risk Factors -- Operational Risks -- Market conditions and economic cyclicality may adversely affect our industry ; -- Our success depends on local economic conditions ; -- Severe weather and natural disasters, including as a result of climate change, pandemics, epidemics, acts of war or terrorism or other external events could have significant effects on our business ; and Risk Factors -- " Financial Risks -Liquidity risks could affect operations and jeopardize our financial condition."