What changed in this filing

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Item 1. Business

2026-03-17 compared with 2025-03-11 · 1067 added, 1788 removed, 853 unchanged (77% of the section changed)

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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 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,

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

The Bank operates

machines in 8 locations in its primary service area.

The Bank offers Visa

Checkcards, which are debit cards with the

Visa logo that work

like checks and can be used anywhere Visa is accepted,

including ATMs.

Checkcards, which are debit cards with

the Visa logo that work like

checks and can be used anywhere Visa

is accepted, including ATMs.

The Bank’s Visa

can be used internationally through the Plus

The Bank offers online banking, bill payment and other electronic

banking services through its Internet website,

www.auburnbank.com

Our online banking services, bill payment and

electronic services are subject to certain cybersecurity risks.

See “Risk Factors – Our information systems may experience

interruptions and security breaches.”

Checkcards can be used internationally through the Plus

The Bank offers online banking, bill payment, online

consumer account opening, and other electronic banking services through

its Internet website, www.auburnbank.com

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

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

Other banks have 35 offices in Lee

National and regional competitors that have offices in our market

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.

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

unions, mortgage companies,

insurance companies, and other local and nonlocal financial institutions,

including institutions offering services through

mail, by telephone and over the Internet.

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

competition from nonbank financial institutions may be expected to intensify

Among the advantages that larger financial institutions have

over the Bank are their ability to finance extensive advertising

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

their assets among loans and securities of the

highest yield in locations with the greatest demand.

Many of the major commercial banks or their affiliates operating

Bank’s service area offer

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

banks typically have

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.

The Bank operates in a highly competitive market for loans, deposits and

other financial services in East Alabama,

including Lee County.

Based on FDIC deposit market share data as of June 30, 2025, the Bank held

the largest share of

deposits in Lee County.

The Bank competes with 20 national, regional and community banks with offices

in Lee County,

which operate offices in the local market and many have substantially greater

financial, technological and marketing

The Bank also competes with credit unions, mortgage lenders, insurance

companies, investment firms and other

financial service providers.

In addition, financial services are increasingly

offered through digital and online platforms by

institutions that may not maintain a physical presence in our market.

Many larger financial institutions have advantages over

the Bank, including broader product offerings, higher lending

limits, greater access to capital markets, more extensive advertising and

marketing capabilities, and the ability to operate

across larger geographic markets.

The Bank also faces significant competition for deposits and other financial

from investment companies, mutual funds, insurance companies and other

financial institutions offering alternative savings

and investment products.

Some of these competitors may not be subject

to the same regulatory requirements as banks.

The Bank seeks to compete by emphasizing customer relationships, community

presence, local decision-making and

responsive service.

Selected Economic Data

Our market is Lee County,

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

Lee County and Macon

County form the Auburn-Opelika MSA.

Census Bureau estimates Lee County’s

population was 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

Kia Motors has a large automobile factory in nearby West

Point, Georgia, and Hyundai Motors has a large

automobile factory near Montgomery,

suppliers to the automotive industry have facilities in Lee

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.

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

fastest growing MSA in Alabama.

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

During the same time, household income is

estimated to increase 14.25%, to $69,213.

The Company’s primary market area

is Lee County, Alabama, including

the cities of Auburn and Opelika and surrounding

communities in East Alabama.

Lee County is part of the Auburn-Opelika

metropolitan statistical area.

The local economy

is influenced by higher education, healthcare services, public education,

distribution and logistics operations, retail and

service businesses, and automobile manufacturing and related suppliers

located in the region.

Major employers in the area

include Auburn University,

regional healthcare providers, public school systems, manufacturing facilities,

and distribution

The presence of large automobile manufacturing

plants and related suppliers along the Interstate 85 corridor in

eastern Alabama and western Georgia also contributes

significantly to economic activity in the region and supports local

employment, business development, and population growth.

As of year-end 2025, Lee County’s

unemployment rate was

2.1% compared to 2.7% for the State of Alabama.

Economic conditions in our market area, including employment levels, housing

activity, business investment, inflation

interest rates, influence loan demand, credit quality,

deposit growth, and other aspects of our operations.

Changes in these

conditions could affect our results of operations and financial

The Auburn-Opelika metropolitan area has experienced population

and economic growth in recent years, supported by

expansion in education, healthcare, manufacturing and related industries.

Continued growth in these sectors may influence

future economic conditions in our market area.

Loans and Loan Concentrations

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

throughout the life of the loan.

throughout the

life of the loan.

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

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Any adverse economic or

other conditions affecting these industries would

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

other conditions affecting these industries would also likely

have an adverse effect on the local workforce, other local

businesses, and individuals in the community that have entered

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conditions and fluctuations.

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

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

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

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equivalent employees, including 37 officers.

Our employees have been with us an average of approximately 11

Our employees have been with us an average of approximately 12 years.

We successfully implemented

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where their job duties permitted.

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

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

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Incentive Plan”).

The Plan provides for a variety

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

The Plan provides for a variety of equity and equity-based awards, including stock

options, performance

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

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We believe that the

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

2024 Incentive Plan provides the flexibility to structure appropriate incentives

attract and retain talented people in a competitive market where many of our

competitors are public companies who offer

stock-based incentives.

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

to fill positions by

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

fill positions by

promotion and transfer from within the organization.

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respective subsidiaries by

the bank regulatory

agencies are primarily intended to maintain the safety and soundness of depository

institutions and the

the bank regulatory agencies are primarily intended to maintain the

safety and soundness of depository institutions and the

federal deposit insurance system, as well as the protection of depositors,

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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.

changes in legislation and regulatory rules and practices occur regularly.

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, rules

regulatory proposals referred to below.

Bank Holding Company Regulation

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banks, and certain related activities.

The Company is required to file periodic reports

and other information with the

Federal Reserve.

The Company is required to file

periodic reports and other information with the Federal

The Federal Reserve examines the Company and its subsidiaries.

The State of Alabama currently does

not regulate bank holding companies.

The State of Alabama currently does not

regulate bank holding companies.

The BHC Act requires prior Federal Reserve approval for,

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controlling banks as to be a proper incident

The Federal Reserve adopted new rules, effective September

30, 2020, simplifying determinations of control of

banking organizations for BHC Act purposes.

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

to, and nonobjection by the Federal Reserve under

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

Superintendent of Banks (the “Alabama

Superintendent”) under the Alabama Banking Code.

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

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

under the Control Act, to file a notice

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

and notices currently required from the Federal

Reserve and the Alabama Superintendent.

the federal Change in Bank Control Act (the “Control Act”), and in the case of bank

holding companies controlling

Alabama state banks, by the Alabama Superintendent of Banks (the “Alabama

Superintendent”) under the Alabama

Banking Code.

Bank holding companies that are and remain “well-capitalized” and

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Community Reinvestment Act of 1977 (the “CRA”), may elect to become

“financial holding companies.”

holding companies and their subsidiaries are permitted to acquire or engage

in activities such as insurance underwriting,

securities underwriting, travel agency activities, broad insurance

agency activities, merchant banking and other activities

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

In addition, under the BHC Act’s

merchant banking authority and Federal Reserve regulations, financial

holding companies are authorized to invest in

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

as long as the financial holding company makes its

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

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

with any depositary institutions controlled by the financial holding

The Federal Reserve recommended repeal of

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

pursuant to Section 620 of the Dodd-Frank Wall

Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank

Act”), but has taken no action.

The Company has

not elected to become a financial holding company,

but it may elect to do so in the future.

Financial holding companies

continue to be subject to Federal Reserve supervision, regulation and

“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

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

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 in the case of bank

holding companies controlling

Alabama state banks, by the Alabama Superintendent of Banks (the “Alabama

Superintendent”) under the Alabama

Banking Code.

Bank holding companies that are and remain “well-capitalized” and

“well-managed,” as defined in Federal Reserve

and whose insured depository institution subsidiaries maintain “satisfactory”

or better ratings under the

Community Reinvestment Act of 1977 (the “CRA”), may elect to become

“financial holding companies.” Financial holding

companies and their subsidiaries are permitted to acquire or engage

in activities such as insurance underwriting, securities

underwriting, travel agency activities, broad insurance agency

activities, merchant banking and other activities that the

Federal Reserve determines to be financial in nature or complementary

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 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

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

of functional

regulation to subsidiary activities.

For example, insurance activities are subject to supervision and regulation

by state insurance authorities and securities

broker-dealer and investment advisory activities are regulated by

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

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acquirer is “well capitalized” and “well managed”.

Bank mergers are also subject to the approval of the resulting bank’s

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

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”.

Under the Alabama Banking

Code, the Alabama Superintendent may approve an

Alabama bank’s acquisition

and operation of banks in other states.

Also, Alabama banks may enter be acquired by an out-

of-state bank, and the resulting out-of-state bank may continue to operate the

acquired branches in Alabama.

including Alabama banks, may branch anywhere in the United States and out

of state banks may branch into Alabama.

“Bank Regulation”.

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

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All covered and exempt transactions between a bank and its affiliates

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

banks and their subsidiaries are prohibited

from purchasing low-quality assets from the bank’s

Finally, Section 23A requires that all of

a bank’s extensions

of credit to its affiliates be appropriately secured by permissible

collateral, generally United States government or agency

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

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.

and other transactions among affiliates to be on terms

and under circumstances, including credit standards, that are substantially the

same as or at least as favorable to the bank or

its subsidiary as those prevailing at the time for similar transactions with unaffiliated

Federal Reserve policy and the Federal Deposit Insurance Act require

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may not otherwise be warranted.

an FDIC-insured subsidiary becomes subject to a capital restoration plan with

its regulators, the parent bank holding

company is required to guarantee performance of such plan up to

5% of the bank’s assets, and such guarantee

priority in a bankruptcy of the bank holding company.

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

subsidiary, each of

the bank holding company’s subsidiary

depository institutions may be responsible for any losses to the

FDIC’s Deposit Insurance Fund

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

As a result, a bank holding company

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

capital notes or other

instruments which

qualify as capital under bank regulatory rules.

However, any loans from the holding company

to such subsidiary banks

likely will be unsecured and subordinated to such bank’s

an FDIC-insured subsidiary becomes subject to a regulatory capital restoration

plan, the parent bank holding company is

required to guarantee the 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,

of the bank holding company’s subsidiary

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

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.”

See “- Federal Reserve Capital

Rules” and “Prompt Corrective Action.”

The Federal Reserve’s Small Bank

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qualifying bank

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

Proposed legislation, entitled the

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

raise the permitted consolidated asset level to

Such legislation is among various bills highlighted in February

2025 by House Financial Services Committee

and thrift holding companies with up to $3 billion of consolidated assets.

The Federal Reserve treats the Company as a small banking holding

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regulations applicable to FDIC-insured banks.

See “FDIC Insurance Assessments.”

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.

The Federal Reserve has adopted the Federal Financial Institutions Examination

Council’s (“FFIEC”) Uniform

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

institution a confidential composite “CAMELS” rating

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

The Alabama Banking Code has provisions designed to provide

Alabama banks competitive equality with national banks.

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.”

Under the Federal Financial Institutions Examination Council’s

(“FFIEC”) Uniform Financial Institutions Rating System

(“UFIRS”), the Federal Reserve assigns state member banks a confidential

composite “CAMELS” rating based on an

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

financial condition and operations:

apital Adequacy,

sset Quality,

ensitivity to market risk, as well as the quality of risk

management practices.

ensitivity to market risk, as well as the quality of risk management

Each component and the overall rating are rated on a scale of 1 to 5, with one being the

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

reflects exposures to changes in interest rates.

Regulators’ evaluations of this component, consider management’s

ability to identify, measure,

monitor and control market risk;

the institution’s

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.

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

the financial institution’s earnings

monitor and control market

the institution’s size;

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.

Assessments may be

made 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

interest rate risk exposure arising from non-trading positions.

ratings are based on evaluations of an institution’s

operational, financial and compliance performance.

The composite CAMELS

rating is not an arithmetical

formula or rigid weighting of numerical component ratings.

of subjectivity and examiner judgment, especially as

these relate to qualitative assessments, are important elements in assigning

The Federal Reserve is maintaining a

heightened focus on bank funding pressures based on risk profiles and

management’s ability to manage their

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

assigns a risk-management rating to all state

member banks and bank holding companies.

In February 2021 the Federal Reserve expanded its Guidance for Assessing

Risk Management to institutions with under $100 billion

This guidance states that principles of sound

management should apply to all risk confronting a banking organization,

including credit, market, liquidity,

compliance, and legal risks.

exchange rates,

commodity prices or equity prices;

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.

See “Management’s

Discussion and Analysis of Financial Condition and Results of Operations –

Market and Liquidity Risk Management.”

Composite CAMELS ratings are based on evaluations of an institution’s

managerial, operational, financial and compliance

The composite CAMELS rating is not an arithmetical formula

or a rigid weighting of numerical component

Elements of subjectivity and examiner judgment, especially

as these relate to qualitative assessments, are important

elements in assigning ratings.

In stressful economic times, the Federal

Reserve has 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 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

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.

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

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.

Each assessment category

and the overall rating is ranked

on a scale of 1to 5 with 1 being the best rating and requiring the least supervisory

Bank mergers, which generally accompany holding

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bank’s primary federal

The Federal Reserve and the Alabama Superintendent must approve mergers

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

The FDIC and the Office of the

Comptroller of the Currency (“OCC”) may comment on mergers

involving the Company or the Bank.

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

to mergers of bank holding companies or

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

policies and rules in September 2024.

adopted a Statement of Policy on Bank Merger Transactions

(the “FDIC Merger Policy”).

The new FDIC Merger Policy

recognizes Biden Administration Executive Order 14036 “Promoting

Competition in the American Economy” (July 9,

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

to consider the impact that

consolidation may have on maintaining a fair,

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

small businesses, startups, and consumers.”

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

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

methods the FDIC employs in

conducting its independent analysis will continue to be informed

by the United States Department of Justice’s

approach to evaluating competitive effects.”

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

involving national banks and federal

savings associations, deleted expedited and streamline applications for

business combinations and adopted a policy

statement clarifying its review of applications under the Bank Merger

Act’s statutory factors.

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

their views of mergers where the Federal

Reserve is the responsible regulator, especially

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

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

other factors, of the effects of the transaction on

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

approval under the Bank

Merger Act and the Federal Reserve, in acquisitions and mergers

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

important advisory role in bank and BHC mergers,

Bank and bank holding company mergers require evaluation by

the federal bank regulators, among other factors, of the

effects of the transaction on competition under the Bank Merger

Act and the BHC Act.

Applications under these Acts also

are subject to United States Department of Justice (“DoJ”) antitrust review

and possible litigation challenges.

the Federal Trade Commission (“FTC”) adopted

new non-binding merger guidelines in 2023.

The DoJ revoked

Bank Merger Guidelines that were adopted with the federal bank

regulators and adopted a 2024 Banking Addendum to its

2023 merger guidelines.

The Federal bank regulators continue

to apply the 1995 Bank Merger guidelines in considering the

competitive effects of mergers.

The DoJ has an important advisory role in bank and BHC mergers,

but the bank regulators are the primary decision makers.

regulators may then consider the Antitrust Division’s

competitive factors report as part of their respective review processes,

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

The DoJ and the Federal Trade Commission

adopted new non-binding Merger Guidelines in 2023.

In September 2024, the DoJ revoked its 1995 Bank Merger

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

The 1995 Bank Merger

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

notwithstanding the FDIC Merger Policy,

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

The Federal Reserve continues to apply the

1995 Bank Merger Guidelines in evaluating bank and bank holding

company mergers.

The bank regulators may 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

The GLB Act and related regulations require banks and their affiliated

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that own data.

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

It would amend various sections of the

GLB Act and preempt certain state privacy laws.

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

federal standard for comprehensive data privacy and security regulation.

Neither of these bills were adopted.

privacy legislation may be proposed.

Consumer Laws and the Community Reinvestment Act

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

that requires it to regulate consumer

financial products and services, whether or not offered by banks or

their affiliates.

The CFPB has the authority to adopt

regulations and enforce various laws, including the fair lending laws, the Truth

in Lending Act, the Electronic Funds

Transfer Act, mortgage lending rules, the

Truth in Savings Act, the Fair Credit Reporting Act and Privacy

Financial Information rules.

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

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

regulations, and the precedents set in CFPB enforcement

actions and interpretations.

“Open banking” rules were adopted by the Consumer Financial Protection

Bureau (“CFPB”) in 2024 that require covered

financial institutions to provide consumers and authorized third parties

access to consumer financial data through secure

interfaces, has been the subject of litigation.

This would make it easier for customers

to move their accounts and assets held

The CFPB Open banking rules have been the subject of litigation, and although the CFPB has requested

comments on changes to the regulations, the status of the proposed revised rules

is uncertain.

Consumer Laws and the CFPB

The CFPB has a broad mandate that requires it to regulate consumer financial

products and services offered by banks and

The CFPB is authorized 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

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, the CFPB’s

regulations, and the precedents set in CFPB enforcement actions

interpretations apply to all banks.

The CFPB limited its funding requests in 2025 and the 2025 One Big Beautiful tax

act reduced its funding cap from the

Federal Reserve from 12% in 2024 to 6.9%.

The CFPB Acting Director has sought to reduce CFPB staff from

approximately 1,700 persons to 200, but litigation is challenging this.

Community Reinvestment Act (“CRA”) and Fair Lending Laws

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

The CRA imposes

continuing, affirmative obligations on all FDIC-insured

institutions, consistent with their safe and sound operation, to help

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

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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

FDIC-insured institution that has applied to:

(i) charter a national bank;

obtain deposit insurance coverage for all new-

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

relocate an office;

or (v) merge or consolidate

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

A less than satisfactory CRA rating

will slow, if not preclude,

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

a company from

becoming a financial holding company.

The federal CRA regulations require that evidence of discriminatory,

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

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

low- and moderate-income neighborhoods.

The bank regulatory agencies’ CRA assessments are publicly available.

Consideration of CRA performance is required for expansion of bank activities

under the Bank Merger Act and BHC Act,

and for branching and financial holding company activities.

A less than satisfactory

CRA rating will slow, if not

such expansion activities.

The federal CRA regulations require that evidence of

discriminatory,

illegal or abusive lending

practices be considered in the CRA evaluation.

CRA agreements with private parties must be disclosed and annual

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National Community Reinvestment Coalition reported

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

plans with banking organizations for an aggregate of

$580 billion for mortgage, small business and community

development lending, investments and philanthropy in

LMI and under-resourced communities.

The pending Capital One

Financial Acquisition of Discover Financial Services includes a community

benefit plan with another community

organization valued at $265 billion, which is the largest

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

28, 2022, with satisfactory

ratings on both its lending and community development

that as of January 2026, it had executed 22 community benefit plans

with banking organizations for an aggregate of $606

billion for mortgage, small business and community development

lending, investments and philanthropy in LMI and under-resourced

The Capital One Financial acquisition of

Discover Financial Services in 2025 included 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 March

3, 2025, 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

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.

served by the combining organizations, as well as CRA performance

in evaluating merger and acquisition applications

under the Bank Merger Act and the BHC Act and branching applications.

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

including LMI neighborhoods.

performance records may be the basis for denying an application.

New CRA Rules were adopted by the federal bank regulators in 2023.

July 16, 2025, prior to the new rules, effective

date, the Federal Reserve, the FDIC, and the OCC jointly issued a proposal to rescind

the 2023 rule and replace these with

the 1995 CRA regulations, with certain technical amendments.

The bank regulators

continue to apply the 1995 CRA

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

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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”).

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;

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

The new performance evaluation framework establishes two tests for intermediate

the Retail Lending Test;

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”;

“Substantial Noncompliance.”

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

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

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

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

Banks will receive consideration for any qualified community development

loans, investments, or services, regardless of

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

development investments,

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

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

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;

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.

The federal bank regulators have updated their guidance several times on

overdrafts, including overdrafts incurred at ATMs

The DoJ’s and the federal bank

regulatory agencies’ Interagency Policy Statement on Discrimination in

Lending provides guidance to financial institutions.

The DOJ has prosecuted what it regards as violations of the fair lending

laws, generally.

The federal bank regulators have updated their guidance several times on overdrafts,

including overdrafts incurred at ATMs

and point of sale terminals.

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

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

on overdraft and not sufficient funds

Among other things, the federal regulators require banks to monitor

accounts and to limit the use of overdrafts by

customers as a form of short-term, high-cost credit, including, for

example, giving customers who overdraw their accounts

on more than six occasions where a fee is charged in a rolling 12-month

period, a reasonable opportunity to choose a less

costly alternative and decide whether to continue with fee-based overdraft

It also encourages placing appropriate

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

fees for transactions that overdraw an

account by de minimis amounts.

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

litigation against banks in various jurisdictions.

The federal bank

regulators continue to consider responsible small dollar

lending, including overdrafts and related fee issues and issued principles

for offering small-dollar loans in a responsible

The CFPB began refocusing on overdrafts in 2021.

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.

Banks are encouraged to place appropriate

daily limits on overdraft fees, and have been asked

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.

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.

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of the Consumer Financial Protection Act.

Further, overdraft fees assessed by financial institutions

on transactions that a

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

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.

A CFPB Rule adopted in December 2024 to limit banks with over $10 billion in assets from charging

more than $5 for an

overdraft was rescinded pursuant to the Congressional Review Act in May 2025.

Residential Mortgages

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

and are not “higher-priced.”

and are not “higher-priced.” Generally,

these CFPB regulations apply to all consumer,

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mortgage loan cannot exceed specified amounts or percentages of the total

Qualified mortgages must have:

Qualified mortgages also must

(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;

(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

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

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

(the “2018 Growth Act”) provides that

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.

deemed “qualified mortgages”, provided:

the mortgage is documented;

does not include interest only or negative amortizations terms;

any prepayment penalties are within the Truth

in Lening act limits;

fees are less than 10% of the loan value.

This relieves smaller banks from many of the “qualified mortgage”

requirements.

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

The CFPB’s mortgage servicing

mortgage servicing standards

include requirements regarding force-placed insurance,

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year after the loan is paid off or transferred.

These standards increase the

cost and compliance risks of servicing mortgage

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

collateral or the proceeds we may realize

These standards increase the cost

and compliance risks of servicing mortgage

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

on collateral or the proceeds we may realize

from the sale of foreclosed property.

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we may make loans that do not meet the safe harbor requirements for “qualified

The Bank’s mortgage lending 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.

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,

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

and collectively, “GSE”).

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

These rules include the kinds of loan defects that could

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

mortgage loan originator or seller.

The FHFA also has updated

these GSEs’ representations and warranties framework and provided an independent

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

after the GSEs’ quality control and appeal

processes have been exhausted.

The Bank is subject to the CFPB’s integrated

disclosure rules under the Truth in Lending Act and

the 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

Congress encouraged federal regulators to provide

better guidance on TRID in an effort to provide a clearer understanding

for consumers and bankers alike.

provides partial exemptions from the collection, recording and reporting requirements

under Sections 304(b)(5) and (6) of

the Home Mortgage Disclosure Act (“HMDA”), for those banks with fewer than 500

closed-end mortgages or less than

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

the bank’s rating under the CRA for the

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.

These rules include the types 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 Bank sells mortgage loans to Fannie Mae and services these on an actual/actual basis.

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entitled to forbearance.

CARES Act Loan Modifications and Forbearance

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

on March 27, 2020.

of that Act allowed banks to temporarily suspend certain GAAP requirements

for restructured loans in light of the effects of

the COVID-19 pandemic.

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

Interagency Statement and later guidance encouraging banks to work

prudently with borrowers on covered modifications.

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

residential mortgage loans sold to Fannie Mae to

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

during the pandemic.

During forbearance,

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

if all contractual payments were fully and timely

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

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Bank regulators are required to consider compliance with anti-

money laundering laws in acting upon merger and acquisition

and other expansion proposals under the BHC Act and the

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

in an amount equal to twice the sum involved in

money laundering laws in acting upon merger and acquisition and

other expansion proposals under the BHC Act and the

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

imposed in an amount equal to twice the sum involved in

the violating transaction, up to $1 million.

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generally monitor such matters.

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

Statement on Risk-Focused Bank

The Federal Reserve, the depository institution regulators 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.

Under this Join Statement, institutions 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

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

anti-money laundering, Bank Secrecy Act

and countering the financing of terrorism (“AML/CFT”) enforcement,

which clarified that isolated or technical violations

or deficiencies generally are 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

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

It describes how the agencies

incorporate the customer due diligence regulations and recordkeeping

The statement

addresses how the agencies evaluate violations of individual pillars of the

AML/CFT compliance program.

It describes how

the agencies incorporate the customer due diligence regulations and recordkeeping

requirements issued by the United States

of the Treasury (“Treasury”)

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

On October 23, 2020, FinCEN and the Federal Reserve invited comment on a proposed

rule that would amend the

recordkeeping and travel rules under the Bank Secrecy Act, which would

lower the applicable threshold from $3,000 to

$250 for international transactions and apply these rules to transactions using

convertible virtual currencies and digital

assets with legal tender status.

This rule remained a proposal in FinCEN’s

Semiannual Agenda published August 16, 2024.

Department of the Treasury (the “Treasury”)

as part of the internal controls pillar of a bank’s

AML/BSA compliance

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

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(collectively, the

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

other things, the AML Act:

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

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;

emphasizes coordination and information-sharing among financial institutions,

financial regulators and

foreign financial regulators.

“Corporate Transparency Act” or the “CTA”),

to strengthen anti-money laundering and countering

terrorism financing programs.

FinCEN regulation 31 C.F.R.

101.380 implements the Corporate Transparency

Act (the “CTA”), and became

January 1, 2024.

These regulations require entities to report information about their

beneficial owners and the individuals

who created the entity (together, “beneficial ownership

information” or “BOI”).

FinCEN explained that the 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.”

101.380 implements the CTA

effective on January 1, 2024.

These regulations require

to report information about their beneficial owners and the individuals

who created the entity (together, “beneficial

ownership information” or “BOI”).

The new rules expand financial institutions’

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

information and verify the beneficial

obligations under the Customer Due

Diligence Rule (“CDD Rule”) to collect information and verify the beneficial

ownership of legal entities.

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

requirements to report their

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

anti-money laundering diligence activities and

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

motion to stay a nationwide injunction on enforcement

of the CTA that

was issued by the U.S.

District Court of the Eastern District of Texas

Cop Shop, Inc.

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

District of Texas issued a separate

nationwide injunction

of the CTA and

the Beneficial

Ownership Information Reporting Rule (BOI Reporting Rule) in

of the Treasury

, which remined in effect as of January 2025.

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

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.

Following litigation and nationwide injunctions, the Treasury

Department suspended enforcement of the CTA

2025 with respect to U.S.

citizens or domestic reporting companies or

their beneficial owners.

This Alert confirmed

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information and are not subject to liability if

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

they fail to do so while the suspension continues.

FinCEN published an interim final rule on March 26, 2025, that revised the definition

of “reporting company” in its

regulations implementing the CTA

to include only entities formed under the law of a foreign country

that have registered to

do business in any U.S.

State or tribal jurisdiction by the filing of a document with a

secretary of state or similar office

(formerly known as “foreign reporting companies”).

FinCEN also formally exempted entities previously known as

“domestic reporting companies” from the CTA’s

reporting requirements.

Bills have been introduced in Congress to repeal the CTA,

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Administration will continue to defend the litigation challenging the

Most recently, the Protect Small Business from

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

extend the compliance deadline to December 31,

2025 for submitting BOI for entities existing before 2024.

FinCEN published a request for information and comment on December

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

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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

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

bank regulators have issued alerts that

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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.

Other Laws and Regulations

The Company is also required to comply with various corporate governance

The Company is 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

Sarbanes-Oxley Act of 2002, as well as related rules and regulations adopted

by the SEC, the Public Company Accounting

Oversight Board and Nasdaq.

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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,

These guidelines require a minimum ratio of capital to risk-weighted

assets (including certain off-balance sheet activities,

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

totaling 10.5%.

capital includes common equity and related retained earnings and

a limited amount of qualifying preferred stock, less

goodwill and certain core deposit intangibles.

Tier 1 capital includes common equity

and related retained earnings and a limited amount of qualifying preferred

stock, less goodwill and certain core deposit

common equity must be the predominant form of capital.

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 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%.

The Federal Reserve also has 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

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.

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.

Reserve believes the risk-based ratios do not

fully take into account the quality of capital and interest rate, liquidity,

holding companies to operate with

a higher leverage ratio.

Lastly, the Federal Reserve

indicates that it 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

becoming more widely used by the bank regulators to measure capital adequacy.

Under Federal Reserve policies, bank holding companies are generally

expected to operate with capital positions well

above the minimum ratios.

The guidelines also provide that institutions experiencing internal growth or

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, depending upon a

bank’s or bank holding

company’s risk profile, and the level and

nature of their risks, including the volume and severity of

their problem loans.

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.

supervisory assessments of capital adequacy may differ

significantly from conclusions based solely on the level of an

organization’s

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 Reserve has not advised the Company or the Bank of any specific

minimum leverage ratio or tangible Tier 1

leverage ratio applicable to them.

The Federal Deposit Insurance Corporation Improvement Act of 1991

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how its capital levels compare to various relevant capital measures and

certain other factors, as established by regulation.

certain other factors established by regulation.

“Prompt Corrective Action Rules.”

Basel III Capital Rules

Federal Reserve Capital Rules

The Federal Reserve and the other federal bank regulators adopted

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Framework for more Resilient Banks and Banking Systems.”

capital rules are called the “Basel III Capital

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

These are included in Federal Reserve Regulation Q.

The Basel III Capital Rules generally limit Tier

1 capital to common stock and noncumulative perpetual preferred stock.

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

Equity Tier I Capital” or “CET1.”

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

to certain adjustments, minority common equity

interests in subsidiaries.

These “Basel III Capital Rules” in Federal Reserve

Regulation Q were fully phased-in, generally,

on January 1, 2019.

The Bank has elected not to have its capital structure evaluated under

the community bank leverage framework permitted

by the 2018 Growth Act.

Regulation Q generally limits Tier 1 capital

to common stock and noncumulative perpetual preferred stock.

defines “Common Equity Tier I Capital” or “CET1”

to include common stock and related surplus, retained earnings, and

subject to certain adjustments, minority common equity interests in subsidiaries.

CET1 is reduced by deductions for:

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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”).

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;

The Company’s CET1 is not adjusted

for certain accumulated other comprehensive income (“AOCI”).

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

than 25% of CET1 (after the first

deductions above):

MSRs, net of associated DTLs;

DTAs arising from

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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 Capital Requirements

The various minimum capital requirements under Federal Reserve Regulation

CET1 Conservation Buffer

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Minimum Tier 1 Capital

conservation buffer

Minimum Tier 1 Capital plus conservation

Minimum Total

conservation buffer

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

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

Capital plus conservation buffer

Certain Risk-Weightings

Among other things, Regulation Q as changed by the Basel III Capital Rules Q changed

some of the risk weightings used to

determine risk-weighted capital adequacy.

Among other things, Regulation Q:

Assigns a 250% risk weight to MSRs or 10% or greater investments in other financial

institutions;

Assigns 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

Retains 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,

Assigns a 150% risk weight to past due exposures (other than sovereign exposures

and residential mortgages);

Assigns a 250% risk weight to DTAs,

to the extent not deducted from capital (subject to certain maximums);

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

Increased the risk weight for exposures to qualifying securities firms from

HVCRE Risk Weight

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

effective April 1, 2020, to implement Section 214

of the 2018 Growth Act.

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

an acquisition construction or development loan.

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

property made after December 31, 2014 that:

primarily finance or refinance the acquisition, development, or construction

of real property;

the purpose of such loans must be to acquire, develop, or improve such real

property into income producing

the repayment of the loan must depend on the future income or sales proceeds from, or

refinancing of, such real

exclusions from HVCRE are specified.

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

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

to the appraised as completed value, which is

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

HVCRE loans are assigned a 150% risk weight.

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

Increases the risk weight for exposures to qualifying securities firms from

A “high volatility commercial real estate” loan (“HVCRE,”) which has

a 150% risk weight generally is a credit facility

secured by land or improved real property made after 2014 that:

primarily finances or refinances the acquisition, development, or

construction of real property;

has the purpose of providing financing to acquire, develop, or improve

such real property into income producing

the repayment of the loan is dependent upon the future income or sales proceeds

from, or refinancing of, such real

Exceptions are made for various things, including loans for (i) the acquisition,

development and construction of 1 to 4

family residences, and investments in community development or agricultural

land, and (ii) commercial real properties

where the loan-to-value ratio is not more than the maximum supervisory

level determined by the Federal Reserve or the

borrower has contributed capital in a form specified by the rule equal

to at least 15% of the real property’s “as completed”

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:

The capital conservation buffer is equal to the lowest of the

following, calculated as of the last day of the previous calendar

The institution's CET 1 capital ratio minus the institution's minimum

The institution's tier 1 capital ratio minus the institution's minimum tier 1 capital ratio

The institution's total capital ratio minus the institution's minimum total capital

ratio requirement.

The capital conservation buffer limits permissible dividends,

stock repurchases and discretionary bonuses to the following

percentages based on the capital conservation buffer

subject to any further regulatory limitations, including those based on

risk assessments and enforcement actions:

Capital Conservation

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> 0.625% - 1.250%

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

adopted an interim final rule that

amended the capital conservation buffer.

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

purposes of the maximum payout ratio to allow banking organizations

to more freely use their capital buffers to promote

lending and other financial intermediation activities, by making the

limitations on capital distributions more gradual.

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

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

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

distributions and associated tax effects not reflected in net

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

Banking organizations were encouraged to

make prudent capital distribution decisions.

Q amended the definition of “eligible retained income” in 2020

to allow banking organizations to more freely use their

capital buffers to promote lending and other financial intermediation

activities, by making the limitations on capital

distributions more gradual.

“Eligible retained income, as used in Federal

Reserve Regulation Q, is the greater of (i) net

income for the four preceding quarters, net of distributions and

associated tax effects not reflected in net income;

the average of all net income over the preceding four quarters.

organizations were encouraged to make prudent

capital distribution decisions.

Regulatory Capital Changes

Simplification

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

capital rules.

The last of these changes

become effective on April 1, 2020.

The principal changes for standardized approaches institutions, such

the Company and

the Bank are:

Deductions from capital for certain items, such as temporary difference

DTAs, MSAs and investments

unconsolidated subsidiaries were decreased to those amounts that individually

exceed 25% of CET1;

Institutions can elect to deduct investments in unconsolidated subsidiaries or subject

them to capital requirements;

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

1 capital and (iii) total capital.

Effects of CECL Accounting Changes

The Financial Accounting Standards Board’s

(“FASB”) Accounting

Standards Update (“ASU”) No.

2016-13 “Financial

Instruments – Credit Losses (Topic

Measurement of Credit Losses on Financial Instruments” on

June 16, 2016, which

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

in place of the incurred loss method.

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

of expected credit losses using the CECL

methodology, and updated

concepts and practices in existing supervisory guidance that remain applicable.

adopted CECL effective beginning January 1, 2023

and the Company recognized all effects on its regulatory capital

year of adoption.

Prompt Corrective Action Rules

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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.

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;

implement the “prompt corrective action” standards for depository

institutions.

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

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

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,

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ratio of 4.0% or greater;

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

a Tier 1 risk-based capital ratio of less

“undercapitalized”

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

1 risk-based capital ratio of less

than 6.0%, a Common Equity Tier 1 capital

ratio of less than 4.5% or generally has a leverage capital ratio of less

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

6.0%, a Tier 1 risk-based

“significantly undercapitalized”

if it has a total risk-based capital ratio of less than 6.0%, a Tier 1

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

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less than 3.0%;

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

to total assets.

“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

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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

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.

rates by more

than 75 basis points.

Less than “adequately capitalized” banks cannot accept or renew brokered

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”.

that are “undercapitalized” are subject to growth limitations and

are required to submit a capital restoration plan for

A depository institution’s parent

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The aggregate liability of the parent holding company is limited to the lesser of

5% of the depository

(i) 5% of the depository

institution’s total assets at the time

it became undercapitalized and the amount necessary to bring the institution

it became undercapitalized and (ii) the amount necessary to bring the

institution into

compliance with applicable capital standards.

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to a number of requirements and restrictions,

including orders to sell sufficient voting stock to

become “adequately capitalized”, requirements to reduce total assets, and

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.

including orders to:

sell sufficient voting stock to become “adequately capitalized”;

Reduce total assets;

Cease receipt of deposits from correspondent banks.

“Critically undercapitalized” depository institutions are subject to

the appointment of a receiver or conservator.

The Company’s management believes

that the prompt corrective action provisions of FDICIA have not had and are not

expected to have any material effect on the Bank or the

Company or their respective operations.

Dividends and Distributions

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“Distributions” include dividends

declared or paid on common stock, discretionary bonuses and stock

repurchases, redemptions or repurchases of Tier 2

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

The Company’s primary source

dividends from the Bank.

“Eligible retained income” for the Bank and other Federal Reserve regulated

institutions is the greater of:

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

associated tax effects not already

reflected in net income;

the average net income over the preceding four quarters.

The Company’s primary source

of cash is dividends from the Bank.

The Bank’s Call Report are used for its calculation

“eligible retained income.”

The Bank’s Call Report are used for

its calculation of “eligible retained income.”

The Bank’s capital conservation

buffer exceeded 2.5% at December 31, 2025.

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

framework for prompt corrective action.

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

equity Tier 1, total risk-based, Tier

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

following table.

Management has not received any notification from the

Bank's regulators, which changes the Bank’s

As of December 31, 2025, the Bank is “well capitalized” for bank regulatory

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

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

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

During 2024, the Bank paid total cash dividends of

2025, the Bank paid total cash dividends of

approximately $3.8 million to the Company.

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The Federal Reserve

has indicated that depository institutions and their holding companies should

generally pay dividends only out of current

year’s operating earnings.

also has indicated that banks depository institutions and their holding companies

should generally pay dividends only out of

current year’s operating earnings.

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

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payments, stock redemptions and stock repurchases.

Prior consultation with the Federal Reserve supervisory staff is

Prior consultation with the Federal Reserve supervisory staff

required before:

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redemptions and purchases of common or perpetual preferred stock

which would reduce such Tier 1 capital at end

of the period compared to the beginning of the period.

Bank holding company directors must consider different

factors to ensure that its dividend level is prudent relative to

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

scenarios, such as potential events

that could affect its ability to pay,

while still maintaining a strong financial position.

which would reduce Tier 1 capital at end of

the period compared to the beginning of the period.

Bank holding company directors must consider various factors tis setting a dividend

level that is prudent to maintaining a

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

such as potential events that could affect

its ability to pay, while

still maintaining a strong financial position.

As a general matter,

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

should consult with the Federal Reserve and

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

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:

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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

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

overall current and prospective

financial condition;

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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

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

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;

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

The CBLR leverage ratio is Tier 1 capital divided

by average total consolidated asset for the latest quarter,

account the capital simplification discussed above and the CECL related capital

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

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

comparable to other banking organizations and which

may be useful to investors.

It may consider the CBLR in the future.

Capital Rule Changes

The Federal Reserve, the FDIC and the OCC have been working on proposed changes

to their capital rules, which the FDIC

Board is scheduled to discuss on March 19, 2026.

Michelle Bowman, the Federal Reserve Vice

Chair for Supervision

outlined the proposals in broad terms in a March 12, 2026 speech, which continued

a theme to “right-size” capital to match

Although many of the pending proposals focus on large banks, Ms.

stated “smaller banks, which are

more focused on traditional lending activities, will see slightly larger

reductions in capital requirements.”

The proposals

have not been published for comment, and we cannot predict the effects

of these proposals on us.

FDICIA directs that each federal bank regulatory agency prescribe standards

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including the CFPB’s regulations.

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

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applicable to consumer financial products and services.

Violations of laws and regulations, including

those administered by

of laws and regulations, including those administered by

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

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constitutes the major portion of a bank’s

Thus, the earnings and growth of the Company and the Bank, as well as

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

liabilities are subject to the influence of

The 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,

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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

means, including setting target federal funds rates, open

market dealings in United States government securities, the setting

of the 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

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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

rate established by the Federal Open Market Committee (“FOMC).

The Federal Reserve has indicated that it may use this

implement a mandatory policy to reduce excess liquidity,

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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

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

Term deposits are 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

In light of disruptions in economic conditions caused by 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.

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.

In March 2020, the

FOMC reduced the federal funds rate target twice to

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 securities and agency mortgage

-backed securities (“MBS”).

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

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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

Further increases were announced in 2022:

50 basis points on May 4, 75 basis points on

each of June 15, July 27,

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

During 2023, the Federal Reserve announced

additional target rate increases of 25 basis points on

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

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

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

Two other reductions in November

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

policy changed from accommodative to restrictive.

Reserve raised the target federal funds rate eight times in 2022

for a total 4.25%.

During 2023, the Federal Reserve four

announced additional target rate increases of 25 basis points each.

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 reductions in November

December 2024 resulted in a target range of 4.25%-4.50%

at the end of 2024.

In 2025, the FOMC reduced its target federal funds rates three times to

target rate of 3.50%-3.75%, where it remains as of

March 2, 2026.

In January 2026, the FOMC reaffirmed its long-term goals originally adopted in 2012 that

seeks to achieve

maximum employment and inflation at the rate of 2 percent over the

longer run based on the annual change in the price

index for personal consumption expenditures.

The Federal Reserve’s securities

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balance it deemed ample.

On May 4, 2024, the Federal Reserve’s

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

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

reducing the monthly redemption cap on Treasury

securities from $60 billion to $25 billion.

Starting in June 2024, the FOMC reduced the monthly redemption

cap on Treasury securities from $60 billion to $25

The Committee maintained the monthly redemption cap on agency debt

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

remaining principal amounts of maturing securities

in Treasury securities.

The Federal Reserve’s SOMA was $6.4

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

February 28, 2024.

The Federal Reserve seeks to maintain maximum employment and

targets longer term inflation of 2% based on annual

changes in the personal consumption expenditures.

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

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

The economic outlook is uncertain, and the

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

remained above that rate through February

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

to reduce its target federal funds rate

further at this time.

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

market rates, liquidity issues at two

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

Bank Term Funding

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

credit unions, and other eligible

depository institutions pledging U.S.

agency debt and mortgage-backed securities, and other qualifying

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

The BTFP expires March 11, 2024, except for

loans outstanding prior to its expiration.

The Company did not participate in the BTFP in 2023.

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

obtain liquidity against a wide range of

collateral through the Federal Reserve’s

discount window,

which was available with the same collateral margins as the

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.

and agency mortgage-backed securities at

$35 billion, reinvested any remaining principal amounts of maturing

securities in Treasury securities.

In April 2025, the FOMC further slowed the reduction its SOMA holdings by reducing

the monthly redemption cap on

Treasury securities from $25 billion to $5 billion,

while maintaining the monthly redemption cap on agency debt and

agency mortgage-backed securities at $35 billion.

The FOMC announced on October 29, 2025 that it would conclude the

reduction of its aggregate SOMA securities holdings on December

At its December 2025 meeting, the FOMC

determined to initiate purchases of shorter-term Treasury

securities as needed to maintain an ample supply of reserves on an

ongoing basis.

Most recently, on January

31, 2026 the FOMC announced that beginning February 1, 2026, it would,

subject to modest deviations for operational reasons:

Roll over amount of principal payments from the Federal Reserve's SOMA holdings

of Treasury securities

maturing in each calendar month that exceeds $60 billion per month.

coupon securities would be

redeemed up to this monthly cap and Treasury bills would

be redeemed to the extent that coupon principal

payments are less than the monthly cap.

Reinvest into agency mortgage-backed securities (MBS) the amount

of principal payments from SOMA holdings

of agency debt and agency mortgage-backed securities (“MBS”) received

in each calendar month that exceeds a

cap of $35 billion per month.

SOMA holdings as of March 4, 2026, 2026 were $6.23 trillion, including

approximately $2 trillion of agency securities and

FDIC Insurance Assessments

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

Since 2011, and as discussed above under “Recent

Regulatory Developments”, the FDIC has been calculating assessments

based on an institution’s average

consolidated total assets less its average tangible equity (the “FDIC Assessment Base”)

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.

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

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

Brokered Deposit

Total Base Assessment

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

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

Since 2011, the FDIC has been calculating assessments based

on an institution’s average consolidated

total assets less its

average tangible equity (the “FDIC Assessment Base”).

A bank's assessment base and assessment rate are determined each

Generally, established “small banks”

with less than $10 billion in assets are assigned an individual rate based on a

formula using financial data and CAMELS (the “financial ratios method”).

The better the CAMELS rating and other

financial ratios, the lower the assessment rate.

The FDIC assessment schedule for Small Banks, such as the Bank, for the first

assessment period provides a total annual

assessment rate of 2 to 32 basis points:

As a result of the decision to insure all deposits in Silicon Valley

Bank and Signature Bank upon their failures in March

2023, the FDIC made a special assessment of 3.36 points for a projected eight quarters

on banks with more than $5 billion

of uninsured deposits.

These special assessments did not apply to the Bank.

The FDIC’s minimum DIF reserve

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

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

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

grants the Board sole discretion in

provides for dividends from the fund when the reserve ratio exceeds 1.5%, but grants the Board

sole discretion in

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

The reserve ratio reached 1.36% on

September 30, 2018, exceeding the minimum requirement.

As a result, deposit insurance surcharges on Large

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

the FDIC for their portion of assessments

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

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

received and applied against the Bank’s

deposit insurance assessments during 2019 and 2020.

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

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

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.

to DIF members.

The DIF reserve ratio was 1.42% at December 31, 2025, 14 basis points higher

than at the end of 2024, and above the

The Company recorded FDIC insurance premiums expenses of $0.5 million

for both 2024 and 2023, respectively,

reflects the FDIC’s amended

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

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

for each of 2025 and 2024.

CRE and Leveraged Loans

The federal bank regulatory agencies released guidance in 2006

on “Concentrations in Commercial Real Estate Lending”

The federal bank regulatory agencies released guidance on “Concentrations

in Commercial Real Estate Lending” (2006)

(the “CRE Guidance”).

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

land development and

The CRE Guidance defines CRE loans as exposures

secured by raw land, land development and

construction (including 1-4 family residential construction), multi-family

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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

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Estate Lending (December 18, 2015).

The CRE Guidance also applies when a bank has a sharp increase in CRE loans or

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

See “Management’s Discussion and Analysis

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

See Management’s Discussion and Analysis of

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

concentrations of the various types of CRE

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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

and the loan needs of customers.

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 bank regulators, including the Federal Reserve issued a Policy Statement

on Prudent Commercial Real Estate

Loan Accommodations and Workouts

(June 30, 2023), which updated existing guidance.

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.

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.

modified loans to borrowers who

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

subject to adverse classification solely

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

is less than the outstanding loan balance.

Policy Statement also describes the classifications of CRE loan accommodations

and workouts and addresses regulatory

accounting and reporting in such situations, including CECL.

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

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

Leveraged Loans

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

The Federal Reserve and other banking regulators issued their “Interagency

Guidance on Leveraged Lending” (2006)

2 unchanged sentences

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

shared national credits.

The Bank did not have any leveraged loans at year-end 2025, 2024

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.

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

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.

of an accounting restatement due to material noncompliance with a financial

reporting requirement under the federal

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

any current or former executive officer,

incentive-based compensation (including stock options) received

during the three-year period preceding the date of the

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

financial statements.

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

and applies to all executive officers.

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

CEO and CFO to return any bonus or other

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

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.

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

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.

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

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

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

or 2023 subject to the Interagency Guidance on Leveraged Lending or

that were shared national credits.

Certain Dodd-Frank Act Provisions

No Hedging of Equity Incentive Compensation

The Dodd-Frank Act, Section 955, requires the SEC establish rules requiring

that companies disclose in their annual

meeting proxy materials 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

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

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,

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

The Company’s Insider

Trading Policy 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

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

put option contracts, including

straddles, and the like.

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

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

security, including Company Securities.

Company’s Insider Trading

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

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

arrangements that encourage inappropriate risk

taking by covered financial institutions, are deemed to be excessive, or that

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.”

compensation should:

This Policy prohibits Covered

Persons from engaging in speculative transactions or short-term trading in

Company Securities at any time.

Short-selling

Company securities or engaging in transactions involving “Derivative Securities”

on Company securities are prohibited.

Further, hedging instruments or strategies,

including Derivative Securities may not be used to increase the value

the risks of any awards under the 2024 Incentive Plan.

The Company’s

Insider Trading Policy is included as an exhibit

its annual report on SEC Form 10-K.

No Incentives Encouraging Inappropriate Risk-Taking

Section 956 of the Dodd-Frank Act requires the appropriate federal

regulators to issue regulations or guidelines that

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 to the covered

financial institution.

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,

“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;

3 unchanged sentences

of directors.

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

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

have less effect on smaller banking

2 unchanged sentences

banking organizations.

The federal bank regulators, the SEC and other regulators proposed regulations

The Company’s Compensation

Committee Charter provides that the Committee shall identify and limit features of

compensation plans that it reasonably believes would lead to unnecessary

and excessive risk-taking, and establish a

compensation strategy to provide balanced risk-taking incentives in alignment

with the Company’s risk appetite and

compliance with the various laws and regulations governing executive

officer and director compensation.

The federal bank regulators, the SEC and other regulators first proposed regulations

implementing Section 956 in April

which would have been applicable to, among others, depository

institutions and their holding companies with $1 billion or

What changed 10-K

Item 1. Business