10-K - AUBN - Equibles

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

20549

FORM

10-K

☒

Annual report pursuant to Section 13 or 15(d) of the Securities

Exchange Act of 1934.

For the fiscal year ended

December 31, 2024

☐

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from __________ to __________

Commission File Number:

0-26486

Auburn National Bancorporation, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

63-0885779

(State or other jurisdiction

of incorporation)

(I.R.S. Employer

Identification No.)

100 N. Gay Street

Auburn,

Alabama

36830

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (

334

)

821-9200

Securities registered pursuant to Section 12 (b) of the Act:

Title of Each Class

Trading Symbol

Name of Exchange on which Registered

Common Stock

, par value $0.01

AUBN

NASDAQ

Global Market

Securities registered to Section 12(g) of the Act:

None

Indicate by check mark if the registrant

is a well-known seasoned issuer, as defined in Rule 405

of the Securities Act. Yes

☐

☒

Indicate by check mark if the registrant

is not required to file reports pursuant to

Section 13 or Section 15(d) of the Act. Yes

☐

☒

Indicate by check mark whether the registrant

(1) has filed all reports required to be

filed by Section 13 or 15(d) of the Securities

Exchange Act of 1934 during the

preceding 12 months (or for such shorter period

that the registrant was required to file

such reports), and (2) has been subject to

such filing requirements for the past

90 days.

Yes

☒

☐

Indicate by check mark whether the registrant

has submitted electronically every Interactive

Data File required to be submitted pursuant

to Rule 405 of Regulation S-

T (§ 232.405 of this chapter) during

the preceding 12 months (or for such shorter

period that the registrant was required

to submit such files).

Yes

☒

☐

Indicate by check mark whether the registrant

is a large accelerated filer, an accelerated filer, a non-accelerated

filer, or a smaller reporting company. See the

definitions of “large accelerated filer,” “accelerated filer” and

“smaller reporting company” in Rule 12b-2

of the Exchange Act. (Check one):

Large Accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging Growth

Company

☐

If an emerging growth company, indicate by check mark if the registrant

has selected not to use the extended

transition period for complying with any

new or revised

financial accounting standards provided pursuant

to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant

has filed a report on and attestation

to its management’s assessment of the effectiveness of its internal control

over

financial reporting under Section 404(b)

of the Sarbanes-Oxley Act (15 U.S.C. 7262(b))

by the registered public accounting firm

that prepared or issued its audit

report.

☐

If securities are registered pursuant to Section

12(b) of the Act, indicate by check mark

whether the financial statements of the registrant

included in the filing reflect

the correction of an error to previously

issued financial statements.

☐

Indicate by check mark whether any of

those error corrections are restatements

that required a recovery analysis of incentive-based

compensation received by any of

the registrant’s executive officers during the relevant recovery period

pursuant to §240.10D-1(b).

☐

Indicate by check mark if the registrant

is a shell company (as defined in Rule

12b-2 of the Act). Yes

☐

☒

State the aggregate market value of the

voting and non-voting common equity

held by non-affiliates computed by reference to the

price at which the common equity

was last sold, or the average bid and asked

price of such common equity as of the

last business day of the registrant’s most recently completed

second fiscal quarter:

40,992,280

as of June 30, 2024.

APPLICABLE ONLY TO CORPORATE REGISTRANTS

Indicate the number of shares outstanding

of each of the registrant’s classes of common stock, as

of the latest practicable date:

3,493,699

shares of common stock as

of March 10 2025.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual

Meeting of Shareholders, scheduled to

be held May 13, 2025, are incorporated by

reference into Part II, Item 5 and

Part III of this Form 10-K.

Table of Contents

TABLE OF CONTENTS

PART I

PAGE

ITEM 1.

BUSINESS

ITEM 1A.

RISK FACTORS

ITEM 1B.

UNRESOLVED STAFF COMMENTS

ITEM 1C.

CYBERSECURITY

ITEM 2.

PROPERTIES

ITEM 3.

LEGAL PROCEEDINGS

ITEM 4.

MINE SAFETY DISCLOSURES

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

ACCOUNTING AND FINANCIAL DISCLOSURE

122

ITEM 9A.

CONTROLS AND PROCEDURES

122

ITEM 9B.

OTHER INFORMATION

123

ITEM 9C.

DISCLOSURE REGARDING FORGEIN JURISDICTIONS THAT PREVENT

INSPECTION

123

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

124

ITEM 11.

EXECUTIVE COMPENSATION

124

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

MANAGEMENT AND RELATED STOCKHOLDER MATTERS

124

ITEM 13.

CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR

INDEPENDENCE

124

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

124

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

125

ITEM 16.

FORM 10-K SUMMARY

126

Table of Contents

PART

SPECIAL CAUTIONARY NOTE REGARDING

FORWARD

-LOOKING STATEMENTS

Various

of the statements made herein under the captions “Management’s

Discussion and Analysis of Financial Condition

and Results of Operations”, “Quantitative and Qualitative Disclosures about

Market Risk”, “Risk Factors” “Description of

Property” and elsewhere, are “forward-looking statements” within the meaning

and protections of Section 27A of the

Securities Act of 1933 and Section 21E of the Securities Exchange

Act of 1934, as amended (the “Exchange Act”).

Forward-looking statements include statements with respect to our beliefs, plans,

objectives, goals, expectations,

anticipations, assumptions, estimates, intentions and future performance,

and involve known and unknown risks,

uncertainties and other factors, which may be beyond our control,

and which may cause the actual results, performance,

achievements or financial condition of the Company to be materially different

from future results, performance,

achievements or financial condition expressed or implied by such forward-looking

statements.

You

should not expect us to

update any forward-looking statements.

All statements other than statements of historical fact are statements that could

be forward-looking statements.

You

can

identify these forward-looking statements through our use of words such

as “may,” “will,” “anticipate,”

“assume,”

“should,” “indicate,” “would,” “believe,” “contemplate,” “expect,”

“estimate,” “continue,” “designed”, “plan,” “point to,”

“project,” “could,” “intend,” “target,” “seek” and other

similar words and expressions of the future.

These forward-looking

statements may not be realized due to a variety of factors, including,

without limitation:

●

the effects of future economic, business and market conditions and

changes, foreign, domestic and locally,

including inflation, seasonality,

natural disasters or climate change, such as rising sea and water levels, hurricanes

and tornados, epidemics or pandemics including supply chain disruptions,

inventory volatility, and changes

consumer behaviors;

●

the effects of war or other conflicts, acts of terrorism, trade restrictions, tariffs,

sanctions, the value of the U.S.

dollar against other currencies, or other events that may affect general

economic conditions, consumer and

business confidence;

●

governmental monetary and fiscal policies, including taxes, federal

deficit spending and the debt required to fund

such spending, changes in monetary policies in response to inflation and changes

in prices , including changes in

the Federal Reserve’s target

federal funds rate and changes in the Federal Reserve’s

holdings of securities through

quantitative tightening or easing; and the duration that the Federal Reserve

will keep its targeted federal funds

rates at or above current target ranges to meet its long term inflation

target of 2%;

●

legislative, executive branch and regulatory changes, including changes

by executive orders, the possible

reorganization and/or consolidation of the bank regulatory

agencies and/or the CFPB, changes in the leadership

and personnel, including reductions in the number and experience of personnel,

at the bank and securities

regulators and the CFPB, freezes on changes in regulations and interpretations,

the numerous new Executive

Orders, and the uncertain effects of all these, including the

costs and benefits of such changes;

●

the effects of the potential privatization of Fannie Mae and Freddie Mac

and its release from conservatorship on

the mortgage markets and us as seller and servicer of residential mortgage

loans;

●

recent Supreme Court rulings that may lead to more court challenges to regulations

and regulatory actions, which

may cause uncertainty,

wasted implementation costs and time by the industry,

and lengthy delays until ultimate

resolution;

●

changes in banking, securities and tax laws, regulations and rules and their

application by the regulators, including

capital and liquidity

requirements, and changes in the scope and cost of FDIC insurance;

Table of Contents

●

changes in accounting pronouncements and interpretations, including the

required use, beginning January 1, 2023,

of Financial Accounting Standards Board’s

(“FASB”) Accounting

Standards Update (ASU) 2016-13, “Financial

Instruments – Credit Losses (Topic

326): Measurement of Credit Losses on Financial Instruments,” as well as the

updates issued since June 2016 (collectively,

FASB ASC Topic

326) on Current Expected Credit Losses

(“CECL”), and ASU 2022-02, Troubled Debt

Restructurings and Vintage Disclosures,

which eliminates troubled

debt restructurings (“TDRs”) and related guidance;

●

the failure of assumptions and estimates, including those used in the Company’s

CECL models to establish our

allowance for credit losses and estimate asset impairments, as well as differences

in, and changes to, economic,

market and credit conditions, including changes in borrowers’ credit risks and

payment behaviors from those used

in our CECL models and loan portfolio reviews;

●

the risks of changes in market interest rates and the shape of the yield curve on customer

behaviors; the levels,

composition and costs of deposits, loan demand and mortgage loan originations;

the values and liquidity of loan

collateral, our securities portfolio and interest-sensitive assets and

liabilities; and the risks and uncertainty of the

amounts realizable on collateral;

●

the risks of increases in market interest rates creating unrealized losses on our

securities available for sale, which

adversely affect our stockholders’ equity for financial

reporting purposes and our tangible equity;

●

changes in borrower liquidity and credit risks, and changes in savings, deposit and

payment behaviors;

●

changes in the availability and cost of credit and capital in the financial markets, and

the types of instruments that

may be included as capital for regulatory purposes;

●

changes in the prices, values and sales volumes of residential and commercial

real estate;

●

the effects of competition from a wide variety of local, regional,

national and other providers of financial,

investment and insurance services, including the disruptive effects

of financial technology and other competitors

who are not subject to the same regulation, including capital and liquidity

requirements, internal controls, and

supervision and examination, as the Company and the Bank, and competition

from credit unions, which are not

subject to federal income taxation;

●

more permissive regulation and/or enforcement regarding digital assets, such as cyber

currency and stable coins

that creates additional competition to banks, and greater risks to the

payment systems that the banking industry,

including the Company,

relies on, and greater risks of fraud and theft of digital assets and their effects

customers, other financial institutions, including our counterparties, and

confidence in the financial system,

generally;

●

the timing and amount of rental income from third parties from office

space in our Auburn Center headquarters

and in former office locations;

●

the risks of mergers, acquisitions and divestitures, including,

without limitation, the related time and costs of

implementing such transactions, integrating operations as part of these

transactions and possible failures to achieve

expected gains, revenue growth and/or expense savings from such transactions;

●

changes in technology or products that may be more difficult, costly,

or less effective than anticipated;

●

cyber-attacks and data breaches that may compromise our systems, our vendors’

systems or customers’

information;

●

the risks that our deferred tax assets (“DTAs”)

included in “other assets” on our consolidated balance sheets, if

any, could be reduced

if estimates of future taxable income from our operations and tax planning strategies

are less

than currently estimated, and sales of our capital stock could trigger a

reduction in the amount of net operating loss

carry-forwards that we may be able to utilize for income tax purposes;

Table of Contents

●

the risks that our dividends, share repurchases and discretionary

bonuses are limited by regulation to the

maintenance of a capital conservation buffer of 2.5% and

our future earnings and “eligible retained earnings” over

rolling four calendar quarter periods;

●

other factors and risks described under “Risk Factors” herein and in any of our

subsequent reports that we make

with the Securities and Exchange Commission (the “Commission” or

“SEC”) under the Exchange Act.

All written or oral forward-looking statements that we make or are attributable

to us are expressly qualified in their entirety

by this cautionary notice.

We have no obligation

and do not undertake to update, revise or correct any of the forward-

looking statements after the date of this report, or after the respective dates on which

such statements otherwise are made.

ITEM 1.

BUSINESS

Auburn National Bancorporation, Inc. (the “Company”) is a bank holding

company registered with the Board of Governors

of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding

Company Act of 1956, as amended (the

“BHC Act”).

The Company was incorporated in Delaware in 1990, and in 1994 it succeeded

its Alabama predecessor as

the bank holding company controlling AuburnBank, an Alabama state member

bank with its principal office in Auburn,

Alabama (the “Bank”).

The Company and its predecessor have controlled the Bank since 1984.

As a bank holding

company, the Company

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

currently

are permitted to the Bank under applicable laws and regulations.

The holding company structure also provides greater

financial and operating flexibility than is presently permitted to the

Bank.

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

primarily in East Alabama, including

Lee County and surrounding areas.

The Bank has been a member of the Federal Reserve Bank of Atlanta (the

“Federal

Reserve Bank”) since April 1995.

The Bank’s primary regulators are the Federal

Reserve and the Alabama Superintendent

of Banks (the “Alabama Superintendent”).

The Bank has been a member of the Federal Home Loan Bank of Atlanta (the

“FHLB-Atlanta”) since 1991.

General

The Company’s business is conducted

primarily through the Bank and its subsidiaries.

Although it has no immediate plans

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

indirectly in a number of activities closely related to

banking permitted by the Federal Reserve.

The Company’s principal

executive offices are located at 100 N. Gay Street, Auburn, Alabama 36830,

and its telephone

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

The Company maintains an Internet website at

www.auburnbank.com

The

Company’s website and

the information appearing on the website are not included or incorporated in, and are not part of,

this report.

The Company files annual, quarterly and current reports, proxy statements, and other

information with the

SEC.

You

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

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

Washington,

DC 20549.

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

reference rooms.

The SEC maintains an Internet site at

www.sec.gov

that contains reports, proxy,

and other information,

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

Table of Contents

Services

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

Notasulga, and Valley,

Alabama and a loan

production office in Phenix City,

Alabama.

evaluate the utilization of our existing facilities and customer preferences

for online and mobile banking.

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

branch office in Auburn

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

efficiently by another existing Bank branch.

It offers checking, savings, transaction deposit accounts and

certificates of deposit, and is an active residential mortgage

lender in its primary service area.

The Bank’s primary service area includes

the cities of Auburn and Opelika, Alabama and

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

The Bank also offers commercial, financial,

agricultural, real estate construction and consumer loan products,

and other financial services.

The Bank operates ATM

machines in 10 locations in its primary service area.

The Bank offers Visa

Checkcards, which are debit cards with the

Visa logo that work

like checks and can be used anywhere Visa is accepted,

including ATMs.

The Bank’s Visa

Checkcards

can be used internationally through the Plus

network.

The Bank offers online banking, bill payment and other electronic

banking services through its Internet website,

www.auburnbank.com

Our online banking services, bill payment and

electronic services are subject to certain cybersecurity risks.

See “Risk Factors – Our information systems may experience

interruptions and security breaches.”

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

other digital or crypto instruments, stablecoins or

businesses.

Competition

The Bank had the largest share of the Lee County,

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

The banking business in

East Alabama, including Lee County,

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

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

of Alabama.

Other banks have 35 offices in Lee

County.

National and regional competitors that have offices in our market

include J.P.

Morgan Chase, Wells

Fargo, Truist,

PNC, Regions, Valley

National, SouthState and Cadence.

The national and regional banks we compete with have

substantially greater resources, and numerous offices

and affiliates operating over wide geographic areas.

The Bank

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

unions, mortgage companies,

insurance companies, and other local and nonlocal financial institutions,

including institutions offering services through

the

mail, by telephone and over the Internet.

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

services,

competition from nonbank financial institutions may be expected to intensify

further.

Among the advantages that larger financial institutions have

over the Bank are their ability to finance extensive advertising

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

their assets among loans and securities of the

highest yield in locations with the greatest demand.

Many of the major commercial banks or their affiliates operating

in the

Bank’s service area offer

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

banks typically have

substantially higher lending limits than the Bank.

Banks also have experienced significant competition for deposits from mutual

funds, insurance companies and other

investment companies and from money center banks’ offerings

of high-yield investments and deposits, including CDs and

savings accounts.

Certain of these competitors are not subject to the same regulatory restrictions as the Bank.

Selected Economic Data

Our market is Lee County,

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

Alabama.

Lee County and Macon

County form the Auburn-Opelika MSA.

The U.S. Census Bureau estimates Lee County’s

population was 174,241 in 2020

and an estimated 183,215 in July 2023.

The largest employers in the area are Auburn University,

East Alabama Medical

Center, Lee County School System, Auburn

and Opelika City Schools, Auburn City Schools, Wal

-Mart Distribution

Center, Aptar CSP Technologies,

Pharmavite, LLC, HL Mando America Corporation (automobile

brakes and steering),

SCA (automotive plastics), Borbet Alabama (automotive aluminum

wheels), Golden State Foods and Briggs & Stratton.

Auto manufacturing and related suppliers are increasingly important

along Interstate Highway 85 to the east and west of

Auburn.

Kia Motors has a large automobile factory in nearby West

Point, Georgia, and Hyundai Motors has a large

automobile factory near Montgomery,

Alabama.

Various

suppliers to the automotive industry have facilities in Lee

County.

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

and 3.3% for the State of Alabama

according to the U.S. Bureau of Labor Statistics.

Table of Contents

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

fastest growing MSA in Alabama.

The Auburn-

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

During the same time, household income is

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

Loans and Loan Concentrations

The Bank makes loans for commercial, financial and agricultural purposes, as well as for

real estate mortgages, real estate

acquisition, construction and development and consumer purposes.

While there are certain risks unique to each type of

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

real estate acquisition, construction and

development, agricultural and consumer lending than with residential real

estate mortgage loans.

To help manage these

risks, the Bank has established underwriting standards used in evaluating

each extension of credit on an individual basis,

which are substantially similar for each type of loan.

These standards include a review of the economic conditions

affecting the borrower,

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

collateral and the

borrower’s past credit performance.

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

throughout the life of the loan.

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

real estate

lending.

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

loans on owner occupied property,

as of December

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

Our regulators’ CRE Guidance excludes loans on owner occupied

property from CRE.

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

(42% of total loans) at year

end 2023.

See “Lending Practices –

CRE.

”

The Bank has loans outstanding to borrowers in all industries within our

primary service area.

Any adverse economic or

other conditions affecting these industries would

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

businesses, and individuals in the community that have entered

into loans with the Bank.

For example, the auto

manufacturing business and its suppliers have positively

affected our local economy,

but automobile sales manufacturing is

cyclical and adversely affected by increases in interest rates.

Decreases in automobile sales, including adverse changes due

to interest rate increases and inflation, tariffs, supply

chain disruptions (including changes resulting from the effects of

tariffs and related changes in countries and producers in

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

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

and employment, and could adversely affect

economic conditions in the markets we serve.

However, management believes that due

to the diversified mix of industries

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

affect other area industries to the same

degree or within the same time frame.

The Bank’s primary service area also is subject

to both local and national economic

conditions and fluctuations.

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

gage loans

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

time to time has purchased loan participations from

outside its primary service area.

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

have

a relationship with the borrower, or

its business or owners.

Table of Contents

Human Capital

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

equivalent employees, including 39 officers.

Our employees have been with us an average of approximately 11

years.

We successfully implemented

plans to protect our

employees’ health consistent with CDC and State of Alabama guidelines

during the COVID-19 pandemic, while

maintaining critical banking services to our communities and experiencing

little employee turnover.

In addition, we

developed our remote and electronic banking services, and established remote

work access to help employees stay at home

where their job duties permitted.

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

experience

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

customers and communities continuity

of service.

We have a talented

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

We believe the

Auburn-

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

of life.

Our MSA was the second

fastest growing MSA in Alabama from 2010 to 2022.

Auburn University is a major employer that attracts talented students

and employee families.

We had a successful

management transition in 2022 where our CEO became Chairman,

and was succeeded by our CFO,

whose role was then filled by our Chief Accounting Officer.

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

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

Officer had been with us for 7 years.

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

accounting firms and focused on financial

services before joining the Bank.

We seek to offer

competitive compensation and benefits.

We provide

employer matches for employee contributions to our

401(k) retirement plan.

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

Plan (the “2024

Incentive Plan”).

The Plan provides for a variety

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

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

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

incentive awards.

We believe that the 2024

Incentive Plan provides the flexibility to structure appropriate incentives to

attract and retain talented people in a competitive market where many

of our competitors are public companies who offer

stock-based incentives.

We encourage

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

to fill positions by

promotion and transfer from within the organization.

Career development is advanced through ongoing performance and

development conversations with employees, internally developed

training programs and other training and development

opportunities.

Our employees are encouraged to be active in our communities as part of our commitment

to these communities and our

employees.

Statistical Information

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

of this Annual Report on Form 10-K.

SUPERVISION AND REGULATION

The Company and the Bank are extensively regulated under federal

and state laws applicable to bank holding companies

and banks.

The supervision, regulation and examination of the Company and the Bank and their

respective subsidiaries by

the bank regulatory

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

institutions and the

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

rather than holders of Company capital stock and

other securities.

Any change in applicable law or regulation may have a material effect

on the Company’s business, and

our results of operations and financial condition.

The following discussion is qualified in its entirety by reference to the

particular laws and rules referred to below.

Table of Contents

Bank Holding Company Regulation

The Company, as a bank

holding company, is subject to supervision,

regulation and examination by the Federal Reserve

under the BHC Act.

Bank holding companies generally are limited to the business of banking,

managing or controlling

banks, and certain related activities.

The Company is required to file periodic reports

and other information with the

Federal Reserve.

The Federal Reserve examines the Company and its subsidiaries.

The State of Alabama currently does

not regulate bank holding companies.

The BHC Act requires prior Federal Reserve approval for,

among other things, the acquisition by a bank holding company

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

shares or substantially all the assets of any bank, or

for a merger or consolidation of a bank holding company

with another bank holding company.

The BHC Act generally

prohibits a bank holding company from acquiring direct or indirect

ownership or control of voting shares of any company

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

indirectly in any activity other than banking or

managing or controlling banks or performing services for its authorized

subsidiaries.

A bank holding company may,

however, engage in or acquire an interest

in a company that engages in activities that the Federal Reserve has determined

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

controlling banks as to be a proper incident

thereto.

The Federal Reserve adopted new rules, effective September

30, 2020, simplifying determinations of control of

banking organizations for BHC Act purposes.

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

to, and nonobjection by the Federal Reserve under

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

Superintendent of Banks (the “Alabama

Superintendent”) under the Alabama Banking Code.

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

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

under the Control Act, to file a notice

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

and notices currently required from the Federal

Reserve and the Alabama Superintendent.

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

“well-managed,” as defined in Federal Reserve

Regulation

and whose insured depository institution subsidiaries maintain “satisfactory”

or better ratings under the

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

“financial holding companies.”

Financial

holding companies and their subsidiaries are permitted to acquire or engage

in activities such as insurance underwriting,

securities underwriting, travel agency activities, broad insurance

agency activities, merchant banking and other activities

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

thereto.

In addition, under the BHC Act’s

merchant banking authority and Federal Reserve regulations, financial

holding companies are authorized to invest in

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

as long as the financial holding company makes its

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

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

with any depositary institutions controlled by the financial holding

company.

The Federal Reserve recommended repeal of

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

pursuant to Section 620 of the Dodd-Frank Wall

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

Act”), but has taken no action.

The Company has

not elected to become a financial holding company,

but it may elect to do so in the future.

Financial holding companies

continue to be subject to Federal Reserve supervision, regulation and

examination.

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

of functional regulation to subsidiary activities.

For example, insurance activities would be subject to supervision and

regulation by state insurance authorities and

securities broker-dealer and investment advisory activities are regulated

by the SEC.

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

subject to various restrictions, including that the

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

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

primary federal regulator pursuant to the Bank Merger Act.

The BHC Act and the Bank Merger Act provide various

generally similar statutory factors.

Under the Alabama Banking Code, with the prior approval of the Alabama

Superintendent, an Alabama bank may acquire and operate one or

more banks in other states pursuant to a transaction in

which the Alabama bank is the surviving bank.

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

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

resulting from such transaction may continue to

operate the acquired branches in Alabama.

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

See “Bank Regulation”.

Table of Contents

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

Various

legal limitations restrict the Bank from lending

or otherwise supplying funds to the Company.

The Company and the Bank are subject to Sections 23A and 23B of the

Federal Reserve Act and Federal Reserve Regulation W thereunder.

Section 23A defines “covered transactions,” which

include extensions of credit and other transactions with affiliates, and

limits a bank’s covered transactions

with any affiliate

to 10% of such bank’s capital and

surplus.

All covered and exempt transactions between a bank and its affiliates

must be

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

banks and their subsidiaries are prohibited

from purchasing low-quality assets from the bank’s

affiliates.

Finally, Section 23A requires that all of

a bank’s extensions

of credit to its affiliates be appropriately secured by permissible

collateral, generally United States government or agency

securities.

Section 23B of the Federal Reserve Act generally requires covered

and other transactions among affiliates to be

on terms and under circumstances, including credit standards, that are substantially

the same as or at least as favorable to

the bank or its subsidiary as those prevailing at the time for similar transactions

with unaffiliated companies.

Federal Reserve policy and the Federal Deposit Insurance Act require

a bank holding company to act as a source of

financial and managerial strength to its FDIC-insured subsidiaries and

to take measures to preserve and protect such bank

subsidiaries in situations where additional investments in a bank subsidiary

may not otherwise be warranted.

In the event

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

its regulators, the parent bank holding

company is required to guarantee performance of such plan up to

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

is given

priority in a bankruptcy of the bank holding company.

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

subsidiary, each of

the bank holding company’s subsidiary

depository institutions may be responsible for any losses to the

FDIC’s Deposit Insurance Fund

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

As a result, a bank holding company

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

capital notes or other

instruments which

qualify as capital under bank regulatory rules.

However, any loans from the holding company

to such subsidiary banks

likely will be unsecured and subordinated to such bank’s

depositors and to other creditors of the bank.

See “Capital.”

The Federal Reserve’s Small Bank

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

qualifying bank

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

assets.

Proposed legislation, entitled the

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

raise the permitted consolidated asset level to

$10 billion. Such legislation is among various bills highlighted in February

2025 by House Financial Services Committee

hearings.

The Federal Reserve treats the Company as a small banking holding

company under the Small BHC Policy.

As a result,

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

the Company’s capital adequacy

will continue

to be evaluated on a bank only basis.

See “Capital.”

Bank Regulation

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

It is subject to supervision, regulation and

examination by the Alabama Superintendent and the Federal Reserve, which

monitor all areas of the Bank’s operations,

including loans, reserves, mortgages, capital adequacy,

liquidity, funding sources

and concentrations, issuances and

redemption of capital securities, payment of dividends, establishment of

branches, and compliance with laws.

The Bank’s

deposits are insured by the FDIC to the maximum extent provided

by law, and the Bank is subject to various

FDIC

regulations applicable to FDIC-insured banks.

See “FDIC Insurance Assessments.”

Alabama law permits statewide branching by banks.

The Alabama Banking Code has provisions designed to ensure

Alabama banks have competitive equality with national banks.

Table of Contents

The Federal Reserve has adopted the Federal Financial Institutions Examination

Council’s (“FFIEC”) Uniform

Financial

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

institution a confidential composite “CAMELS” rating

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

financial condition and operations:

apital

Adequacy,

sset Quality,

anagement,

arnings,

iquidity and

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

management practices.

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

reflects exposures to

changes in interest rates.

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

to management’s

ability to identify, measure,

monitor and control market risk; the institution’s

size; the nature and complexity of its activities

and its risk profile; and the adequacy of its capital and earnings in relation

to its level of market risk exposure.

Market risk

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

the financial institution’s earnings

or the

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

exchange rates, commodity prices or equity prices;

management’s ability to identify,

measure, monitor and control exposure to market risk; and the nature and complexity

interest rate risk exposure arising from non-trading positions. Composite

ratings are based on evaluations of an institution’s

managerial,

operational, financial and compliance performance. The composite CAMELS

rating is not an arithmetical

formula or rigid weighting of numerical component ratings. Elements

of subjectivity and examiner judgment, especially as

these relate to qualitative assessments, are important elements in assigning

ratings.

The Federal Reserve is maintaining a

heightened focus on bank funding pressures based on risk profiles and

management’s ability to manage their

liquidity

positions.

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

assigns a risk-management rating to all state

member banks and bank holding companies.

In February 2021 the Federal Reserve expanded its Guidance for Assessing

Risk Management to institutions with under $100 billion

in assets.

This guidance states that principles of sound

management should apply to all risk confronting a banking organization,

including credit, market, liquidity,

operational,

compliance, and legal risks.

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

solely in traditional banking

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

day-to-day operations, relatively basic risk

management systems may be adequate. In accordance with the Interagency

Guidelines Establishing Standards for Safety

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

information systems, and internal audit that are

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

its activities.

The summary, or composite,

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

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

1 being the highest or best possible rating.

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

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

level of performance and therefore requires the

highest degree of supervisory attention.

Bank mergers, which generally accompany holding

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

bank’s primary federal

regulator.

The Federal Reserve and the Alabama Superintendent must approve mergers

and

acquisitions by the Bank.

The FDIC and the Office of the Comptroller of the Currency

(“OCC”) may comment on mergers

involving the Company or the Bank.

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

to mergers of bank holding companies or

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

policies and rules in September 2024.

The FDIC

adopted a Statement of Policy on Bank Merger Transactions

(the “FDIC Merger Policy”).

The new FDIC Merger Policy

recognizes Biden Administration Executive Order 14036 “Promoting

Competition in the American Economy” (July 9,

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

to consider the impact that

consolidation may have on maintaining a fair,

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

small businesses, startups, and consumers.”

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

2025.

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

methods the FDIC employs in

conducting its independent analysis will continue to be informed

by the United States Department of Justice’s

(“DoJ”)

approach to evaluating competitive effects.”

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

involving national banks and federal

savings associations, deleted expedited and streamline applications for

business combinations and adopted a policy

statement clarifying its review of applications under the Bank Merger

Act’s statutory factors.

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

their views of mergers where the Federal

Reserve is the responsible regulator, especially

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

the OCC.

Table of Contents

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

other factors, of the effects of the transaction on

competition.

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

approval under the Bank

Merger Act and the Federal Reserve, in acquisitions and mergers

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

important advisory role in bank and BHC mergers,

but the bank regulators are the primary decision makers.

The bank

regulators may then consider the Antitrust Division’s

competitive factors report as part of their respective review processes,

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

The DoJ and the Federal Trade Commission

adopted new non-binding Merger Guidelines in 2023.

In September 2024, the DoJ revoked its 1995 Bank Merger

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

Guidelines.

The 1995 Bank Merger

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

notwithstanding the FDIC Merger Policy,

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

The Federal Reserve continues to apply the

1995 Bank Merger Guidelines in evaluating bank and bank holding

company mergers.

The GLB Act and related regulations require banks and their affiliated

companies to adopt and disclose privacy policies,

including policies regarding the sharing of personal information with

third parties.

The GLB Act also permits bank

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

permitted to financial holding companies.

A variety of federal and state privacy laws govern the collection, safeguarding,

sharing and use of customer information,

and require that financial institutions have policies regarding information

privacy and security. Some

state laws also protect

the privacy of information of state residents and require adequate security

of such data, and certain state laws may,

in some

circumstances, require us to notify affected individuals

of security breaches of computer databases that contain their

personal information. These laws may also require us to notify law enforcement,

regulators or consumer reporting agencies

in the event of a data breach, as well as businesses and governmental agencies

that own data.

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

24, 2023.

It would amend various sections of the

GLB Act and preempt certain state privacy laws.

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

federal standard for comprehensive data privacy and security regulation.

Neither of these bills were adopted.

Other

privacy legislation may be proposed.

Consumer Laws and the Community Reinvestment Act

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

that requires it to regulate consumer

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

their affiliates.

The CFPB has the authority to adopt

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

in Lending Act, the Electronic Funds

Transfer Act, mortgage lending rules, the

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

of Consumer

Financial Information rules.

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

in assets,

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

regulations, and the precedents set in CFPB enforcement

actions and interpretations.

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

CRA regulations.

Under the CRA, all FDIC-

insured institutions have a continuing and affirmative

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

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

moderate-income (“LMI”) neighborhoods.

The CRA

requires a depository institution’s

primary federal regulator to periodically assess the institution’s

record of assessing and

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

ing low- and moderate-income neighborhoods.

The bank regulatory agency’s CRA assessment

is publicly available.

Further, consideration of the CRA is required of

any

FDIC-insured institution that has applied to: (i) charter a national bank; (ii)

obtain deposit insurance coverage for all new-

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

relocate an office; or (v) merge or consolidate

with, or

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

institution.

A less than satisfactory CRA rating

will slow, if not preclude,

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

a company from

becoming a financial holding company.

The federal CRA regulations require that evidence of discriminatory,

illegal or

abusive lending practices be considered in the CRA evaluation.

The federal CRA regulations require that evidence of discriminatory,

illegal or abusive lending practices be considered in

the CRA evaluation.

Financial holding company elections and the continuation of financial

holding company activities are permitted, only if

each affiliated bank has received a “satisfactory” or better

CRA rating.

Table of Contents

CRA agreements with private parties must be disclosed and annual

CRA reports must be made to a bank’s

primary federal

regulator.

Community benefit plans have become common in banking mergers,

especially larger bank combinations.

The

National Community Reinvestment Coalition reported

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

plans with banking organizations for an aggregate of

$580 billion for mortgage, small business and community

development lending, investments and philanthropy in

LMI and under-resourced communities. The pending Capital One

Financial Acquisition of Discover Financial Services includes a community

benefit plan with another community

organization valued at $265 billion, which is the largest

ever.

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

28, 2022, with satisfactory

ratings on both its lending and community development

tests.

The Federal Reserve considers the effects of a bank acquisition

proposal on the convenience and needs of the markets

served by the combining organizations. Bank regulators

consider CRA performance in evaluating merger and acquisition

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

expansion proposals, such as new branch

offices.

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

Reserve will assess and emphasize

CRA records of each subsidiary depository institution of the applicant

bank holding company and the target bank in

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

and such records may be the basis for

denying the application.

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

Act (the “ECOA”) and the Fair Housing Act

and other fair lending laws, which prohibit discrimination based on race or

color, religion, national origin, sex and familial

status in any aspect of a consumer or commercial credit or residential real estate transaction.

The DoJ’s and the federal

bank regulatory agencies’ Interagency Policy Statement on Discrimination

in Lending provides guidance to financial

institutions in determining whether discrimination exists, how the agencies

will respond to lending discrimination, and what

steps lenders might take to prevent discriminatory lending practices.

The DOJ has prosecuted what it regards as violations

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

New CRA Regulations

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

changes in new CRA regulations, which were

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

1, 2024 (the “New CRA Regulations”).

Most

of the New CRA Regulation’s become

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

data reporting,

are scheduled to become effective January 1, 2027.

The New CRA Regulations confirm that the CRA and fair lending

responsibilities and compliance are mutually reinforcing and that these

regimes recognize the importance of ensuring that

the credit markets are inclusive.

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

other illegal credit practices.

The New CRA Regulations’ objectives include:

●

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

the statute and to encourage

financial inclusion;

●

Adapt to changes in the banking industry,

including the expanded role of mobile and online banking;

●

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

●

Tailor performance

standards to account for differences in bank size and business models

and local conditions;

●

Tailor data collection

and reporting requirements and use existing data whenever possible;

●

Promote transparency and public engagement;

●

Confirm that CRA and fair lending responsibilities are mutually reinforcing;

and

●

Create a consistent regulatory approach that applies to banks regulated

by all three agencies.

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

size and business model.

These rules create a new

framework for evaluating CRA performance.

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

purpose” banks.

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

relative to the

bank asset size thresholds in the old CRA rule.

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

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

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

prior years.

Table of Contents

The new performance evaluation framework establishes two tests for intermediate

banks:

•

the Retail Lending Test;

and

•

the Intermediate Bank Community Development Test,

or if elected by the Bank, the Community Development

Financing Test.

The Bank presently intends to use the Intermediate Bank Community

Development Test.

The community development

evaluation of the prior CRA rules continues.

The New CRA Regulations implement a new retail lending evaluation for

intermediate banks, and provide them the option of evaluation under

a new test for community development financing.

Intermediate banks would be evaluated and assigned conclusions reflecting

their performance under these tests in their

facility-based assessment area of “Outstanding”; “High Satisfactory”;

“Low Satisfactory”; “Needs to Improve”; or

“Substantial Noncompliance.”

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

banks

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

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

A “facility-based assessment area” is an area that encompasses or is adjacent

to deposit-taking facilities, including main

offices, branches, and deposit-taking ATMs

and other remote service facilities.

Intermediate banks may delineate facility-

based areas of part of a county.

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

“outside retail lending area”

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

retail lending is outside their facility-based

assessment areas.

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

lending relative to its deposit base in its

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

ratio for all reporting banks with at least one

branch in the same facility-based assessment area.

Second, the agencies will evaluate the geographic distribution and

borrower distribution of a bank’s

major product lines in the bank’s

Retail Lending Test Areas (i.e., the

bank’s facility-based

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

retail lending area) using a series of metrics

and benchmarks.

After the agency determines a recommended conclusion for the Retail Lending

Test Area, the agency

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

in which the retail lending

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

retail lending performance, or in which the

benchmarks may not appropriately represent the credit needs and opportunities

in an area.

Banks will receive consideration for any qualified community development

loans, investments, or services, regardless of

location.

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

development investments,

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

assessment areas will depend on the adequacy of

the bank's responsiveness to community development needs and opportunities

within the bank's facility-based assessment

areas and applicable performance context information.

The New CRA Regulations codify agency interpretations under the

former CRA regulations, and provide 11

community development categories.

The agencies will evaluate the extent to

which a bank’s community development

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

community development needs.

An intermediate bank's community development test performance is evaluated

pursuant to

the following criteria:

•

the number and dollar amount of community development loans;

•

the number and dollar amount of community development investments;

•

the extent to which the bank provides community development services; and

•

the bank's responsiveness through community development loans, community

development investments, and

community development services to community development needs.

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

retail lending remains a core part of a bank's

affirmative obligation under the CRA to meet the credit

needs of their entire communities. At the same time, the agencies

recognize that, compared to large banks, intermediate banks

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

have a more limited capacity to conduct community development activities,

and may focus on the local communities where

their branches are located.”

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

capacity to conduct community development financing, as they

do under the current approach.

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

that apply to banks with assets of

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

banks with assets greater than $10 billion.

Table of Contents

Overdrafts

The federal bank regulators have updated their guidance several times on

overdrafts, including overdrafts incurred at ATMs

and point of sale terminals.

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

with

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

on overdraft and not sufficient funds

fees.”

Among other things, the federal regulators require banks to monitor

accounts and to limit the use of overdrafts by

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

example, giving customers who overdraw their accounts

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

period, a reasonable opportunity to choose a less

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

coverage.

It also encourages placing appropriate

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

fees for transactions that overdraw an

account by de minimis amounts.

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

of various

litigation against banks in various jurisdictions. The federal bank

regulators continue to consider responsible small dollar

lending, including overdrafts and related fee issues and issued principles

for offering small-dollar loans in a responsible

manner on May 20, 2020.

CFPB Consumer Financial Protection Circular 2022-06 (Oct. 26,

2022) concluded that overdraft fee practices must comply

with Regulation Z, Regulation E, and the prohibition against unfair,

deceptive, and abusive acts or practices in Section 1036

of the Consumer Financial Protection Act.

Further, overdraft fees assessed by financial institutions

on transactions that a

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

with these other consumer laws and

regulations.

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

effective October

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

District of Mississippi.

Among other things, this rule

limits overdraft charges to $5 in most cases.

Residential Mortgages

CFPB regulations require that lenders determine whether a consumer

has the ability to repay a mortgage loan.

These

regulations establish certain minimum requirements for creditors when

making ability to repay determinations, and provide

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

and are not “higher-priced.”

Generally,

these CFPB regulations apply to all consumer,

closed-end loans secured by a dwelling including home-purchase loans,

refinancing and home equity loans—whether first or subordinate lien.

Qualified mortgages must generally satisfy detailed

requirements related to product features, underwriting standards,

and requirements where the total points and fees on a

mortgage loan cannot exceed specified amounts or percentages of the total

loan amount.

Qualified mortgages must have:

(1) a term not exceeding 30 years; (2) regular periodic payments that do not result in

negative amortization, deferral of

principal repayment, or a balloon payment; (3) and be supported with documentation

of the borrower and its credit.

December 10, 2020, the CFPB issued final rules related to “qualified mortgage”

loans. Lenders are required under the law

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

lenders make those loans. Loans that meet

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

to repay.

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

(the “2018 Growth Act”) provides that

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

in consolidated assets automatically are

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

requirements to satisfy the criteria listed

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

safe harbor may not have negative

amortization, must follow prepayment penalty limitations included

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

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

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

The CFPB’s mortgage servicing

standards

include requirements regarding force-placed insurance,

certain notices prior to rate adjustments on adjustable-rate

mortgages, and periodic disclosures to borrowers. Servicers are prohibited

from processing foreclosures when a loan

modification is pending, and must wait until a loan is more than 120 days delinquent

before initiating a foreclosure action.

Servicers must provide borrowers with direct and ongoing access to its personnel,

and provide prompt review of any loss

mitigation application. Servicers must maintain accurate and accessible mortgage

records for the life of a loan and until one

year after the loan is paid off or transferred. These standards increase the

cost and compliance risks of servicing mortgage

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

collateral or the proceeds we may realize

from the sale of foreclosed property.

We focus our

residential mortgage origination on qualified mortgages and those that meet our

investors’ requirements, but

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

mortgages.”

Table of Contents

The Federal Housing Finance Authority (“FHFA”)

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

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

(individually and collectively,

“GSE”). Among these,

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

These rules include the kinds of loan defects that could

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

mortgage loan originator or seller.

The FHFA also has updated

these GSEs’ representations and warranties framework and provided an independent

dispute

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

after the GSEs’ quality control and appeal

processes have been exhausted.

The Bank is subject to the CFPB’s integrated

disclosure rules under the Truth in Lending Act and

the Real Estate

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

secured by real property.

Our residential mortgage

strategy, product

offerings, and profitability may change as these regulations are interpreted

and applied in practice, and

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

the resolution of their conservatorships.

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

for a mortgage, if an additional creditor

offers a consumer a second offer with a lower annual percentage

rate. Congress encouraged federal regulators to provide

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

for consumers and bankers alike. The law also

provides partial exemptions from the collection, recording and reporting requirements

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

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

closed-end mortgages or less than

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

the bank’s rating under the CRA for the

two years has been at least “satisfactory.”

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

Growth Act on August 31, 2018.

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

As a result, the Bank is not

obligated to make any advances to Fannie Mae on principal and interest

on such mortgage loans where the borrower is

entitled to forbearance.

CARES Act Loan Modifications and Forbearance

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

on March 27, 2020.

Section 4013

of that Act allowed banks to temporarily suspend certain GAAP requirements

for restructured loans in light of the effects of

the COVID-19 pandemic.

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

Interagency Statement and later guidance encouraging banks to work

prudently with borrowers on covered modifications.

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

residential mortgage loans sold to Fannie Mae to

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

during the pandemic.

During forbearance,

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

if all contractual payments were fully and timely

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

or related evictions or sales until March

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

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

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

Mae pursuant to the CARES Act and the

Interagency Statement.

Anti-Money Laundering, Countering the Financing of Terrorism

and Sanctions

Under the Uniting and Strengthening America by Providing Appropriate Tools

Required to Intercept and Obstruct

Terrorism Act of 2001

(the “USA PATRIOT

Act”), financial institutions are subject to prohibitions against specified

financial transactions and account relationships, as well as to enhanced

due diligence and “know your customer” standards

in their dealings with foreign financial institutions and foreign customers.

The USA PATRIOT

Act requires financial institutions to establish anti-money laundering

programs, and sets forth

minimum standards, or “pillars” for these programs, including:

●

the development of internal policies, procedures, and controls;

●

the designation of a compliance officer;

●

an ongoing employee training program;

●

an independent audit function to test the programs; and

●

ongoing customer due diligence and monitoring.

Table of Contents

The International Money Laundering Abatement and Anti-Terrorism

Funding Act of 2001 specifies “know your customer”

requirements that obligate financial institutions to take actions to verify

the identity of the account holders in connection

with opening an account at any U.S. financial institution.

Bank regulators are required to consider compliance with anti-

money laundering laws in acting upon merger and acquisition

and other expansion proposals under the BHC Act and the

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

in an amount equal to twice the sum involved in

the violating transaction, up to $1 million.

Federal Financial Crimes Enforcement Network (“FinCEN”) rules

require banks to know the beneficial owners of

customers that are not natural persons, update customer information

in order to develop a customer risk profile, and

generally monitor such matters.

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

Statement on Risk-Focused Bank

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

Banks that operate in compliance with applicable law,

properly manage customer relationships and effectively

mitigate risks by implementing controls commensurate with the

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

banking services.

Examiners review risk

management practices to evaluate and assess whether a bank has developed

and implemented effective processes to

identify, measure,

monitor, and control risks.

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

AML/BSA enforcement guidance and

clarifying that isolated or technical violations or deficiencies are

generally not considered the kinds of problems that would

result in an enforcement action.

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

the

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

program. It describes how the agencies

incorporate the customer due diligence regulations and recordkeeping

requirements issued by the United States. Department

of the Treasury (“Treasury”)

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

program.

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

rule that would amend the

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

lower the applicable threshold from $3,000 to

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

convertible virtual currencies and digital

assets with legal tender status.

This rule remained a proposal in FinCEN’s

Semiannual Agenda published August 16, 2024.

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

Act of 2020 and the Corporate Transparency Act

(collectively, the

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

programs. Among

other things, the AML Act:

●

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

and foreign entities conducting

business in the U.S.;

●

increases potential fines and penalties for BSA violations and improves

whistleblower incentives;

●

codifies the risk-based approach to AML compliance;

●

modernizes AML systems;

●

expands the duties and powers FinCEN; and

●

emphasizes coordination and information-sharing among financial institutions,

U.S. financial regulators and

foreign financial regulators.

FinCEN regulation 31 C.F.R.

101.380 implements the Corporate Transparency

Act (the “CTA”), and became

effective on

January 1, 2024.

These regulations require entities to report information about their

beneficial owners and the individuals

who created the entity (together, “beneficial ownership

information” or “BOI”).

FinCEN explained that the rule would help

protect the U.S. financial system from illicit use by making it more difficult

for bad actors to conceal their financial

activities through entities with opaque ownership structures.

FinCEN also explained that the proposed reporting obligations

would provide essential information to law enforcement and others to help

prevent corrupt actors, terrorists, and

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

The new rules expand financial institutions’

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

information and verify the beneficial

ownership of legal entities.

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

requirements to report their

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

anti-money laundering diligence activities and

costs.

Table of Contents

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

Texas Top

Cop Shop, Inc. v.

Garland

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

District of Texas issued a separate

nationwide injunction

of the CTA and

the Beneficial

Ownership Information Reporting Rule (BOI Reporting Rule) in

Smith v. U.S. Department

of the Treasury

, which remined in effect as of January 2025.

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

injunction.

This Alert confirmed

that reporting companies are not currently required to file beneficial ownership

information and are not subject to liability if

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

Bills have been introduced in Congress to repeal the CTA,

and it is unknown whether these will pass or if the

Administration will continue to defend the litigation challenging the

CTA.

Most recently, the Protect Small Business from

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

extend the compliance deadline to December 31,

2025 for submitting BOI for entities existing before 2024.

FinCEN published a request for information and comment on December

15, 2021 seeking ways to streamline, modernize

the United States AML and countering the financing of terrorists.

The United States has imposed various sanctions upon foreign

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

Venezuela,

and certain of their government officials and persons.

Banks are required to comply with these sanctions, which

require additional customer screening and transaction monitoring.

Russia’s February 2022 invasion

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

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

bank regulators have issued alerts that

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

the invasion.

FinCEN has issued four alerts on

potential Russian illicit financial activity since February 2022.

On January 25, 2023, FinCEN issued an alert to financial

institutions on potential investments in the U.S. commercial real estate sector by

sanctioned Russian elites, oligarchs, their

family members, and the entities through which they act. The alert listed potential

red flags and typologies involving

attempted sanctions evasion in the commercial real estate sector,

and reminds financial institutions of their Bank Secrecy

Act (BSA) reporting obligations.

On February 6, 2025, the DoJ ended Task

Force Klepto Capture, which was established

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

restrictions taken against Russian financial

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

and anti-money laundering measures

and efforts to use cryptocurrency to evade U.S. sanctions.

Other Laws and Regulations

The Company is also required to comply with various corporate governance

and financial reporting requirements under the

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

adopted by the SEC, the Public Company Accounting

Oversight Board and Nasdaq. In particular,

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

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

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

FDIC rules on internal controls, and

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

compliance with these rules.

If the Company fails

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

affect its reputation, its ability to obtain the

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

and other financial institutions with which

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

sell Company securities on terms and conditions

acceptable to the Company.

The Company’s assessment of its financial reporting

controls as of December 31, 2024 is

included in this report with no material weaknesses reported.

Table of Contents

Capital

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

companies and state member banks, respectively.

These guidelines required, beginning December 31, 2019, a minimum

ratio of capital to risk-weighted assets (including

certain off-balance

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

totaling 10.5%.

Tier 1

capital includes common equity and related retained earnings and

a limited amount of qualifying preferred stock, less

goodwill and certain core deposit intangibles.

Voting

common equity must be the predominant form of capital.

Tier 2

capital consists of non–qualifying preferred stock, qualifying subordinated,

perpetual, and/or mandatory convertible debt,

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

unrealized holding gains on available for

sale equity securities with readily determinable market values that are

prudently valued, and a limited amount of general

loan loss allowance. Tier 1 and Tier

2 capital equals total capital.

In addition, the Federal Reserve has established minimum leverage

ratio guidelines for bank holding companies not subject

to the Small BHC Policy, and

state member banks, which provide for a minimum leverage ratio of Tier

1 capital to adjusted

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

However, bank regulators expect banks and bank

holding

companies to operate with a higher leverage ratio.

The guidelines also provide that institutions experiencing internal

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

substantially above the minimum

supervisory levels without significant reliance on intangible assets.

Higher capital may be required in individual cases and

depending upon a bank holding company’s

risk profile.

All bank holding companies and banks are expected to hold capital

commensurate with the level and nature of their risks including the volume

and severity of their problem loans.

Lastly, the Federal Reserve’s

guidelines indicate that the Federal Reserve will continue to consider

a “tangible Tier 1

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

expansion or new activities.

The level of Tier 1

capital to risk-adjusted assets is becoming more widely used by the bank regulators

to measure capital adequacy.

The

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

leverage ratio or tangible Tier 1

leverage ratio applicable to them. Under Federal Reserve policies, bank holding

companies are generally expected to

operate with capital positions well above the minimum ratios. The Federal

Reserve believes the risk-based ratios do not

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

market and operational risks. Accordingly,

supervisory assessments of capital adequacy may differ

significantly from conclusions based solely on the level of an

organization’s

risk-based capital ratio.

The Federal Deposit Insurance Corporation Improvement Act of 1991

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

banking agencies to take “prompt corrective action” regarding depository

institutions that do not meet minimum capital

requirements.

FDICIA establishes five capital tiers: “well capitalized,” “adequately capitalized,”

“undercapitalized,”

“significantly undercapitalized” and “critically undercapitalized.”

A depository institution’s capital tier will depend

upon

how its capital levels compare to various relevant capital measures and

certain other factors, as established by regulation.

See

“Prompt Corrective Action Rules.”

Basel III Capital Rules

The Federal Reserve and the other federal bank regulators adopted

in June 2013 final capital rules for bank holding

companies and banks implementing the Basel Committee on Banking

Supervision’s “Basel III: A Global

Regulatory

Framework for more Resilient Banks and Banking Systems.”

These U.S. capital rules are called the “Basel III Capital

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

These are included in Federal Reserve Regulation Q.

The Basel III Capital Rules generally limit Tier

1 capital to common stock and noncumulative perpetual preferred stock.

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

Equity Tier I Capital” or “CET1.”

CET1

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

to certain adjustments, minority common equity

interests in subsidiaries.

CET1 is reduced by deductions for:

●

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

which are treated separately,

net

of associated deferred tax liabilities (“DTLs”);

●

Deferred tax assets (“DTAs”)

arising from operating losses and tax credit carryforwards net of allowances

and

DTLs;

●

Gains on sale from any securitization exposure; and

●

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

associated DTLs.

The Company made a one-time election in 2015 and, as a result, the Company’s

CET1 is not adjusted for certain

accumulated other comprehensive income (“AOCI”).

Table of Contents

Additional “threshold deductions” of the following that are

individually greater than 10% of CET1 or collectively greater

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

●

MSAs, net of associated DTLs;

●

DTAs arising from

temporary differences that could not be realized through net operating

loss carrybacks, net of

any valuation allowances and DTLs; and

●

Significant common stock investments in unconsolidated financial institutions,

net of associated DTLs.

Noncumulative perpetual preferred stock and Tier

1 minority interest not included in CET1, subject to limits, will qualify as

additional Tier I capital.

All other qualifying preferred stock, subordinated debt and qualifying minority

interests will be

included in Tier 2 capital.

The various capital elements and total capital requirements under

the Basel III Capital Rules are:

Fully Phased in

January 1, 2019

Minimum CET1

4.50%

CET1 Conservation Buffer

2.50%

Total CET1

7.0%

Deductions from CET1

100%

Minimum Tier 1 Capital

6.0%

Minimum Tier 1 Capital

plus

conservation buffer

8.5%

Minimum Total

Capital

8.0%

Minimum Total

Capital

plus

conservation buffer

10.5%

Table of Contents

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

label mortgage securities, trust

preferred CDOs and asset backed securities;

●

Retained existing risk weights for residential mortgages, but assign a 100%

risk weight to most commercial real

estate loans and a 150% risk-weight for HVCRE;

●

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

exposures and residential mortgages);

●

Assigned a 250% risk weight to DTAs,

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

●

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

●

Increased the risk weight for exposures to qualifying securities firms from

20% to 100%.

HVCRE Risk Weight

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

effective April 1, 2020, to implement Section 214

of the 2018 Growth Act.

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

that is

an acquisition construction or development loan.

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

property made after December 31, 2014 that:

●

primarily finance or refinance the acquisition, development, or construction

of real property;

●

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

property into income producing

property; and

●

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

refinancing of, such real

property.

Various

exclusions from HVCRE are specified.

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

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

to the appraised as completed value, which is

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

HVCRE loans are assigned a 150% risk weight.

Table of Contents

Capital Conservation Buffer

Full compliance with the capital conservation buffer

was required beginning January 1, 2019.

Thereafter, permissible

dividends, stock repurchases and discretionary bonuses will be

limited to the following percentages based on the capital

conservation buffer as calculated above, subject to

any further regulatory limitations, including those based on risk

assessments and enforcement actions:

Capital Conservation

Buffer %

Buffer % Limit

More than 2.50%

None

> 1.875% - 2.50%

60.0%

> 1.250% - 1.875%

40.0%

> 0.625% - 1.250%

20.0%

≤ 0.625

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

adopted an interim final rule that

amended the capital conservation buffer.

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

for

purposes of the maximum payout ratio to allow banking organizations

to more freely use their capital buffers to promote

lending and other financial intermediation activities, by making the

limitations on capital distributions more gradual. The

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

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

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

distributions and associated tax effects not reflected in net

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

Banking organizations were encouraged to

make prudent capital distribution decisions.

Regulatory Capital Changes

Simplification

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

capital rules.

The last of these changes

become effective on April 1, 2020.

The principal changes for standardized approaches institutions, such

the Company and

the Bank are:

●

Deductions from capital for certain items, such as temporary difference

DTAs, MSAs and investments

unconsolidated subsidiaries were decreased to those amounts that individually

exceed 25% of CET1;

●

Institutions can elect to deduct investments in unconsolidated subsidiaries or subject

them to capital requirements;

and

●

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

1 capital and (iii) total capital.

Effects of CECL Accounting Changes

The Financial Accounting Standards Board’s

(“FASB”) Accounting

Standards Update (“ASU”) No. 2016-13 “Financial

Instruments – Credit Losses (Topic

326): Measurement of Credit Losses on Financial Instruments” on

June 16, 2016, which

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

in place of the incurred loss method.

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

of expected credit losses using the CECL

methodology, and updated

concepts and practices in existing supervisory guidance that remain applicable.

The Company

adopted CECL effective beginning January 1, 2023

and the Company recognized all effects on its regulatory capital

in the

year of adoption.

Table of Contents

Prompt Corrective Action Rules

All of the federal bank regulatory agencies’ regulations establish risk-adjusted

measures and relevant capital levels that

implement the “prompt corrective action” standards.

The relevant capital measures are the total risk-based capital ratio,

Tier 1 risk-based capital ratio, Common

equity tier 1 capital ratio, as well as the leverage capital ratio.

Under the

regulations, a state member bank will be:

●

well capitalized if it has a total risk-based capital ratio of 10% or greater,

a Tier 1 risk-based capital ratio of 8% or

greater, a Common equity tier 1 capital ratio

of 6.5% or greater, a leverage capital ratio of

5% or greater and is not

subject to any written agreement, order,

capital directive or prompt corrective action directive by a federal bank

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

●

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

a Tier 1 risk-based capital ratio

of 6.0% or greater, a Common Equity Tier

1 capital ratio of 4.5% or greater, and generally

has a leverage capital

ratio of 4.0% or greater;

●

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

a Tier 1 risk-based capital ratio of less

than 6.0%, a Common Equity Tier 1 capital

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

than 4.0%;

●

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

6.0%, a Tier 1 risk-based

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

1 capital ratio of less than 3%, or a leverage capital ratio of

less than 3.0%; or

●

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

to total assets.

The federal bank regulatory agencies have authority to require additional

capital where they determine it is necessary,

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

bank is determined to have less than a satisfactory

rating on any of its CAMELS ratings. The regulators have confirmed that

higher capital levels may be required in light of

market conditions and risk.

Depository institutions that are “adequately capitalized” for bank

regulatory purposes must receive a waiver from the FDIC

prior to accepting or renewing brokered deposits, and cannot pay interest

rates or brokered deposits that exceeds market

rates by more than 75 basis points.

Banks that are less than “adequately capitalized” cannot accept or renew

brokered

deposits.

FDICIA generally prohibits a depository institution from making any capital

distribution, including paying

dividends or any management fee to its holding company,

if the depository institution thereafter would be

“undercapitalized”.

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

required to submit a

capital restoration plan for approval.

A depository institution’s parent

holding company must guarantee that the institution will comply with such capital

restoration plan.

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

5% of the depository

institution’s total assets at the time

it became undercapitalized and the amount necessary to bring the institution

into

compliance with applicable capital standards.

If a depository institution fails to submit an acceptable plan, it is treated

as if

it is “significantly undercapitalized”.

If the controlling holding company fails to fulfill its obligations under FDICIA and

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

the claim against the holding company’s

capital

restoration obligation would be entitled to a priority in such bankruptcy

proceeding over third-party creditors of the bank

holding company.

Significantly undercapitalized depository institutions may be subject

to a number of requirements and restrictions,

including orders to sell sufficient voting stock to

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

cessation of receipt of deposits from correspondent banks.

“Critically undercapitalized” institutions are subject to the

appointment of a receiver or conservator.

Because the Company and the Bank exceed applicable capital requirements,

Company and Bank management do not believe that the prompt corrective

action provisions of FDICIA have had or are

expected to have any material effect on the Company

and the Bank or their respective operations.

Table of Contents

Dividends and Distributions

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

Federal Reserve Regulation Q limits “distributions,”

including discretionary bonus payments from eligible retained

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

capital conservation buffer of common equity Tier

1 capital (“CET1”) exceeds 2.5%. “Distributions” include dividends

declared or paid on common stock, discretionary bonuses and stock

repurchases, redemptions or repurchases of Tier 2

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

“Eligible retained income” for the Bank

and other Federal Reserve regulated institutions is the greater of:

●

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

tax effects not already

reflected in net income; or

●

the average net income over the preceding four quarters.

The Company’s primary source

of cash is dividends from the Bank.

The Bank’s Call Report are used for its calculation

“eligible retained income.”

The Bank’s capital conservation

buffer exceeded 2.5% at December 31, 2024.

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

framework for prompt corrective action. To

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

equity Tier 1, total risk-based, Tier

1 risk-

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

following table. Management has not received any notification from the

Bank's regulators, which changes the Bank’s

regulatory capital status.

Prior regulatory approval also is required by statute if the total of all dividends

declared by a state member bank (such as

the Bank) in any calendar year will exceed the sum of such bank’s

net profits for the year and its retained net profits for the

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

During 2024, the Bank paid total cash dividends of

approximately $3.8 million to the Company.

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

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

of $9.7 million.

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

policies and requirements relating to the

payment of dividends, including requirements to maintain capital above

regulatory minimums. The appropriate federal and

state regulatory authorities are authorized to determine when the payment

of dividends would be an unsafe or unsound

practice, and may prohibit such dividends. The Federal Reserve has indicated

that paying dividends that deplete a state

member bank’s capital base

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

The Federal Reserve

has indicated that depository institutions and their holding companies should

generally pay dividends only out of current

year’s operating earnings.

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

consolidated financial

statements.

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

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

payments, stock redemptions and stock repurchases.

Prior consultation with the Federal Reserve supervisory staff is

required before:

●

redemptions or repurchases of capital instruments when the bank

holding company is experiencing financial

weakness; and

●

redemptions and purchases of common or perpetual preferred stock

which would reduce such Tier 1 capital at end

of the period compared to the beginning of the period.

Table of Contents

Bank holding company directors must consider different

factors to ensure that its dividend level is prudent relative to

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

scenarios, such as potential events

that could affect its ability to pay,

while still maintaining a strong financial position. As a general matter,

the Federal

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

should consult with the Federal Reserve and

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

dividends if:

●

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

previously paid during that

period, is not sufficient to fully fund the dividends;

●

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

current and prospective

financial condition; or

●

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

adequacy ratios.

Community Bank Leverage Ratio Framework

Section 201 of the 2018 Growth Act provides that banks and bank holding

companies with consolidated assets of less than

$10 billion that meet a “community bank leverage ratio,” established by

the federal bank regulators as part of the

community bank leverage ratio framework (“CBLR”).

The federal banking agencies have the discretion to determine

that

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

risk profile may be assessed by

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

derivatives’ exposure, and other methods.

The CBLR framework which became effective

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

measure capital adequacy.

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

and is

intended to reduce regulatory burdens for qualifying community

banking organizations that do not use advanced

approaches capital measures, and otherwise qualify.

Eligible institutions must have:

●

less than $10 billion of assets;

●

a leverage ratio greater than 9%;

●

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

●

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

assets.

The CBLR leverage ratio is Tier 1 capital divided

by average total consolidated asset for the latest quarter,

taking into

account the capital simplification discussed above and the CECL related capital

transitions.

A CBLR banking organization with a ratio above the requirement

will not be subject to other capital and leverage

requirements.

If elected by a banking organization, The CBLR leverage

ratio will be the sole capital measure, and electing

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

purposes.

The Company has not

adopted the CBLR, although it believes it is eligible to elect to use the CBLR framework.

Management believes that

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

Company’s earning assets in a manner

most

comparable to other banking organizations and which

may be useful to investors.

It may consider the CBLR in the future.

FDICIA

FDICIA directs that each federal bank regulatory agency prescribe standards

for depository institutions and depository

institution holding companies relating to internal controls, information

systems, internal audit systems, loan documentation,

credit underwriting, interest rate exposure, asset growth composition,

a maximum ratio of classified assets to capital,

minimum earnings sufficient to absorb losses, a minimum

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

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

regulatory agencies deem appropriate.

Table of Contents

Enforcement Policies and Actions

The Federal Reserve and the Alabama Superintendent examine and

regulate our compliance with laws and regulations,

including the CFPB’s regulations.

The CFPB issues regulations, interpretations and enforcement actions

under the laws

applicable to consumer financial products and services.

Violations of laws and regulations, including

those administered by

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

Reserve and the Alabama Superintendent

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

or taking other formal or informal enforcement actions.

Under certain circumstances, these agencies may enforce

these remedies directly against officers, directors, employees and

others participating in the affairs of a bank or bank holding

company, in the form of fines, penalties,

or the recovery, or

claw-back, of compensation.

Fiscal and Monetary Policies

Banking is a business that depends on interest rate differentials.

In general, the difference between the interest paid by

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

a bank on its loans and securities holdings,

constitutes the major portion of a bank’s

earnings.

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

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

liabilities are subject to the influence of

economic conditions generally,

both domestic and foreign, and also to the monetary and fiscal policies of the

United States

and its agencies, particularly the Federal Reserve.

The Federal Reserve regulates the supply of money through various

means, including open market dealings in United States government

securities, the setting of discount rate at which banks

may borrow from the Federal Reserve, and the reserve requirements

on deposits.

The Federal Reserve has been paying interest on depository institutions required

and excess reserve balances since October

2008.

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

Federal Reserve greater scope to use its

lending programs to address conditions in credit markets while also maintaining

the federal funds rate close to the target

rate established by the Federal Open Market Committee.

The Federal Reserve has indicated that it may use this authority to

implement a mandatory policy to reduce excess liquidity,

in the event of inflation or the threat of inflation.

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

Requirements of Depository Institutions)

authorizing the Reserve Banks to offer term deposits to

certain institutions.

Term deposits, which

are deposits with

specified maturity dates, will be offered through a Term

Deposit Facility.

Term deposits will be one

of several tools that

the Federal Reserve could employ to drain reserves when policymakers

judge that it is appropriate to begin moving to a less

accommodative stance of monetary policy.

In 2011, the Federal Reserve repealed its historical

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

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

and the stress in U.S. financial markets,

the Federal Reserve, Congress and the Department of the Treasury

took a host of fiscal and monetary measures. In March

2020, the Federal Reserve reduced the federal funds rate target

twice to 0-0.25%. The Federal Reserve established various

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

help stabilize the financial system and purchased

large amounts of government and government agency

mortgaged backed securities.

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

inflation as “transitory,” but

as inflation

continued at increasing rates the Federal Reserve’s

policy changed.

The Federal Reserve announced a 25 basis point

increase in the target federal funds range on March 17,

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

0-0.25%.

Further increases were announced in 2022: 50 basis points on May 4, 75 basis points on

each of June 15, July 27,

September

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

During 2023, the Federal Reserve announced

additional target rate increases of 25 basis points on

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

The

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

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

-5.00%.

Two other reductions in November

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

Table of Contents

The Federal Reserve’s securities

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

from $3.9 trillion in

early March 2020 to $9.0 trillion at April 11,

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

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

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

its securities holdings in an effort to reduce inflation:

●

Reinvestments of principal of maturing Treasury

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

months and thereafter would be $60 billion per month.

●

Reinvestments of principal of maturing agency debt and agency mortgage

-backed securities would be reduced by

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

per month.

●

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

balance sheet was somewhat above the

balance it deemed ample.

On May 4, 2024, the Federal Reserve’s

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

in June

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

reducing the monthly redemption cap on Treasury

securities from $60 billion to $25 billion.

The Committee maintained the monthly redemption cap on agency debt

and

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

remaining principal amounts of maturing securities

in Treasury securities.

The Federal Reserve’s SOMA was $6.4

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

February 28, 2024.

The Federal Reserve seeks to maintain maximum employment and

targets longer term inflation of 2% based on annual

changes in the personal consumption expenditures.

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

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

The economic outlook is uncertain, and the

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

remained above that rate through February

2024.

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

to reduce its target federal funds rate

further at this time.

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

market rates, liquidity issues at two

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

Bank Term Funding

Program

(“BTFP”).

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

credit unions, and other eligible

depository institutions pledging U.S. Treasuries,

agency debt and mortgage-backed securities, and other qualifying

assets as

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

The BTFP expires March 11, 2024, except for

loans outstanding prior to its expiration.

The Company did not participate in the BTFP in 2023.

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

obtain liquidity against a wide range of

collateral through the Federal Reserve’s

discount window,

which was available with the same collateral margins as the

BTFP,

but which offers loans of up to 90 days.

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

values, collateral margins subsequently have been reduced

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

amount of discount depending on the type of collateral.

FDIC Insurance Assessments

The Bank’s deposits are insured

by the FDIC’s DIF,

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

Since 2011, and as discussed above under “Recent

Regulatory Developments”, the FDIC has been calculating assessments

based on an institution’s average

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

accordance with changes mandated by the Dodd-Frank Act.

The FDIC changed its assessment rates which shifted part of

the burden of deposit insurance premiums toward depository institutions relying

on funding sources other than deposits.

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

all risk categories and now uses “financial

ratios method” based on CAMELS composite ratings to determine assessment

rates for small established institutions with

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

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

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

All basis points are annual amounts.

Table of Contents

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

as the Bank, for the first assessment period

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

Established Small Institution

CAMELS Composite

1 or 2

4 or 5

Initial Base Assessment Rule

5 to 18 basis points

8 to 32 basis points

18 to 32 basis points

Unsecured Debt Adjustment.

Cannot exceed the lesser of 5

basis points or 50% of the

bank’s initial FDIC

assessment rate

-5 to 0 basis points

Brokered Deposit

Adjustment

N/A

Total Base Assessment

Rate

2.5 to 18 basis points

4 to 32 basis points

13 to 32 basis points

As shown above. these assessments are adjusted based on the bank’s

CAMELS rating.

For example, Small Banks, with

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

for the period to be billed in June

2023.

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

banks with more than $5

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

to insure all depositors in connection with the

March 2023 failures of Silicon Valley

Bank and Signature Bank.

These special assessments do not apply to the Bank.

The minimum FDIC’s DIF reserve

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

The FDIC Board of directors is

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

a reserve ratio before the beginning of each

calendar year.

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

FDI Act

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

grants the Board sole discretion in

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

The reserve ratio reached 1.36% on

September 30, 2018, exceeding the minimum requirement.

As a result, deposit insurance surcharges on Large

Banks

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

the FDIC for their portion of assessments

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

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

received and applied against the Bank’s

deposit insurance assessments during 2019 and 2020.

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

due to the pandemic and government

stimulus, the DIF’s reserve ratio declined

below 1.35% to 1.30%. The FDIC issued a restoration plan on September

15,

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

of 1.35% within 8 years. Although the FDIC, at

that time, maintained its then current assessment rates, the FDIC may increase

deposit assessment rates by up to two basis

points without notice, or more following notice and a comment period,

to meet the required reserve ratio.

The designated

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

The Company recorded FDIC insurance premiums expenses of $0.5 million

for both 2024 and 2023, respectively,

which

reflects the FDIC’s amended

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

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

Table of Contents

CRE and Leveraged Loans

CRE

The federal bank regulatory agencies released guidance in 2006

on “Concentrations in Commercial Real Estate Lending”

(the “CRE Guidance”).

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

land development and

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

property, and non-farm nonresidential

property

where the primary or a significant source of repayment is derived from

rental income associated with the property (that is,

loans for which 50% or more of the source of repayment comes from

third party, non-affiliated,

rental income) or the

proceeds of the sale, refinancing, or permanent financing of this property.

Loans to REITs and unsecured

loans to

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

also be considered CRE loans under the CRE

Guidance.

Loans on owner occupied CRE are generally excluded.

In December 2015, the Federal Reserve and other bank

regulators issued an interagency statement to highlight prudent risk

management practices from existing guidance that

regulated financial institutions and made recommendations regarding

maintaining capital levels commensurate with the

level and nature of their CRE concentration risk.

The CRE Guidance requires that banks have appropriate processes be in

place to identify, monitor

and control risks

associated with real estate lending concentrations.

This could include enhanced strategic planning, CRE underwriting

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

risk exposure limits as well as appropriately

designed compensation and incentive programs.

Higher allowances for loan losses and capital levels may also be required.

The CRE Guidance is triggered when either:

●

Total reported loans

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

total capital;

●

Total reported loans

secured by multifamily and nonfarm nonresidential properties and loans for

construction, land

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

total risk-based capital.

This CRE Guidance was supplemented by the Interagency Statement on

Prudent Risk Management for Commercial Real

Estate Lending (December 18, 2015).

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

has significant concentrations of CRE secured by a particular property

type. See “Management’s Discussion and Analysis

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

concentrations of the various types of CRE

loans.

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

and land development loans and $324.0

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

approximately 73% and 286%,

respectively, of

the Bank’s total risk-based capital at December

31, 2024.

The Company has always had significant

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

and the loan needs of both its retail

and commercial customers.

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

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

monitoring and administration

procedures, are generally appropriate to manage its concentrations as required

under the Guidance.

The Federal Reserve joined the other depository institution regulators in issuing

a Policy Statement on Prudent Commercial

Real Estate Loan Accommodations and Workouts

(June 30, 2023).

This Policy Statement builds on and updates existing

guidance to enable financial institutions to work prudently and constructively

with creditworthy borrowers during times of

financial stress.

The Policy Statement provides a broad set of risk management principles relevant

to CRE short term loan

accommodations and longer-term workouts in all

business cycles, particularly in challenging economic environments.

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

in assessing the adequacy of a

financial institution's risk management practices for loan accommodation

and workout activities.

Financial institutions that

implement prudent CRE loan accommodation and workout arrangements

after performing a comprehensive review of a

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

these efforts, even if these arrangements result

in modified loans that have weaknesses that result in adverse classification. In addition,

modified loans to borrowers who

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

subject to adverse classification solely

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

is less than the outstanding loan balance.

The

Policy Statement also describes the classifications of CRE loan accommodations

and workouts and addresses regulatory

accounting and reporting in such situations, including CECL.

Table of Contents

Leveraged Loans

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

Guidance on Leveraged Lending”

highlighting standards for originating leveraged transactions and managing

leveraged portfolios, as well as requiring banks

to identify their highly leveraged transactions, or HLTs.

The Government Accountability Office issued a statement on

October 23, 2017 that this guidance constituted a “rule” for purposes of the Congressional

Review Act, which provides

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

for signature by the President disapproving it.

No such action was taken, and instead, the federal bank regulators issued a September

11, 2018 “Statement Reaffirming the

Role of Supervisory Guidance.”

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

of law or provide

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

agencies’ views of supervisory expectations and

priorities, and appropriate practices.

The federal bank regulators continue to identify elevated risks in leveraged

loans and

shared national credits.

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

2024 or 2023 subject to the Interagency Guidance on Leveraged

Lending or that were shared national credits.

Other Dodd-Frank Act Provisions

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

a say on executive compensation.

Under the

Dodd-Frank Act, each company must give its shareholders the opportunity to

vote on the compensation of its executives, on

a non-binding advisory basis, at least once every three years.

The Dodd-Frank Act also adds disclosure and voting

requirements for golden parachute compensation that is payable to named

executive officers in connection with sale

transactions.

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

disclose in proxy materials for annual

shareholders meetings, information that shows the relationship between

executive compensation actually paid to their

named executive officers and their financial performance,

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

company’s stock and dividends or

distributions.

The Dodd-Frank Act also provides that a company’s

compensation

committee may only select a consultant, legal counsel or other advisor on methods

of compensation after taking into

consideration factors to be identified by the SEC that affect the independence

of a compensation consultant, legal counsel

or other advisor.

Section 954 of the Dodd-Frank Act added section 10D to the Exchange Act.

Section 10D directs the SEC to adopt rules

prohibiting a national securities exchange or association from listing a company

unless it develops, implements, and

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

compensation in certain circumstances.

In the event

of an accounting restatement due to material noncompliance with a financial

reporting requirement under the federal

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

any current or former executive officer,

any

incentive-based compensation (including stock options) received

during the three-year period preceding the date of the

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

financial statements.

There is no

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

and applies to all executive officers.

Section

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

CEO and CFO to return any bonus or other

incentive-

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

of similarly inaccurate financial

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

the period, if the restatement was due

to misconduct.

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

the Dodd-Frank Act requires the

Company to seek the return of compensation.

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

-1 under the Exchange Act, which requires each

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

awarded executive compensation.

The Commission approved Nasdaq Listing Rule 5608 (“Rule 5608”) on June

9, 2023.

Under Rule 10D-1, listed companies

must recover from current and former executive officers’

incentive-based compensation received during the three

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

an accounting restatement.

Table of Contents

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

compensation is required on a “no fault” basis,

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

responsibility for the erroneous financial

statements. A restatement due to material noncompliance with any financial

reporting requirement under the securities laws

triggers application of the recovery policy.

The determination regarding materiality of an error should be based on facts and

circumstances and existing judicial and administrative interpretations.

The proposed Nasdaq Rule requires recovery for

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

(commonly referred to as “Big R”

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

to previously issued financial statements

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

in the current report or the error correction

was recognized in the current period (commonly referred to as “little r” restatement).

Nasdaq-listed companies, such as the Company,

are required to recover the amount of incentive-based compensation

received by an executive officer that exceeds the amount the executive

officer would have received had the incentive-based

compensation been determined based on the accounting restatement,

computed without regard to any taxes paid.

Nasdaq

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

earned or vested based wholly or in part upon

the attainment of any “financial reporting measure.”

Incentive-based compensation is deemed received on or after October

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

specified in the incentive-based compensation

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

compensation occurs after the end of that period.

The Company adopted an Erroneously Awarded

Executive Incentive Based Compensation Policy effective

December 1,

2023 to comply with these rules.

The SEC adopted a rule in August 2013 to implement pay ratios pursuant to Section 953

of the Dodd-Frank Act comparing

their CEO’s total compensation to

the median compensation of all other employees.

These rules applied beginning to fiscal

year 2017 annual reports and proxy statements.

Smaller reporting companies, such as the Company,

are exempted from

this rule.

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

that each company disclose in the proxy materials

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

to purchase financial instruments designed to

hedge or offset decreases in the market value of equity

securities granted as compensation or otherwise held by the

employee or board member.

The SEC adopted changes to its Reg. S-K Item 407(i) implementing this Section.

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

any awards under that Plan as of February

12, 2025.

The Company’s insider trading policy,

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

and certain independent contractors and specified related persons (collectively,

“Covered Persons”).

This Policy prohibits

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

transactions involving Company “Derivative

Securities.”

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

put option contracts, including

straddles, and the like.

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

rights or

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

security, including Company Securities.

The

Company’s Insider Trading

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

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

arrangements that encourage inappropriate risk

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

may lead to material losses.

In June 2010, the

federal bank regulators adopted Guidance on Sound Incentive Compensation

Policies, which, although targeted to larger,

more complex organizations than the Company,

includes principles that have been applied to smaller organizations similar

to the Company.

This Guidance applies to incentive compensation to executives as well as employees, who,

“individually

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

to material amounts of risk.”

Incentive

compensation should:

●

Provide employees incentives that appropriately balance risk and reward;

●

Be compatible with effective controls and risk-management;

and

●

Be supported by strong corporate governance, including active and

effective oversight by the organization’s

board

of directors.

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

have less effect on smaller banking

organizations, which typically are less complex and make

less use of incentive compensation arrangements than larger

banking organizations.

Table of Contents

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

implementing Section 956 in April 2011,

which would have been applicable to, among others, depository

institutions and their holding companies with $1 billion or