10-K
AUBURN NATIONAL BANCORPORATION, INC (AUBN)
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, 2025
OR
☐
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
☐
No
☒
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
☐
No
☒
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
☒
No
☐
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
☒
No
☐
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
☐
No
☒
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:
$
55,287,550
as of June 30, 2025.
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 16, 2026.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual
Meeting of Shareholders, scheduled to
be held May 12, 2026, 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
4
ITEM 1A.
RISK FACTORS
27
ITEM 1B.
UNRESOLVED STAFF COMMENTS
36
ITEM 1C.
CYBERSECURITY
36
ITEM 2.
PROPERTIES
38
ITEM 3.
LEGAL PROCEEDINGS
39
ITEM 4.
MINE SAFETY DISCLOSURES
39
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
40
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
42
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
65
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
65
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
106
ITEM 9A.
CONTROLS AND PROCEDURES
106
ITEM 9B.
OTHER INFORMATION
107
ITEM 9C.
DISCLOSURE REGARDING FORGEIN JURISDICTIONS THAT PREVENT
INSPECTION
107
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
108
ITEM 11.
EXECUTIVE COMPENSATION
108
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
108
ITEM 13.
CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
108
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
108
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
109
ITEM 16.
FORM 10-K SUMMARY
110
Table of Contents
3
PART
I
SPECIAL CAUTIONARY NOTE REGARDING
FORWARD
-LOOKING STATEMENTS
Various
of the statements made herein under the captions “Business,” Properties,” “Risk Factors,”
“Management’s
Discussion and Analysis of Financial Condition and Results of Operations”,
“Quantitative and Qualitative Disclosures
about Market Risk”, 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 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 such as hurricanes, and tornados and floods, epidemics or
pandemics, supply chain disruptions and changes in consumer behaviors;
●
the effects of war, other conflicts or
attacks, 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, and consumer
and business confidence;
●
governmental fiscal and monetary policies and changes, including
taxes, the amount of federal deficit spending
and the debt to fund such spending, changes in monetary policies, including
changes in the Federal Reserve’s
target federal funds rate and 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%;
●
changes in market interest rates and the shape of the yield curve on changes in savings,
deposit and payment
behaviors, the levels, composition and costs of deposits, loan demand and mortgage
loan originations, and the
values and liquidity of and interest-sensitive assets and liabilities;
●
increases in market interest rates that may result in unrealized losses on our
securities portfolio, which adversely
affect our stockholders’ equity for financial reporting purposes and
our tangible equity;
●
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 products, including
stablecoin and other digital assets businesses, which 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 of digital assets, such as cyber
currency and stablecoins (including
rewards or other forms of payments functionally similar to interest), that
increases competition to banks, increases
risks to the payment systems, increases risks of fraud and theft of digital assets and their effects
on customers other
financial institutions, including our counterparties, and confidence
in the financial system, generally;
●
changes in banking, securities and tax laws, regulations and rules and their
application by the regulators, including
capital and liquidity requirements, and in the coverage and cost of FDIC deposit
insurance;
Table of Contents
4
●
legislative, executive branch and regulatory changes, including changes
in policy, leadership and personnel,
including reductions in the number and experience of personnel, at the bank
and securities regulators and the
CFPB, and the uncertain effects of all these, including the costs and
benefits of such changes;
●
the effects of the potential privatization and changes to Fannie Mae
and Freddie Mac and its purchases of
mortgage-backed securities on the mortgage markets and to us as an
originator, seller and servicer of residential
mortgage loans;
●
the assumptions, judgments and estimates made by the Company,
including those used in the Company’s CECL
models to establish our allowance for credit losses and asset impairments, as well as differences
in, and changes to,
economic, market and credit conditions, including changes in employment
levels and payment behaviors from
those used in our CECL models and loan portfolio reviews;
●
changes in accounting pronouncements and interpretations;
●
changes in borrower credit risks, and;
●
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 our technology or products that may be more difficult,
costly and risky, or less effective
than
anticipated;
●
threats of potential cyber-attacks and data breaches, in constantly changing
forms and increasing sophistication,
including through the use of artificial intelligence and state sponsorship
of the attacks;
●
the estimates that our future taxable income could be inaccurate, and if lower taxable
income is realized from our
operations, the amount of our deferred tax assets that we anticipate will be reduced;
●
our future earnings and “eligible retained earnings” over rolling four calendar
quarter periods may limit our
dividends, share repurchases and discretionary bonuses; and
●
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.
Table of Contents
5
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.
Services
The Bank operates its main office and 7 branches in Auburn, Opelika,
Notasulga, and Valley,
Alabama and a loan
production office in Phenix City,
Alabama.
We
evaluate the utilization of our existing facilities and customer preferences
for online and mobile banking.
In addition to opening our new main office in 2022, we closed one
branch office in Auburn
at the end of 2024, whose customers could be served conveniently and more
efficiently by another existing Bank branch.
The Bank offers checking, savings, transaction deposit accounts
and certificates of deposit, and is an active residential
mortgage lender in its primary service area.
The Bank’s primary service area includes
the cities of Auburn and Opelika,
Alabama and nearby surrounding areas in East Alabama, primarily
in Lee County.
The Bank also offers commercial,
financial, agricultural, real estate construction and consumer loan products,
and other financial services.
The Bank operates
ATM
machines in 8 locations in its primary service area.
The Bank offers Visa
®
Checkcards, which are debit cards with
the Visa logo that work like
checks and can be used anywhere Visa
is accepted, including ATMs.
The Bank’s Visa
Checkcards can be used internationally through the Plus
®
network.
The Bank offers online banking, bill payment, online
consumer account opening, 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 operates in a highly competitive market for loans, deposits and
other financial services in East Alabama,
including Lee County.
Based on FDIC deposit market share data as of June 30, 2025, the Bank held
the largest share of
deposits in Lee County.
The Bank competes with 20 national, regional and community banks with offices
in Lee County,
which operate offices in the local market and many have substantially greater
financial, technological and marketing
resources.
The Bank also competes with credit unions, mortgage lenders, insurance
companies, investment firms and other
financial service providers. In addition, financial services are increasingly
offered through digital and online platforms by
institutions that may not maintain a physical presence in our market.
Many larger financial institutions have advantages over
the Bank, including broader product offerings, higher lending
limits, greater access to capital markets, more extensive advertising and
marketing capabilities, and the ability to operate
across larger geographic markets.
The Bank also faces significant competition for deposits and other financial
services
from investment companies, mutual funds, insurance companies and other
financial institutions offering alternative savings
and investment products. Some of these competitors may not be subject
to the same regulatory requirements as banks.
The Bank seeks to compete by emphasizing customer relationships, community
presence, local decision-making and
responsive service.
Table of Contents
6
Selected Economic Data
The Company’s primary market area
is Lee County, Alabama, including
the cities of Auburn and Opelika and surrounding
communities in East Alabama. Lee County is part of the Auburn-Opelika
metropolitan statistical area. The local economy
is influenced by higher education, healthcare services, public education,
distribution and logistics operations, retail and
service businesses, and automobile manufacturing and related suppliers
located in the region.
Major employers in the area
include Auburn University,
regional healthcare providers, public school systems, manufacturing facilities,
and distribution
operations. The presence of large automobile manufacturing
plants and related suppliers along the Interstate 85 corridor in
eastern Alabama and western Georgia also contributes
significantly to economic activity in the region and supports local
employment, business development, and population growth.
As of year-end 2025, Lee County’s
unemployment rate was
2.1% compared to 2.7% for the State of Alabama.
Economic conditions in our market area, including employment levels, housing
activity, business investment, inflation
and
interest rates, influence loan demand, credit quality,
deposit growth, and other aspects of our operations. Changes in these
conditions could affect our results of operations and financial
condition.
The Auburn-Opelika metropolitan area has experienced population
and economic growth in recent years, supported by
expansion in education, healthcare, manufacturing and related industries.
Continued growth in these sectors may influence
future economic conditions in our market area.
Loans and Loan Concentrations
The Bank makes loans for commercial, financial and agricultural purposes, as well as for
real estate mortgages, real estate
acquisition, construction and development and consumer purposes.
While there are certain risks unique to each type of
lending, management believes that there is more risk associated with commercial,
real estate acquisition, construction and
development, agricultural and consumer lending than with residential real
estate mortgage loans.
To help manage these
risks, the Bank has established underwriting standards used in evaluating
each extension of credit on an individual basis,
which are substantially similar for each type of loan.
These standards include a review of the economic conditions
affecting the borrower,
the borrower’s financial strength and capacity to repay the debt, the underlying
collateral and the
borrower’s past credit performance.
We
apply these standards at the time a loan is made and monitor them periodically
throughout the
life of the loan.
See “Lending Practices” for a discussion of regulatory guidance on commercial
real estate
lending.
Our commercial real estate (“CRE”) loans, including $59.6 million of
loans on owner occupied property,
as of December
31, 2025 totaled $325.5 million (58% of total loans).
Our regulators’ CRE Guidance excludes loans on owner occupied
property from CRE.
Excluding our owner-occupied loans, our CRE loans were $290.2 million
(51% of total loans) at year
end 2024.
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 mor
tgage loans
are originated outside the primary service area, and the Bank from
time to time has purchased loan participations from
outside its primary service area.
We
also may make loans to other borrowers outside these areas, especially where we
have
a relationship with the borrower, or
its business or owners.
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7
Human Capital
At December 31, 2025, the Company and its subsidiaries had 145 full-time
equivalent employees, including 37 officers.
Our employees have been with us an average of approximately 12 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.
Table of Contents
8
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.
Various
changes in legislation and regulatory rules and practices occur regularly.
Any change in
applicable law or regulation may have a material effect on
the Company’s business, and our results of
operations and
financial condition.
The following discussion is qualified in its entirety by reference to the particular laws, rules
and
regulatory proposals referred to below.
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.
Changes in control of bank holding companies are subject to prior notice
to, and nonobjection by the Federal Reserve under
the federal Change in Bank Control Act (the “Control Act”), and in the case of bank
holding companies controlling
Alabama state banks, by the Alabama Superintendent of Banks (the “Alabama
Superintendent”) under the Alabama
Banking Code.
Bank holding companies that are and remain “well-capitalized” and
“well-managed,” as defined in Federal Reserve
Regulation
Y,
and whose insured depository institution subsidiaries maintain “satisfactory”
or better ratings under the
Community Reinvestment Act of 1977 (the “CRA”), may elect to become
“financial holding companies.” Financial holding
companies and their subsidiaries are permitted to acquire or engage
in activities such as insurance underwriting, securities
underwriting, travel agency activities, broad insurance agency
activities, merchant banking and other activities that the
Federal Reserve determines to be financial in nature or complementary
thereto. In addition, under the BHC Act’s merchant
banking authority and Federal Reserve regulations, financial holding
companies are authorized to invest in companies that
engage in activities that are not
Changes in control of bank holding companies are subject to prior notice
to, and nonobjection by the Federal Reserve under
the federal Change in Bank Control Act (the “Control Act”), and in the case of bank
holding companies controlling
Alabama state banks, by the Alabama Superintendent of Banks (the “Alabama
Superintendent”) under the Alabama
Banking Code.
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9
Bank holding companies that are and remain “well-capitalized” and
“well-managed,” as defined in Federal Reserve
Regulation
Y,
and whose insured depository institution subsidiaries maintain “satisfactory”
or better ratings under the
Community Reinvestment Act of 1977 (the “CRA”), may elect to become
“financial holding companies.” Financial holding
companies and their subsidiaries are permitted to acquire or engage
in activities such as insurance underwriting, securities
underwriting, travel agency activities, broad insurance agency
activities, merchant banking and other activities that the
Federal Reserve determines to be financial in nature or complementary
thereto. In addition, under the BHC Act’s merchant
banking authority and Federal Reserve regulations, financial holding
companies are authorized to invest in companies that
engage in activities that are not financial in nature, as long as the financial
holding company makes its investment, subject
to limitations, including a limited investment
term, no day-to-day management, and no cross-marketing with
any depositary
institutions controlled by the financial holding company.
The 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 are 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, the Alabama Superintendent may approve an
Alabama bank’s acquisition
and operation of banks in other states.
Also, Alabama banks may enter be acquired by an out-
of-state bank, and the resulting out-of-state bank may continue to operate the
acquired branches in Alabama.
Banks,
including Alabama banks, may branch anywhere in the United States and out
of state banks may branch into Alabama.
See
“Bank Regulation”.
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.
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 regulatory capital restoration
plan, the parent bank holding company is
required to guarantee the performance of such plan up to 5% of the bank’s
assets, and such guarantee is given priority in a
bankruptcy of the bank holding company.
Where a bank holding company has more than one bank or thrift subsidiary,
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 “- Federal Reserve Capital
Rules” and “Prompt Corrective Action.”
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 consolidated assets.
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.”
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10
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 provide
Alabama banks competitive equality with national banks.
The Bank’s deposits are insured
by the FDIC to the maximum extent provided by law,
and the Bank is subject to various
FDIC regulations applicable to FDIC-insured banks. See “-FDIC Insurance
Assessments.”
Under the Federal Financial Institutions Examination Council’s
(“FFIEC”) Uniform Financial Institutions Rating System
(“UFIRS”), the Federal Reserve assigns state member banks a confidential
composite “CAMELS” rating based on an
evaluation and rating of six essential components of an institution’s
financial condition and operations:
C
apital Adequacy,
A
sset Quality,
M
anagement,
E
arnings,
L
iquidity and
S
ensitivity to market risk, as well as the quality of risk management
practices.
Each component and the overall rating are rated on a scale of 1 to 5, with one being the
best.
For most institutions, the FFIEC has indicated that market risk primarily
reflects exposures to changes in interest rates.
Regulators’ evaluations of this component, consider management’s
ability to identify, measure,
monitor and control market
risk; the institution’s 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. Assessments may be
made of the sensitivity of the financial
institution’s earnings or the
economic value of its capital to adverse changes in interest rates, foreign
exchange rates,
commodity prices or equity prices; management’s
ability to identify, measure,
monitor and control exposure to market risk;
and the nature and complexity of interest rate risk exposure arising from non
-trading positions. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Market and Liquidity Risk Management.”
Composite CAMELS ratings are based on evaluations of an institution’s
managerial, operational, financial and compliance
performance. The composite CAMELS rating is not an arithmetical formula
or a 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. In stressful economic times, the Federal
Reserve has a heightened focus on bank funding
pressures based on risk profiles and management’s
ability to manage their liquidity positions.
In addition, and separate from the UFIRS, the Federal Reserve assigns a risk-management
rating to all state member banks
and bank holding companies. In February 2021 the Federal Reserve expanded
its Guidance for Assessing Risk
Management to institutions with under $100 billion in assets. This guidance
states that principles of sound management
should apply to all risk confronting a banking organization,
including credit, market, liquidity, operational,
compliance, and
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. Each assessment category
and the overall rating is ranked
on a scale of 1to 5 with 1 being the best rating and requiring the least supervisory
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.
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11
Bank and bank holding company mergers require evaluation by
the federal bank regulators, among other factors, of the
effects of the transaction on competition under the Bank Merger
Act and the BHC Act. Applications under these Acts also
are subject to United States Department of Justice (“DoJ”) antitrust review
and possible litigation challenges. The DoJ and
the Federal Trade Commission (“FTC”) adopted
new non-binding merger guidelines in 2023. The DoJ revoked
the 1995
Bank Merger Guidelines that were adopted with the federal bank
regulators and adopted a 2024 Banking Addendum to its
2023 merger guidelines. The Federal bank regulators continue
to apply the 1995 Bank Merger guidelines in considering the
competitive effects of mergers.
The DoJ has an important advisory role in bank and BHC mergers,
but the bank regulators are the primary decision makers.
The bank regulators may consider the Antitrust Division’s
competitive factors report as part of their respective review
processes, and use their own methods for screening and evaluating bank
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.
“Open banking” rules were adopted by the Consumer Financial Protection
Bureau (“CFPB”) in 2024 that require covered
financial institutions to provide consumers and authorized third parties
access to consumer financial data through secure
interfaces, has been the subject of litigation. This would make it easier for customers
to move their accounts and assets held
in them.
The CFPB Open banking rules have been the subject of litigation, and although the CFPB has requested
comments on changes to the regulations, the status of the proposed revised rules
is uncertain.
Consumer Laws and the CFPB
The CFPB has a broad mandate that requires it to regulate consumer financial
products and services offered by banks and
nonbanks.
The CFPB is authorized to adopt regulations and enforce various laws, including the
fair lending laws, the Truth
in Lending Act, the Electronic Funds Transfer
Act, mortgage lending rules, the Truth in Savings Act, the Fair
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, the CFPB’s
regulations, and the precedents set in CFPB enforcement actions
and
interpretations apply to all banks.
The CFPB limited its funding requests in 2025 and the 2025 One Big Beautiful tax
act reduced its funding cap from the
Federal Reserve from 12% in 2024 to 6.9%.
The CFPB Acting Director has sought to reduce CFPB staff from
approximately 1,700 persons to 200, but litigation is challenging this.
Community Reinvestment Act (“CRA”) and Fair Lending Laws
The Bank is subject to the provisions of the CRA and the Federal Reserve’s
CRA regulations.
The CRA imposes
continuing, affirmative obligations on all FDIC-insured
institutions, consistent with their safe and sound operation, to help
meet the credit needs for their entire communities, including low- and
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, including
low- and moderate-income neighborhoods.
The bank regulatory agencies’ CRA assessments are publicly available.
Consideration of CRA performance is required for expansion of bank activities
under the Bank Merger Act and BHC Act,
and for branching and financial holding company activities. A less than satisfactory
CRA rating will slow, if not
preclude
such expansion activities. The federal CRA regulations require that evidence of
discriminatory,
illegal or abusive lending
practices be considered in the CRA evaluation.
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12
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 January 2026, it had executed 22 community benefit plans
with banking organizations for an aggregate of $606
billion for mortgage, small business and community development
lending, investments and philanthropy in LMI and under-resourced
communities. The Capital One Financial acquisition of
Discover Financial Services in 2025 included a community benefit plan
with another community organization valued at
$265 billion, which is the largest ever.
The Bank had a “satisfactory” CRA rating in its latest CRA public evaluation dated March
3, 2025, with satisfactory ratings
on both its lending and community development tests.
The Federal Reserve considers the effects of a bank acquisition
proposal on the convenience and needs of the markets
served by the combining organizations, as well as CRA performance
in evaluating merger and acquisition applications
under the Bank Merger Act and the BHC Act and branching applications.
In the case of bank holding company applications
to acquire a bank, the Federal Reserve will assess and emphasize CRA records
of each subsidiary depository institution of
the applicant and the target in meeting the needs of their entire communities,
including LMI neighborhoods. Inadequate
performance records may be the basis for denying an application.
New CRA Rules were adopted by the federal bank regulators in 2023. On
July 16, 2025, prior to the new rules, effective
date, the Federal Reserve, the FDIC, and the OCC jointly issued a proposal to rescind
the 2023 rule and replace these with
the 1995 CRA regulations, with certain technical amendments. The bank regulators
continue to apply the 1995 CRA
regulations.
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.
The DOJ has prosecuted what it regards as violations of the fair lending
laws, generally.
Overdrafts
The federal bank regulators have updated their guidance several times on overdrafts,
including overdrafts incurred at ATMs
and point of sale terminals. The CFPB began refocusing on overdrafts in 2021.
Among other things, the federal regulators
require banks to monitor accounts and to limit the use of overdrafts by customers
as a form of short-term, high-cost credit,
including, for example, giving customers who overdraw their accounts on more than
six occasions where a fee is charged in
a rolling 12-month period, a reasonable opportunity to choose a less costly alternative
and decide whether to continue with
fee-based overdraft coverage. Banks are encouraged to place appropriate
daily limits on overdraft fees, and have been asked
to consider eliminating overdraft fees for transactions that overdraw
an account by de minimis amounts. Overdraft policies,
processes, fees and disclosures have been the subject of various litigation against
banks in various jurisdictions. 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.
A CFPB Rule adopted in December 2024 to limit banks with over $10 billion in assets from charging
more than $5 for an
overdraft was rescinded pursuant to the Congressional Review Act in May 2025.
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13
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 also must
have: (1) a term not exceeding 30 years; (2) regular periodic payments
that do not result in negative amortization, deferral
of principal repayment, or a balloon payment; (3) and be supported with documentation
of the borrower and its credit. On
December 10, 2020, the CFPB issued final rules related to “qualified mortgage”
loans. Lenders are required under the law
to determine that consumers have the ability to repay mortgage loans before
lenders make those loans. Loans that meet
standards for QM loans are presumed to be loans for which consumers have the ability
to repay.
The Economic Growth, Regulatory Relief, and Consumer Protection Act
of 2018 (the “2018 Growth Act”) provides that
certain residential mortgages held in portfolio by banks with less than $10 billion
in consolidated assets automatically are
deemed “qualified mortgages”, provided:
●
the mortgage is documented;
●
does not include interest only or negative amortizations terms;
●
any prepayment penalties are within the Truth
in Lening act limits; and
●
fees are less than 10% of the loan value.
This relieves smaller banks from many of the “qualified mortgage”
requirements.
The Bank generally services the loans it originates, including those it sells. The CFPB’s
mortgage servicing 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.”
The Bank’s mortgage lending is subject
to the CFPB’s integrated disclosure
rules under the Truth in Lending Act and the
Real Estate Settlement Procedures Act, referred to as “TRID”, for
credit transactions secured by real property.
The Federal Housing Finance Authority (“FHFA”)
regulates the Federal National Mortgage Association (“Fannie Mae’s”)
and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (individually
and collectively, “GSE”).
Among these,
are repurchase rules applicable to sales of mortgages to the GSEs.
These rules include the types of loan defects that could
lead the GSEs to request a mortgage loan repurchase or seek other remedies against the mortgage
loan originator or seller.
The Bank sells mortgage loans to Fannie Mae and services these on an actual/actual basis.
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.
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.
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14
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.
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 depository institution regulators and FinCEN issued a
Joint Statement on Risk-Focused Bank
Secrecy Act/Anti-Money Laundering Supervision (July 22, 2019).
Under this Join Statement, institutions that operate in
compliance with applicable law,
properly manage customer relationships and effectively mitigate
risks by implementing
controls commensurate with the type and level of their risks are neither prohibited
nor discouraged from providing banking
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
anti-money laundering, Bank Secrecy Act
and countering the financing of terrorism (“AML/CFT”) enforcement,
which clarified that isolated or technical violations
or deficiencies generally are not considered the kinds of problems that would
result in an enforcement action. The statement
addresses how the agencies evaluate violations of individual pillars of the
AML/CFT 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 (the “Treasury”)
as part of the internal controls pillar of a bank’s
AML/BSA compliance
program.
On January 1, 2021, Congress enacted the Anti-Money Laundering
Act of 2020 and the Corporate Transparency Act
(collectively, the
“Corporate Transparency Act” or the “CTA”),
to strengthen anti-money laundering and countering
terrorism financing programs.
FinCEN regulation 31 C.F.R.
101.380 implements the CTA
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”). 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.
Following litigation and nationwide injunctions, the Treasury
Department suspended enforcement of the CTA
on March 2,
2025 with respect to U.S. citizens or domestic reporting companies or
their beneficial owners.
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 suspension continues.
FinCEN published an interim final rule on March 26, 2025, that revised the definition
of “reporting company” in its
regulations implementing the CTA
to include only entities formed under the law of a foreign country
that have registered to
do business in any U.S. State or tribal jurisdiction by the filing of a document with a
secretary of state or similar office
(formerly known as “foreign reporting companies”).
FinCEN also formally exempted entities previously known as
“domestic reporting companies” from the CTA’s
reporting requirements.
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15
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.
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.
Other Laws and Regulations
The Company is required to comply with various corporate governance
and financial reporting requirements under the
Sarbanes-Oxley Act of 2002, as well as related rules and regulations adopted
by the SEC, the Public Company Accounting
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, 2025 is
included in this report with no material weaknesses reported.
Capital
The Federal Reserve has risk-based capital guidelines for bank holding
companies and state member banks, respectively.
These guidelines require a minimum ratio of capital to risk-weighted
assets (including certain off-balance sheet activities,
such as standby letters of credit) and capital conservation buffer,
totaling 10.5%.
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.
The Federal Reserve also has minimum leverage ratio guidelines for
bank holding companies not subject to the Small BHC
Policy, and state member
banks, which provide for a minimum leverage ratio of Tier
1 capital to adjusted average quarterly
assets (“leverage ratio”) equal to 4%.
However, bank regulators expect banks and bank
holding companies to operate with
a higher leverage ratio.
Lastly, the Federal Reserve
indicates that it will continue to consider a “tangible Tier
1 leverage ratio” (deducting all
intangibles) in evaluating proposals for expansion or new activities.
The level of Tier 1 capital to risk-adjusted
assets is
becoming more widely used by the bank regulators to measure capital adequacy.
Under Federal Reserve policies, bank holding companies are generally
expected to operate with capital positions well
above the minimum ratios.
The guidelines also provide that institutions experiencing internal growth or
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, depending upon a
bank’s or bank holding
company’s risk profile, and the level and
nature of their risks, including the volume and severity of
their problem loans.
The Federal Reserve believes
the risk-based ratios do not fully take into account the quality of capital
and interest rate, liquidity,
market and operational risks. Accordingly,
supervisory assessments of capital adequacy may
differ significantly from conclusions based solely on
the level of an organization’s
risk-based capital ratio.
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16
The Federal Reserve has not advised the Company or the Bank of any specific
minimum leverage ratio or tangible Tier 1
leverage ratio applicable to them.
The Federal Deposit Insurance Corporation Improvement Act of 1991
(“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 established by regulation.
See
“Prompt Corrective Action Rules.”
Federal Reserve Capital Rules
General
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 “Basel III Capital Rules” in Federal Reserve
Regulation Q were fully phased-in, generally,
on January 1, 2019.
The Bank has elected not to have its capital structure evaluated under
the community bank leverage framework permitted
by the 2018 Growth Act.
Regulation Q generally limits Tier 1 capital
to common stock and noncumulative perpetual preferred stock.
Regulation Q
defines “Common Equity Tier I Capital” or “CET1”
to include common stock and related surplus, retained earnings, and
subject to certain adjustments, minority common equity interests in subsidiaries.
CET1 is reduced by deductions for:
●
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’s CET1 is not adjusted
for certain accumulated other comprehensive income (“AOCI”).
Additional
“threshold deductions” of each of the following that are individually greater
than 25% of CET1 (after the first
deductions above):
●
MSRs, net of associated DTLs;
●
DTAs arising from
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.
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17
Minimum Capital Requirements
The various minimum capital requirements under Federal Reserve Regulation
Q are:
Minimum CET1
4.50%
CET1 Conservation Buffer
2.50%
Total CET1
7.00%
Deductions from CET1
100%
Minimum Tier 1 Capital
6.00%
Minimum Tier 1 Capital plus conservation
buffer
8.50%
Minimum Total
Capital
8.00%
Minimum Total
Capital plus conservation buffer
10.50%
Certain Risk-Weightings
Among other things, Regulation Q as changed by the Basel III Capital Rules Q changed
some of the risk weightings used to
determine risk-weighted capital adequacy.
Among other things, Regulation Q:
●
Assigns a 250% risk weight to MSRs or 10% or greater investments in other financial
institutions;
●
Assigns up to a 1,250% risk weight to structured securities, including private
label mortgage securities, trust
preferred CDOs and asset backed securities;
●
Retains existing risk weights for residential mortgages, but assign a 100% risk
weight to most commercial real
estate loans and a 150% risk-weight for HVCRE;
●
Assigns a 150% risk weight to past due exposures (other than sovereign exposures
and residential mortgages);
●
Assigns a 250% risk weight to DTAs,
to the extent not deducted from capital (subject to certain maximums);
●
Retains the existing 100% risk weight for corporate and retail loans; and
•
Increases the risk weight for exposures to qualifying securities firms from
20% to 100%.
HVCRE
Risk Weight
A “high volatility commercial real estate” loan (“HVCRE,”) which has
a 150% risk weight generally is a credit facility
secured by land or improved real property made after 2014 that:
●
primarily finances or refinances the acquisition, development, or
construction of real property;
●
has the purpose of providing financing to acquire, develop, or improve
such real property into income producing
property; and
●
the repayment of the loan is dependent upon the future income or sales proceeds
from, or refinancing of, such real
property.
Exceptions are made for various things, including loans for (i) the acquisition,
development and construction of 1 to 4
family residences, and investments in community development or agricultural
land, and (ii) commercial real properties
where the loan-to-value ratio is not more than the maximum supervisory
level determined by the Federal Reserve or the
borrower has contributed capital in a form specified by the rule equal
to at least 15% of the real property’s “as completed”
value.
Capital Conservation Buffer
The capital conservation buffer is equal to the lowest of the
following, calculated as of the last day of the previous calendar
quarter:
(A)
The institution's CET 1 capital ratio minus the institution's minimum
CET1 ratio;
(B)
The institution's tier 1 capital ratio minus the institution's minimum tier 1 capital ratio
requirement; and
(C)
The institution's total capital ratio minus the institution's minimum total capital
ratio requirement.
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18
The capital conservation buffer limits permissible dividends,
stock repurchases and discretionary bonuses to the following
percentages based on the capital conservation buffer
subject to any further regulatory limitations, including those based on
risk assessments and enforcement actions:
Capital Conservation
Buffer %
Buffer % Limit
More than 2.50%
None
> 1.875% - 2.50%
60.0%
> 1.250% - 1.875%
40.0%
> 0.625% - 1.250%
20.0%
≤ 0.625
- 0 -
Reg. Q amended the definition of “eligible retained income” in 2020
to allow banking organizations to more freely use their
capital buffers to promote lending and other financial intermediation
activities, by making the limitations on capital
distributions more gradual. “Eligible retained income, as used in Federal
Reserve Regulation Q, is the greater of (i) net
income for the four preceding quarters, net of distributions and
associated tax effects not reflected in net income; 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
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 for depository
institutions.
The relevant capital measures are the total
risk-based capital ratio, Tier 1 risk-based
capital ratio, Common equity tier 1 capital ratio, as well as the leverage capital
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.
Less than “adequately capitalized” banks 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.
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19
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
(i) 5% of the depository
institution’s total assets at the time
it became undercapitalized and (ii) 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:
(i)
sell sufficient voting stock to become “adequately capitalized”;
(ii)
Reduce total assets; and
(iii)
Cease receipt of deposits from correspondent banks.
“Critically undercapitalized” depository institutions are subject to
the appointment of a receiver or conservator.
The Company’s management believes
that the prompt corrective action provisions of FDICIA have not had and are not
expected to have any material effect on the Bank or the
Company or their respective operations.
Dividends and Distributions
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).
The Company’s primary source
of cash is
dividends from the Bank.
“Eligible retained income” for the Bank and other Federal Reserve regulated
institutions is the greater of:
●
net income for the four preceding calendar quarters, net of any distributions and
associated tax effects not already
reflected in net income; or
●
the average net income over the preceding four quarters.
The Bank’s Call Report are used for
its calculation of “eligible retained income.”
The Bank’s capital conservation
buffer exceeded 2.5% at December 31, 2025.
As of December 31, 2025, the Bank is “well capitalized” for bank regulatory
purposes.
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
2025, the Bank paid total cash dividends of
approximately $3.8 million to the Company.
At December 31, 2025, 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 $6.5 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
also has indicated that banks depository institutions and their holding companies
should generally pay dividends only out of
current year’s operating earnings.
See “Regulatory Capital Changes” and Note 16 to the Company’s
consolidated financial
statements.
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20
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 Tier 1 capital at end of
the period compared to the beginning of the period.
Bank holding company directors must consider various factors tis setting a dividend
level that is prudent to maintaining a
strong financial position, and is not based on overly optimistic earnings scenarios,
such as potential events that could affect
its ability to pay, while
still maintaining a strong financial position. As a general matter,
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.
Capital Rule Changes
The Federal Reserve, the FDIC and the OCC have been working on proposed changes
to their capital rules, which the FDIC
Board is scheduled to discuss on March 19, 2026.
Michelle Bowman, the Federal Reserve Vice
Chair for Supervision
outlined the proposals in broad terms in a March 12, 2026 speech, which continued
a theme to “right-size” capital to match
actual risk.
Although many of the pending proposals focus on large banks, Ms. Bowman
stated “smaller banks, which are
more focused on traditional lending activities, will see slightly larger
reductions in capital requirements.”
The proposals
have not been published for comment, and we cannot predict the effects
of these proposals on us.
FDICIA
FDICIA directs that each federal bank regulatory agency prescribe standards
for depository institutions and depository
institution holding companies relating to internal controls, information
systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth composition,
a maximum ratio of classified assets to capital,
minimum earnings sufficient to absorb losses, a minimum
ratio of market value to book value for publicly traded shares,
safety and soundness, and such other standards as the federal bank
regulatory agencies deem appropriate.
Enforcement Policies and Actions
The Federal Reserve and the Alabama Superintendent examine and
regulate our compliance with laws and regulations,
including the CFPB’s regulations.
The Federal Reserve and the Alabama Superintendent examine and
regulate our compliance with laws and regulations,
including the CFPB’s regulations.
The CFPB issues regulations, interpretations and enforcement actions
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.
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21
Fiscal and Monetary Policies
Banking is a business that depends on interest rate differentials.
In general, the difference between the interest paid by
a
bank on its deposits and its other borrowings, and the interest received by
a bank on its loans and securities holdings,
constitutes the major portion of a bank’s
earnings.
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 setting target federal funds rates, open
market dealings in United States government securities, the setting
of the discount rate at which banks may borrow from the Federal Reserve, and
the reserve requirements on deposits.
The Federal Reserve has been paying interest on depository institutions required
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 (“FOMC).
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 are one
of several tools that the
Federal Reserve could employ to drain reserves when policymakers
judge that it is appropriate to begin moving to a less
accommodative stance of monetary policy.
In light of disruptions in economic conditions caused by COVID-19 and the
stress in U.S. financial markets, the Federal
Reserve, Congress and the Department of the Treasury
took a host of fiscal and monetary measures. In March 2020, the
FOMC 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 securities and agency mortgage
-backed securities (“MBS”).
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 from accommodative to restrictive.
The Federal
Reserve raised the target federal funds rate eight times in 2022
for a total 4.25%.
During 2023, the Federal Reserve four
announced additional target rate increases of 25 basis points each.
The federal funds target rate range was 5.25-5.50% from
May 4, 2023 until September 19, 2024, when it was reduced to 4.75% -5.00%.
Two reductions in November
and
December 2024 resulted in a target range of 4.25%-4.50%
at the end of 2024.
In 2025, the FOMC reduced its target federal funds rates three times to
target rate of 3.50%-3.75%, where it remains as of
March 2, 2026.
In January 2026, the FOMC reaffirmed its long-term goals originally adopted in 2012 that
seeks to achieve
maximum employment and inflation at the rate of 2 percent over the
longer run based on the annual change in the price
index for personal consumption expenditures.
The Federal Reserve’s securities
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.
Starting in June 2024, the FOMC reduced 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, reinvested any remaining principal amounts of maturing
securities in Treasury securities.
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22
In April 2025, the FOMC further slowed the reduction its SOMA holdings by reducing
the monthly redemption cap on
Treasury securities from $25 billion to $5 billion,
while maintaining the monthly redemption cap on agency debt and
agency mortgage-backed securities at $35 billion.
The FOMC announced on October 29, 2025 that it would conclude the
reduction of its aggregate SOMA securities holdings on December
1, 2025.
At its December 2025 meeting, the FOMC
determined to initiate purchases of shorter-term Treasury
securities as needed to maintain an ample supply of reserves on an
ongoing basis.
Most recently, on January
31, 2026 the FOMC announced that beginning February 1, 2026, it would,
subject to modest deviations for operational reasons:
●
Roll over amount of principal payments from the Federal Reserve's SOMA holdings
of Treasury securities
maturing in each calendar month that exceeds $60 billion per month. Treasury
coupon securities would be
redeemed up to this monthly cap and Treasury bills would
be redeemed to the extent that coupon principal
payments are less than the monthly cap.
●
Reinvest into agency mortgage-backed securities (MBS) the amount
of principal payments from SOMA holdings
of agency debt and agency mortgage-backed securities (“MBS”) received
in each calendar month that exceeds a
cap of $35 billion per month.
SOMA holdings as of March 4, 2026, 2026 were $6.23 trillion, including
approximately $2 trillion of agency securities and
agency MBS.
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, the FDIC has been calculating assessments based
on an institution’s average consolidated
total assets less its
average tangible equity (the “FDIC Assessment Base”).
A bank's assessment base and assessment rate are determined each
quarter.
Generally, established “small banks”
with less than $10 billion in assets are assigned an individual rate based on a
formula using financial data and CAMELS (the “financial ratios method”).
The better the CAMELS rating and other
financial ratios, the lower the assessment rate.
The FDIC assessment schedule for Small Banks, such as the Bank, for the first
assessment period provides a total annual
assessment rate of 2 to 32 basis points:
As a result of the decision to insure all deposits in Silicon Valley
Bank and Signature Bank upon their failures in March
2023, the FDIC made a special assessment of 3.36 points for a projected eight quarters
on banks with more than $5 billion
of uninsured deposits.
These special assessments did not apply to the Bank.
The FDIC’s minimum DIF reserve
ratio is 1.35%, which was set by the Dodd-Frank Act.
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%, but grants the Board
sole discretion in
determining whether to suspend or limit the declaration or payment of dividends
to DIF members.
The DIF reserve ratio was 1.42% at December 31, 2025, 14 basis points higher
than at the end of 2024, and above the
minimum.
The Company recorded FDIC insurance premiums expenses of $0.5 million
for each of 2025 and 2024.
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23
CRE and Leveraged Loans
CRE
The federal bank regulatory agencies released guidance on “Concentrations
in Commercial Real Estate Lending” (2006)
(the “CRE Guidance”). The CRE Guidance defines CRE loans as exposures
secured by raw land, land development and
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.
The CRE Guidance requires that banks have appropriate processes be in
place to identify, monitor
and control risks
associated with real estate lending concentrations.
This could include enhanced strategic planning, CRE underwriting
policies, risk management, internal controls, portfolio stress testing and
risk exposure limits as well as appropriately
designed compensation and incentive programs.
Higher allowances for loan losses and capital levels may also be required.
The CRE Guidance is triggered when either:
●
Total reported loans
for construction, land development, and other land of 100% or more of a bank’s
total capital;
or
●
Total reported loans
secured by multifamily and nonfarm nonresidential properties and loans for
construction, land
development, and other land are 300% or more of a bank’s
total risk-based capital.
This CRE Guidance was supplemented by the Interagency Statement on
Prudent Risk Management for Commercial Real
Estate Lending (December 18, 2015). The CRE Guidance also applies when
a bank has a sharp increase in CRE loans or
has significant concentrations of CRE secured by a particular property
type. See Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Balance Sheet Analysis” for
concentrations of the various types of CRE
loans.
At December 31, 2025, the Bank had outstanding $56.6 million in construction
and land development loans and $325.8
million in total CRE loans (excluding owner occupied properties), which represent
approximately 48% and 277%,
respectively, of
the Bank’s total risk-based capital at December
31, 2025.
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 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 bank regulators, including the Federal Reserve issued a Policy Statement
on Prudent Commercial Real Estate
Loan Accommodations and Workouts
(June 30, 2023), which updated existing guidance.
The Policy Statement provides a
broad set of risk management principles relevant to CRE short term loan
accommodations and longer-term workouts in all
business cycles, particularly in challenging economic environments.
It states that the regulatory agencies expect their
examiners to take a balanced approach in assessing the adequacy of a financial institution's
risk management practices for
loan accommodation and workout activities.
Financial institutions that implement prudent CRE loan accommodation
and
workout arrangements after performing a comprehensive review of a borrower's
financial condition will not be subject to
criticism for engaging in these efforts, even if these arrangements
result in modified loans that have weaknesses that result
in adverse classification. In addition, modified loans to borrowers who have
the ability to repay their debts according to
reasonable terms will not be subject to adverse classification solely because the value
of the underlying collateral has
declined to an amount that is less than the outstanding loan balance.
The Policy Statement also describes the classifications
of CRE loan accommodations and workouts and addresses regulatory
accounting and reporting in such situations, including
CECL.
Leveraged Loans
The Federal Reserve and other banking regulators issued their “Interagency
Guidance on Leveraged Lending” (2006)
highlighting standards for originating leveraged transactions and managing
leveraged portfolios, as well as requiring banks
to identify their highly leveraged transactions, or HLTs.
The Bank did not have any leveraged loans at year-end 2025, 2024
or 2023 subject to the Interagency Guidance on Leveraged Lending or
that were shared national credits.
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24
Certain Dodd-Frank Act Provisions
No Hedging of Equity Incentive Compensation
The Dodd-Frank Act, Section 955, requires the SEC establish rules requiring
that companies disclose in their annual
meeting proxy materials whether an employee or board member is permitted
to purchase financial instruments designed to
hedge or offset decreases in the market value of equity securities granted
as compensation or otherwise held by the
employee or board member.
SEC Reg. S-K Item 407(i) implements this Section.
The Company’s Insider
Trading Policy applies to all Company and Bank directors, officers,
employees and certain
independent contractors and specified related persons (collectively,
“Covered Persons”). This Policy prohibits Covered
Persons from engaging in speculative transactions or short-term trading in
Company Securities at any time. Short-selling
Company securities or engaging in transactions involving “Derivative Securities”
on Company securities are prohibited.
Further, hedging instruments or strategies,
including Derivative Securities may not be used to increase the value
or reduce
the risks of any awards under the 2024 Incentive Plan. The Company’s
Insider Trading Policy is included as an exhibit
to
its annual report on SEC Form 10-K.
No Incentives Encouraging Inappropriate Risk-Taking
Section 956 of the Dodd-Frank Act requires the appropriate federal
regulators to issue regulations or guidelines that
prohibits incentive-based compensation arrangements that
encourage inappropriate risk taking by covered financial
institutions, are deemed to be excessive, or that may lead to material losses to the covered
financial institution.
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 have stated that this Guidance is expected to generally
have less effect on smaller banking
organizations, which typically are less complex and make
less use of incentive compensation arrangements than larger
banking organizations.
The Company’s Compensation
Committee Charter provides that the Committee shall identify and limit features of
compensation plans that it reasonably believes would lead to unnecessary
and excessive risk-taking, and establish a
compensation strategy to provide balanced risk-taking incentives in alignment
with the Company’s risk appetite and
compliance with the various laws and regulations governing executive
officer and director compensation.
The federal bank regulators, the SEC and other regulators first proposed regulations
implementing Section 956 in April
2011, which would have been applicable to,
among others, depository institutions and their holding companies with $1
billion or more in assets.
These rules have not been adopted.
Debit Card Interchange Fees
The “Durbin Amendment” to the Dodd-Frank Act and Federal Reserve Regulation
II provide that interchange transaction
fees for electronic debit transactions be “reasonable” and proportional
to certain costs associated with processing the
transactions.
The Durbin Amendment and the Federal Reserve rules thereunder are not applicable
to banks with assets less
than $10 billion. Such smaller banks, however,
compete with banks that are subject to the Durbin Amendment, and
therefore may have to limit their interchange fees, also.
Legislation has been proposed which would regulate credit card
interchange fees.
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Other Legislative and Regulatory Changes
Various
legislative and regulatory proposals, including substantial changes in
banking, and the regulation of banks, thrifts
and other financial institutions, compensation, and the regulation of financial
markets and their participants, and financial
instruments and securities, and the regulators of all of these, as well as the taxation of
these entities, are being considered by
the executive branch of the federal government, Congress and various state governments,
including Alabama.
The 2018 Growth Act
The 2018 Growth Act, which was enacted on May 24, 2018, amended
the Dodd-Frank Act, the BHC Act, the Federal
Deposit Insurance Act and other federal banking and securities laws to provide
regulatory relief.
The following provisions
of the 2018 Growth Act may be particularly helpful to banks of our size, and
we have benefited from the Growth Act’s
changes to the deposit rules:
●
Increased the asset size under the Federal Reserve's Small BHC Policy from
$1 billion to $3 billion;
●
“qualifying community banks,” defined as institutions with total consolidated
assets of less than $10 billion, which
meet a “community bank leverage ratio, which is currently 9.0%, may
be deemed to have satisfied applicable risk-
based capital requirements as well as the capital ratio requirements;
●
section 13(h) of the BHC Act, or the “Volcker
Rule,” is amended to exempt from the Volcker
Rule, banks with
total consolidated assets valued at less than $10 billion (“community banking
organizations”), and trading assets
and liabilities comprising not more than 5.00% of total assets; and
●
“reciprocal deposits” held by banks that are well capitalized and well rated
will not be considered “brokered
deposits” for FDIC purposes,
The FDIC issued comprehensive changes to its brokered deposit rules effective
April 1, 2021. The revised rules establish
new standards for determining whether an entity meets the statutory definition
of “deposit broker,” and identifies
a number
of businesses that automatically meet the “primary purpose exception”
from a “deposit broker.”
The revisions also provide
an application process for entities that seek a “primary purpose exception,”
but do not meet one of the designated
exceptions.”
The new rules provide us greater flexibility.
Reciprocal deposits have expanded our funding and liquidity sources without being
subjected to FDIC limitations on
depositor FDIC insurance coverage and potential federal deposit insurance
assessment increases for brokered deposits.
The applicable agencies also issued final rules simplifying the Volcker
Rule’s proprietary trading restrictions
effective
January 1, 2020. On June 25, 2020, the agencies adopted a final rule simplifying
the Volcker
Rule’s covered fund
provisions effective October 1, 2020.
New regulations and statutes are regularly proposed that contain wide-ranging
proposals for altering the structures,
regulations and competitive relationships of the nation’s
financial institutions.
Recent Developments
Executive Order 14192 seeks to “significantly reduce the private expenditures
required to comply with Federal
regulations.”
For the current fiscal year 2025, for each new regulation, at least 10 existing regulations
shall be identified for
repeal.
Agencies are directed to ensure that the total incremental cost of all new regulations, including
repealed regulations,
being finalized this year, shall be significantly
less than zero, as determined by the OMB Director.
The OMB Director shall
provide agencies with guidance on implementation, including measuring
regulatory costs.
No regulation shall be added to
or removed from the Unified Regulatory Agenda without the approval
of the OMB Director.
Regulations and rules are
broadly defined to include:
…agency statements of general or particular applicability and future effect
designed to implement, interpret, or
prescribe law or policy or to describe the practice requirements of an agency,
including, without limitation,
regulations, rules, memoranda, administrative orders, guidance documents,
policy statements, and interagency
agreements.
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26
The current Acting CFPB Director on February 8, 2025 ordered all CFPB employees
to suspend substantially all activities,
including all supervision, examination and stakeholder engagement
activities, and closed the agency's headquarters for the
week of February 10, 2025.
The Acting CFPB Director also said the CFPB had excessive funding on hand
and would not
take the next scheduled drawdown of funds from the Federal Reserve.
Executive Order 14178 states the Administration’s
policy “to support the responsible growth and use of digital assets,
blockchain technology,
and related technologies across all sectors of the economy.”
“Digital assets” include
“any digital representation of value that is recorded on a distributed ledger,
including cryptocurrencies, digital tokens, and
stablecoins.”
This order revoked Executive Order 14067 “Ensuring Responsible
Development of Digital Assets” (March 9,
2022) and directed the Secretary of the Treasury
is directed to immediately revoke the Department of the Treasury's
“Framework for International Engagement on Digital Assets,” (July 7, 2022).
These new policies include the following that are applicable to banks:
●
protecting and promoting fair and open access to banking services for all law-abiding
individual citizens and
private-sector entities alike; and
●
providing regulatory clarity and certainty built on technology-neutral
regulations, frameworks that account for
emerging technologies, transparent decision making,
and well-defined jurisdictional regulatory boundaries, all of
which are essential to supporting a vibrant and inclusive digital economy and
innovation in digital assets,
permissionless blockchains, and distributed ledger technologies
The Executive Order “Restoring Democracy and Accountability in Government”
(Feb. 11, 2025) requires all agencies to
submit draft regulations for White House review with no carveout for so-called
independent agencies, except for the
monetary policy functions of the Federal Reserve; and consult with the White House
on their priorities and strategic plans.
The White House will set their performance standards.
The Office of Management and Budget will adjust so-called
independent agencies’ apportionments of funds.
The President and the Attorney General (subject to the President’s
supervision and control) will interpret the law for the executive branch,
instead of having separate agencies adopt
conflicting interpretations.
Changes in the Federal Bank Regulators and the SEC
A new Comptroller of the Currency,
and new FDIC and SEC Chairs, and a new Vice
Chair for Supervision at the Federal
Reserve were appointed in 2025 and have taken different approaches
from their immediate predecessors.
The Federal Reserve’s new Vice
Chair for Supervision stated her goals in February 2026:
●
Community banks are and should be subject to less stringent standards than
large banks, and there is significant
opportunity to tailor regulations and supervision to the unique needs and circumstances
of these banks.
●
Increase static and outdated statutory thresholds, including asset thresholds,
which may push banks into different
regulatory restrictions, and supervisory and reporting categories more
suited to larger institutions.
●
Tailor the merger
and acquisition and
de novo
chartering application processes for community banks, including
accurately considering competition among small banks.
●
Changes in Basel III capital rules to support market liquidity,
affordable homeownership, and safety and
soundness. In particular, the capital treatment
of mortgage loans and mortgage servicing assets under the U.S.
standardized approach has resulted in banks reducing their participation in
this important lending activity,
limiting
access to mortgage credit.
●
Change bank supervision to focus on the core material risks to banks’ operations and
the stability of the broader
financial system. Core material risks include non-financial risks where these pose
threats to safety and soundness.
Strong risk management, whether in credit, liquidity,
cybersecurity, or operations,
remains essential, and will be
part of bank examinations.
●
Supervision must also be tailored, matching oversight to each institution's size, complexity,
and risk profile.
●
Supervision must also be tailored, matching oversight to each institution's size, complexity,
and risk profile.
●
Review the CAMELS bank ratings framework, and establish clear metrics
and parameters for all of the
components to provide transparent and objective supervisory assessments to reflect
overall safety and soundness,
n
ot just isolated deficiencies in a single CAMELS component.
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27
●
Adopt a proposed regulation to avoid bank supervisors encouraging, influencing,
or compelling banks to debank or
refuse to bank a customer due to their constitutionally protected political or
religious beliefs, associations, speech,
or conduct.
At the same time, banks must remain free to make their own risk-based decisions to serve individuals
and lawful businesses.
The Office of the Comptroller of the Currency (“OCC”) and
the FDIC have stated similar goals.
De novo bank and bank
merger applications are being approved faster by all the
Federal bank regulators, and the FDIC has approved the deposit
insurance for several industrial bank applications.
The OCC and the FDIC are encouraging innovation and digital asset
activities, and implementing the Guiding and Establishing National
Innovation for U.S. Stablecoins Act (GENIUS Act).
The regulators have rescinded prior policies (i) limiting digital activities and
(ii) requiring prior regulatory notice and
review of novel activities, including digital activities.
The regulators have clarified that banking organizations may
engage
in permissible crypto-asset activities, and provide products and services
to persons engaged in crypto-asset related
activities, subject to safety and soundness and applicable laws and regulations.
The SEC Chair and the SEC are reevaluating the disclosures required of public
company under Regulation S-K, including
the executive compensation disclosures.
The SEC Chair’s goals are to promote a more favorable environment
for public
companies by:
●
anchoring disclosures in financial materiality so that investment decisions
can turn on economic signals rather than
on regulatory noise;
●
scale disclosure requirements with a company’s
size and maturity;
●
de-politicizing shareholder meetings by restoring their focus to significant
corporate matters; and
●
allowing public companies to have litigation alternatives so that innovators
shielded from the frivolous and
investors from the fraudulent.
ITEM 1A. RISK FACTORS
These disclosures under this item reflect the Company’s
beliefs and opinions as to factors that could materially and
adversely affect the Company and its securities in the future.
References to past events are examples only,
and are not
intended to be a complete listing or a representation as to whether or not such factors
have occurred in the past or their
likelihood of occurring in the future.
Any of the following risks could harm our business, results of operations and
financial condition and an investment in our stock.
The risks discussed below also include forward-looking statements, and
our actual results and financial condition may differ
substantially from those discussed in these forward-looking statements.
Operational Risks
Market conditions and economic cyclicality may adversely affect us and our industry.
The Company’s income depends
largely on the difference between interest income
earned on its loans and securities
(earning assets) and its interest expense on its deposits and other borrowings.
Market interest rates affect the spread
between our interest income and our interest expense and the values of our
investment securities. Market rates are affected
by Federal Reserve monetary policy,
fiscal policy, inflation and inflation
expectations, and various other factors.
Inflation
more directly affects our noninterest costs, as well as our customers’
savings and payment behaviors.
Market developments, including unemployment rates, price and inflation
levels, stock and bond market volatility,
and
changes, including those resulting from Russia’s
war in Ukraine and other wars and armed conflicts, tariffs
and foreign
policies, and government fiscal, operational and monetary policies affect
consumer confidence levels, economic activity
and interest rates. Increases in inflation and market interest rates and future expectations
of these, and adverse changes in
consumer and business confidence may change customers’ savings, payment
and borrowing behaviors, and may increase in
loan delinquencies and loan losses. These could affect our
credit quality, our results of
operations and financial condition.
Changes in market interest rates and the shape of the yield curve affect
the value of our investment securities.
Increased
interest rates may result in unrealized losses on investment securities and accumulated
other comprehensive income
(“AOCI”). Increases in AOCI reduce our reported stockholders’ equity.
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28
Our allowance for loan losses is affected by general economic conditions
and we may be negatively affected by credit risk
exposures.
Our models for determining our allowance for credit losses are based on “current
expected credit losses” (“CECL”)
principles in generally accepted accounting principles (“GAAP”),
and may be adversely affected by changes in the
economy. CECL uses current
expected credit losses instead of the “as incurred” loss method used historically
under GAAP,
to estimate losses inherent in our credit exposures. The process for estimating
expected losses requires difficult, subjective
and complex judgments, including forecasts of economic conditions,
and how those economic predictions might affect the
ability of our borrowers to repay their loans or the value of assets.
Macroeconomic factors used in our CECL model
include the Alabama unemployment rate, the Alabama home price index, the national
commercial real estate price index
and the Alabama gross state product.
Changes in economic conditions and factors used in our CECL models, including the
effects of changes in government policies, including
monetary and fiscal policies, may increase the variability of our
provisions for loan losses and our earnings.
The CECL standard has not been in effect over a full business cycle and
its
effects in times of severe economic stress may not be fully known.
See Note 1 to our Financial Statements –
“Allowance
for Credit Losses – Loans.”
Unanticipated adverse changes in the economy,
including those resulting from
fiscal, monetary or other government
policies adversely
affect us.
We periodically
review the expected effects of economic conditions and trends in reviewing
our allowance for credit
loss models.
We may be adversely affected
because of unanticipated adverse changes in the economy,
including
fiscal and monetary policy changes, unemployment levels, inflation,
market conditions or events adversely affecting
specific customers, industries or markets, including disruptions of supply
chains, war and armed conflicts, changes in taxes
and regulation, and changes in borrower behaviors.
Borrowers and their businesses, and real estate and commercial
projects and businesses may be adversely affected by inflation
and higher interest rates, as well as from tighter monetary
policies, and may request or need loan modifications and deferrals.
Businesses may be unable to fully pass on to their
customers increased costs due to inflation, supply chain disruptions, tariffs
and other factors, and their cash flows and
profits may be adversely affected.
If the credit quality and risk profile of our customers materially change adversely,
or if
the risk profile of the market, industry or group of customers changes materially,
or conditions in the real estate and other
markets worsen, or borrower payment behaviors change, our business,
could be materially
adversely affected.
Changes in the real estate markets, including the
origination and secondary markets for residential mortgage
loans, may
continue to adversely affect us.
Inflation and the Federal Reserve monetary actions to fight inflation have caused
residential mortgage rates to increase
significantly. Higher
interest rates and the increased prices of housing during and following the COVID-19 pandemic
have
slowed housing sales. These conditions have adversely affected
housing affordability and increased monthly mortgage
payments. Although short term interest rates have decreased since Fall 2024, longer
term mortgage rates have remained
higher than before the pandemic, and purchase money residential mortgages
and refinancings continue to be adversely
affected. Our mortgage loan production and income have
been adversely affected.
Our concentration of commercial real
estate loans could result in further increased
loan losses, and adversely affect our
business, earnings, and financial condition.
Commercial real estate (“CRE”) is cyclical.
Rapid CRE growth and concentrations of CRE loans, in dollar amounts and
geographic concentrations, present risks of possible loss.
Loans for the acquisition and development of land and residential
construction which are generally viewed as higher risk than loans on existing
structures.
We had approximately
68% of our loan portfolio in CRE loans at year-end 2025, of which approximately
18% were owner-
occupied.
The bank regulators’ CRE Guidance requires banks with high levels of CRE and
CRE growth, to implement
improved underwriting, internal controls, risk management policies and
portfolio stress testing, as well as higher levels of
allowances for possible losses and capital levels.
Increases in interest rates beginning in March 2022 and reduced market
transactions may adversely affect the assumptions and performance
of CRE, especially for projects financed with short term
or unhedged variable rate debt, and the ability of CRE borrowers to refinance
on terms that their projects can support.
Lower demand for CRE and fewer CRE purchase and sale transactions, and reduced
availability of, and higher interest rates
and costs for, CRE loans could adversely
affect the values and liquidity of CRE collateral and our CRE loans, and
sales of
other real estate owned, and therefore our earnings and financial condition,
including our capital and liquidity.
See Balance
Sheet Analysis - Loans” and “Supervision and Regulation – CRE.”
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29
Resolution of the Fannie Mae and Freddie Mac Conservatorships
may have adverse consequences
Fannie Mae and Freddie Mac (the “GSEs”) have been in conservatorship
since September 2008.
The federal government is
considering privatizing these GSEs and ending the conservatorship.
Since these GSEs dominate the residential mortgage
markets, any changes in their operations and requirements, as well as their respective
restructurings, and the costs of their
capital and borrowings as private institutions, could adversely affect
the primary and secondary mortgage markets, and our
residential mortgage businesses, our results of operations and the returns
on capital deployed in these businesses.
Resolution of these extremely large GSEs will be complex,
and the timing and effects of such resolution and the effects
on
mortgage originators and the mortgage markets and their participants,
including the Company,
cannot be predicted.
We may
be obligated to repurchase
mortgage loans we sold to third parties on terms unfavorable
to us.
The Company originates residential mortgage loans. The Company
sells these loans, primarily to Fannie Mae, pursuant to
customary contract representations and warranties. Mortgage buyers
may request that sellers repurchase mortgages for
breach of their seller obligations, if the mortgages do not perform.
Such requests increased substantially during the Credit
Crisis. Although we have had negligible mortgage loan repurchase requests historically,
including during the Credit Crises,
a stressed economy could increase mortgage loan credit issues that may increase mortgage
repurchase requests.
The soundness of other financial institutions could adversely affect us.
We routinely
execute transactions with counterparties in the financial services industry,
including securities firms, central
clearinghouses, and banks. Our ability to engage in routine investment
and banking transactions, as well as the quality and
values of our investments in holdings of obligations of other financial institutions
such as the FHLB-Atlanta, could be
adversely affected by the actions, financial condition, profitability
and regulation of such other financial institutions.
Financial services institutions are interrelated as a result of shared
credits, trading, clearing, counterparty and other
relationships.
Failures and near failures of several mid-sized banks in Spring 2023 caused significant
market volatility
issues for bank stocks, regulatory enforcement actions and uncertainty in
the investor community and among bank
regulators, customers and investors, generally.
In such situations, depositors and other customers tend to reduce their
uninsured deposits and bank supervisors more closely scrutinize bank risks.
These failures resulted in bank regulators
focusing, generally,
on capital adequacy and liquidity in light of bank growth rates, customer,
asset and deposit
concentrations and risks; uninsured deposit levels; CRE; crypto business
and customers.
About the same time, smaller
banks’ engagement with third-party vendors or “partners” providing
digital, electronic and (“BaaS”) and fintech
relationships raised bank regulatory concerns and enforcement actions
regarding such activities and their effects on bank
safety and soundness; the banks’ strategic, capital and liquidity
plans and contingency plans; and vendor diligence and risk
management.
Any losses, defaults by, or
failures of, the institutions we do business with or which affect could
adversely affect our
business, including our liquidity,
financial condition and earnings.
The federal government’s
digital innovation focus may increase our competition
and operational risks
The Executive Order “Strengthening American Leadership in Digital Financial Technology”
(2025) and the federal bank
regulators’ implementation of it, including
rapidly chartering new digital asset banks and trust companies, encouraging
stablecoins and other digital assets, as well as
investigating “de-banking” of the crypto industry and others,
may increase
the use of digital assets and the volume of digital asset transactions, and
the risks of such transactions to banks and to
financial stability, generally.
The proposed CLARITY Act legislation may enable the payment of yield or interest
equivalents on stablecoins that may compete with bank transaction accounts.
These changes could increase competition,
disruption and unexpected changes in the banking industry,
including us.
Increases in banks’ and other financial services
companies’ direct and indirect risk exposures to crypto or digital assets may increase their
cybersecurity and data breach
risks, fraud risks, and AML/CFT and sanctions compliance risks.
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30
Our future success is dependent on our ability
to compete effectively in highly competitive markets.
Lee County and the surrounding areas of East Alabama, where we primarily operate,
are highly competitive.
Our
future growth and success will depend on our ability to compete effectively
in these markets.
Lee County is served by 21
banks, including 12 national and regional competitors.
We compete for
loans, deposits and other financial services and
products with local, regional and national commercial banks, thrifts, credit
unions, mortgage lenders, and securities and
insurance brokerage firms, including services offered in
our market.
Increasingly, non-banking
firms are using technology
to compete for loans, payments, and other banking services.
Various
of these traditional and nontraditional firms offer
services in our market without any physical presence here.
Many competitors have numerous offices and affiliates
operating over wide geographic areas and have diverse customer
and geographic bases to draw upon.
Many of our
competitors offer products and services different
from ours, and have substantially greater resources including technology,
name recognition and advertising than we do, which helps them attract business.
In addition, larger competitors may be
able to price loans and deposits more aggressively than us.
Out of state banks have branched into our markets. See “Item 1
Business.”
Our success depends on local economic conditions.
Our success depends on general economic conditions, especially conditions
in our primary market.
Adverse changes in
such economic conditions, including higher market interest rates and inflation,
supply chain disruptions, changes in
customer behaviors and in the workforce and demand for space since the COVID-19
pandemic, and the timing and
magnitude of future inflation and interest rates, could negatively affect
our results of operations and financial condition.
Our local economy is also affected by the growth of automobile
manufacturing and related suppliers located in Lee County
and nearby.
Auto sales and housing sales are cyclical and generally are affected
adversely by higher prices, higher inflation
and interest rates, and tariffs and changes in tariffs.
Other major employers in our market include education and healthcare,
which may be adversely affected by changes in Federal government
policies, including education and healthcare funding,
and the availability and costs of student loans.
Attractive acquisition opportunities may not be available to us in the
future.
We seek continued
organic growth, including loan growth, and we also may consider the acquisition
of banks, branches,
deposits, or other parts of financial services businesses. We
expect that other financial services companies, including credit
unions and nonbanking institutions, some of which have significantly
greater resources, will compete with us to acquire
financial services businesses. This competition could increase prices for potential
acquisitions that we believe are attractive.
Any acquisition could be dilutive to our earnings and shareholders’ equity per
share of our common stock.
Future acquisitions and expansion activities may disrupt
our business, dilute shareholder value and adversely affect
our
operating results and financial condition.
We evaluate potential
acquisitions and expansion opportunities, including new branches and
other offices.
To the extent
that we grow through acquisitions or new locations, we cannot assure you that we will be able to adequately
or profitably
manage such growth.
Acquiring other banks, branches, or businesses, as well as other geographic
and product expansion
activities involve various known and unknown risks, including credit
quality, valuation and pricing,
systems conversions,
retention and integration of people, retention and growth of customers,
as well as transaction expenses, all of which require
time and coordination with third parties such as service providers. Acquisitions
and other expansion activities may fail to
generate the opportunities and customers, revenues or cost savings forecasted.
Technological
changes affect our business, and we may have fewer resources
than many competitors to invest in and
effectively implement technological improvements;
and manage the related risks related
to operating technology and
realizing returns on technology
investments.
The financial services industry is undergoing rapid technological
changes, including new technology-driven products and
s
ervices and growing demands for user-based banking
applications that can be used anywhere.
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31
Artificial intelligence is at an early stage of development and is expensive,
but may offer opportunities for better customer
services at reduced costs, but with a high level of unknown risks.
The effective use of technology may help us better
analyze our customers and their needs better,
and the effective use of technology may enable us to increase efficiency
and
reduce our operating costs.
At the same time, the initial costs of acquiring and implementing technology
may be material,
and such technology requires ongoing attention to the related risks, including
fraud, cybersecurity and customer privacy,
compliance with the AML/CFT anti-money laundering and
sanctions laws, among others, and various operational and other
risks.
Our future success will depend, in part, upon our ability to use technology effectively
and efficiently to provide
products and services that meet our customers’ preferences and create additional
efficiencies in operations, while
maintaining the security of our systems and data, and complying with applicable
law.
Severe weather,
natural disasters and conflicts could have significant adverse effects on our business.
Severe weather and natural disasters such as hurricanes, tornados, floods, and
acts of war, terrorism, or armed conflict, may
potentially interrupt our business and damage our properties and
collateral securing our loans, result in lost revenues and
additional expenses. Such events also could affect the general economic
conditions that affect us, the stability of our deposit
base, disrupt our customers’ businesses and impair our borrowers’ capacity
to repay loans. Although management has
established disaster recovery and business continuity policies and procedures,
severe weather and natural disasters and
these other events could have a material adverse effect on our business.
Potential gaps in our risk management policies and internal audit procedures
may leave us exposed to unidentified or
unanticipated risks, which could negatively affect our business.
Our enterprise risk management and internal audit program are designed
to mitigate material risks and losses to us. We
regularly review our risks in an effort to maintain risk management
and internal audit policies and procedures addressing
our risks.
Nonetheless, our policies and procedures may not anticipate and identify timely every
risk to which we may be
exposed. Our internal audit process may fail to detect such weaknesses or deficiencies
timely. Many of our
risk
management models and estimates are based on assumptions, estimates and
judgments from observed historical market
behavior to model or project potential future exposure. Other models used
by our business, including our CECL models,
also are based on assumptions, estimates and projections. These models may
not operate properly or timely,
or our inputs,
estimates and assumptions may be inaccurate, or changes in economic
and market conditions, customer behaviors or
regulations may adversely affect the accuracy or usefulness of
the models. These models may not fully or timely predict
future exposures, which may occur significantly faster or
in greater magnitudes than historically. Other
risk management
methods depend upon the evaluation of information regarding markets,
clients, or other matters that are publicly available
or otherwise accessible. This information may not always be accurate,
complete, up-to-date or properly evaluated.
We may have
to implement more extensive and perhaps different risk management
policies and procedures to reflect
changes in the economy,
threats to our systems and data, our markets and customers, regulation, and technology uses and
exposures.
All of these could adversely affect our costs.
Any failure to protect
the confidentiality of customer information could have material adverse effects on us.
Various
laws enforced by the bank regulators and other government agencies protect
the privacy and security of customers’
non-public personal information maintained by banks and their vendors. Our
internal processes, policies and controls are
designed to protect the confidentiality of customer information
we hold and that is accessible to us, our vendors and
employees. It is possible that a vendor or an employee could permit unauthorized
access to or improperly use confidential
customer information. Personal customer data also could be compromised
via intrusions into our systems or those of our
service providers or other persons we do business with such as credit bureaus,
data processors and merchants who accept
credit or debit cards for payment. If our internal controls are inadequate, or
if our employees, vendors and other third parties
fail to comply with our policies and procedures, misappropriation or inappropriate
disclosure and misuse of customer
information could occur.
Any such internal control inadequacies or non-compliance could materially
damage our
reputation, lead to remediation costs and civil or criminal penalties.
See Item 1C. Cybersecurity for more information
about cybersecurity and our management and strategies.
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32
Our systems, including those provided
by third parties may be attacked, which could disrupt
our operations and materially
damage our business.
Our systems and networks, including those provided by our third-party
service providers, are subject to security risks and
may be disrupted, such as denial of service attacks, hacking, terrorist activities,
or identity theft. Cybercrime risks have
increased as electronic and mobile banking activities have increased,
and may increase further as a result of wars in Ukraine
or the Middle East, tensions with mainland China and other countries, foreign
government sponsored cybercrime and theft,
and the development of intrusion tools using artificial intelligence.
Other financial service institutions and their service
providers have reported material security breaches, including use of stolen
access credentials, hacking, malware,
ransomware, phishing and distributed denial-of-service attacks, among
other means. Attackers using a wide and increasing
variety of tactics have disrupted the operations of public companies, and have
demanded ransoms to return hijacked
systems, effected unauthorized transfers, obtained unauthorized
access to confidential information, destroyed data, disabled
or degraded service, and sabotaged systems. Any of these could cause material
financial, operational and reputational harm.
Despite our cybersecurity policies, and our efforts to monitor and
maintain the integrity of the systems we and our third-
party service providers use, we may not be able to anticipate or counter all rapidly evolving
security threats.
Artificial
intelligence used by cyber criminals, including foreign governments,
likely will require additional defenses.
The increasing
levels and sophistication of cyber threats may require us and our vendors to
spend more resources to protect our data.
Security breaches or failures may have serious adverse financial and other
consequences, including disruptions to
operations, misappropriation of confidential information, damage
to systems operated by us or our third-party service
providers, as well as damages to our customers and our counterparties, and
significant remediation costs. These events
could damage our reputation, result in loss of customer business, subject us to additional
regulatory scrutiny, or expose us
to civil litigation and possible financial liability,
any of which could have a material adverse effect on our financial
condition and results of operations.
See “Item 1C. – Cybersecurity.
We may
be unable to attract and retain key people to support our business.
Our success depends, in large part, on our ability to attract and retain
key people. We
compete with other financial services
companies for people primarily on the basis of our culture, compensation
and benefits, support services and financial
position. Intense competition exists for key employees with demonstrated
ability, and we may be unable
to hire or retain
such employees. The unexpected loss of one or more of our key persons and or
the failure to effect timely transitions
involving such persons could have a material adverse effect on
our business, earnings or financial condition.
Financial Risks
Our cost of funds may increase as a result
of general economic conditions, inflation, interest
rates, inflation, changes in
customer behaviors and competitive pressures.
Our costs of funds are affected by general and local economic conditions,
changes in market interest rates and competitive
pressures, and inflation, and anticipated future changes in target short
-term interest rates resulting from the Federal
Reserve’s anti-inflation measures.
Traditionally,
we have obtained funds principally through local deposits and borrowings
from the FHLB-Atlanta. Increases in interest rates typically cause consumers
to shift their funds to more interest-bearing
instruments and increase the competition for deposits. If customers move (i) money
out of bank transaction deposits into investments, stablecoins or other yield-bearing
instruments elsewhere, or (ii) they
move their funds within the Bank from transaction deposits to higher cost, interest-bearing
time deposits, our interest
expense may increase, and our net interest income and earnings may be material and adversely
affected income. If our total
deposits decreased, our funds to make loans and grow will be reduced. Any of
these may adversely affect our business.
See
“Supervision and Regulation – Fiscal and Monetary Policy.”
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33
Our profitability and liquidity may be affected
by changes in interest rates and interest
rate levels, the shape of the yield
curve and economic conditions.
Our profitability is primarily driven by the difference between the
interest rates received on our interest earning assets and
the interest we pay on our deposits and borrowings. Net interest income will be adversely affected
if market interest rates
and the interest we pay on our deposits and borrowings increase faster than the
interest earned on loans and investments,
especially as large portion of our loans have fixed interest
rates. Interest rates, and consequently our results of operations,
are affected by general economic conditions (national,
international and local), fiscal and monetary policies, and
expectations regarding changes in these, and the shape of the yield curve. Net
interest income could be affected by
asymmetrical changes in the different interest rate indexes because
not all of our assets or liabilities are priced with the
same index. and the different indices do not change simultaneously
or at the same magnitude. Higher market interest rates
and continuing run-off of maturing securities held
by the Federal Reserve in its SOMA as quantitative tightening to
curb
inflation and to maintain sufficient reserves in the system policy,
may limit economic growth, and therefore reduce loan
demand and growth.
The production of mortgages and other loans and the value of collateral
securing our loans are dependent on demand within
the markets we serve, as well as interest rates.
Increases in market interest rates tend to decrease mortgage originations,
increase MSR values, decrease the value and liquidity of collateral securing
loans, and may result in unrealized losses on
our investment securities and increase our accumulated other comprehensive
losses.
Accumulated other comprehensive
losses reduce our reported GAAP equity and tangible equity.
See “Management's Discussion and Analysis of Financial
Condition and Results of Operations Table
5,” “Market and Liquidity Risk Management” and Supervision and Regulation.
Liquidity risks could affect operations and jeopardize
our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings
or sales of loans and
investments or otherwise, or due to materially reduced or delayed proceeds
from scheduled loan and securities payments
and maturities, could have a negative effect on our liquidity.
Our funding sources also include federal funds purchased,
securities sold under repurchase agreements, and short- and long-term debt.
We maintain a portfolio
of marketable high-
quality securities that are all held as available for sale, and can be used as a source of liquidity.
As market interest rates
rose prior to Fall 2024, however, we experienced
unrealized losses on our securities available for sale, which would become
realized losses upon the sale of such securities, and such sales at a loss would reduce
our net income and our regulatory
capital.
Our access to funding sources in amounts adequate to finance or capitalize
our activities on terms which are acceptable to
us could be impaired by factors that affect us specifically,
or general economic or banking industry issues.
General
conditions that are not specific to us, such as disruptions in the financial markets, failures
of other banks, such as the Spring
2023 bank failures, or negative views and expectations about the prospects
for the financial services industry,
could
adversely affect us and our liquidity.
Competition, including from stablecoins paying rewards or other interest equivalents
could also adversely affect the availability and cost of deposits and
liquidity.
Our ability to realize our deferred
tax assets may be reduced if our estimates of future
taxable income from our operations
and tax planning strategies do not support this amount, or our tax law reduces
or deferred tax assets.
We are allowed
to carry-back losses for two years for Federal income tax purposes.
As of December 31, 2025, we had a
net deferred tax asset of $6.9 million compared to $10.2 million one year
earlier.
These and future deferred tax assets may
be reduced in the future if our estimates of future taxable income from our operations
and tax planning strategies do not
support the amount of the deferred tax asset.
Changes in accounting and tax rules applicable to banks could adversely
affect our financial conditions and results of
operations.
From time to time, the FASB
and the SEC change the financial accounting and reporting standards that govern
our financial
statements.
These changes can be difficult to predict and can materially affect
our reported financial condition and results
of operations, and may cause us to restate prior period financial statements
.
Congress, the Treasury Department and state
and local governments may also change the tax laws or make consequential
changes to their interpretation that may
adversely affect us.
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34
If we need to raise additional capital in the future,
that capital may not be available on reasonable terms.
We anticipate that
our current capital resources will satisfy our capital requirements
for the foreseeable future under current
capital rules.
If, however, we need to raise additional capital to support
our growth, currently unanticipated losses or new
capital requirements, our ability to raise additional capital will depend,
among other things, on conditions in the capital
markets at that time.
If we cannot raise additional capital on acceptable terms when needed, our ability to grow
will be
limited.
Our employees may take excessive risks which could negatively affect our financial
condition and business.
Banks are in the business of accepting certain risks. Our management
and employees make decisions and choices that may
expose us to risk. Our incentive compensation programs seek to avoid incenting
excessive risk-taking; but some employees
may take such risks. Similarly,
although we our controls and procedures are designed to govern and
monitor associates’
business decisions and prevent them from taking excessive risks and misconduct,
these controls and procedures may not be
effective. If our employees take excessive risks, our financial condition,
results of operations and reputation could be
materially and adversely affected.
Our ability to pay dividends to shareholders, repurchase
stock and pay discretionary bonuses in the future
depends on our
profitability,
capital, liquidity and regulatory requirements,
which may prevent or limit future
dividends.
Cash available to pay dividends to our shareholders is derived primarily from
dividends paid to the Company by the Bank.
The Bank’s ability to pay dividends,
and Company’s ability to pay dividends to
our shareholders, continue to depend on our
earnings and maintaining appropriate liquidity and capital at all levels of our
business consistent with regulatory
requirements. We
generally may pay dividends, repurchase stock and pay discretionary
bonuses, from our current year’s
earnings based on “eligible retained income” over the last four calendar
quarters if our capital conservation buffer exceeds
2.5%. See “Supervision and Regulation.”
Our common stock trades in limited volumes, which could result
in price volatility and inefficient pricing.
Your
ability to sell or buy our common stock depends upon a trading market for our common
stock.
Although our common
stock is quoted on the Nasdaq Global Market under the trading symbol “AUBN,” our
trading volume has been limited
historically. The limited
trading volume may cause fluctuations in the market value of our common stock to be exaggerated,
leading to price volatility exceeding what may occur in a more active trading
market.
As a result, you may be unable to
trade our common stock at the volume, price and time that you desire.
Due to limited trading volumes, market prices may
not reflect our common stock’s true or
intrinsic value.
Legal and Regulatory Risks
The Company is an entity separate and distinct from
the Bank.
The Company is an entity separate and distinct from the Bank.
Company transactions with the Bank are limited by the
Federal Reserve Act and Federal Reserve Regulation W.
The Company cannot generally borrow from the Bank and
depends upon dividends paid by the Bank to the Company,
which are limited by law and regulatory policies. The
Company’s liquidity,
financial condition and ability to pay dividends or repurchase Company common
stock or pay
discretionary could be materially adversely affected if the Bank’s
dividends were further limited by law or
regulatory restriction, or if the Bank’s
earnings, capital position or liquidity were insufficient.
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35
We are
required to maintain
capital to meet regulatory requirements,
and if we fail to maintain sufficient capital, our
financial condition, liquidity and results of operations
would be adversely affected.
The Bank must meet regulatory capital requirements.
If we fail to maintain our capital and meet other regulatory
requirements, our financial condition, liquidity and results of operations may
be materially and adversely affected.
Our
failure to remain “well capitalized” and “well managed” for bank
regulatory purposes, including a failure to meet the
capital conservation buffers needed to avoid restrictions
on distributions, could adversely affect us, our stock and its price.
A failure to remain “well capitalized,” for bank regulatory purposes, could, among
other possible consequences adversely
affect customer confidence and our:
●
ability to grow;
●
costs of and availability of funds;
●
costs of FDIC deposit insurance premiums;
●
ability to raise or replace brokered deposits;
●
ability to pay or increase dividends on our capital stock;
●
ability to repurchase our common stock;
●
ability to make discretionary
bonuses to attract and retain quality personnel;
●
ability to make acquisitions or engage in new activities;
●
flexibility if we become subject to prompt corrective action restrictions; and
●
ability to make payments of principal and interest on any of our capital
instruments that may be then outstanding.
See
“Supervision and Regulation.”
The Federal Reserve may require
us to commit capital resources
to support the Bank.
A bank holding company must act as a source of financial and managerial
strength to its subsidiary bank.
The Federal
Reserve may require a bank holding company to make capital injections into
a troubled subsidiary bank, and we could be
required to provide financial assistance to the Bank if it experienced financial
distress, even if further investment is not
otherwise warranted economically.
See “Supervision and Regulation.”
We are
subject to extensive banking regulation to protect
depositors, which could adversely affect our earnings and our
common stock value.
We are subject to
extensive regulation by federal and state bank regulators. Our success is affected
by laws and regulations
affecting banks and bank holding companies, and our costs of compliance
could adversely affect our earnings.
Banking
regulations are primarily intended to protect depositors and the FDIC’s
DIF, not
shareholders. The financial services
industry also is subject to frequent legislative and regulatory changes and proposed
changes. Compliance with applicable
laws and regulations, as applied by our bank regulators and their examiners
may be is time consuming and costly.
Recent
litigation striking new regulations because the regulators exceeded their
authority or improperly acted when adopting new
rules, creates uncertainty and results in wasted time and costs of preparing
to comply with new rules that never become
effective.
See “Supervision and Regulation.”
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36
Our operations are subject to risk of loss from
unfavorable fiscal, monetary,
regulatory and political developments,
domestic and foreign.
Our businesses and earnings are affected by the fiscal, monetary
and other policies and actions of various federal and state
governmental and regulatory authorities.
Changes in these are beyond our control and are difficult to predict and,
consequently, changes
in these policies could have negative effects on our activities and
results of operations.
Failures of
the executive and legislative branches to agree on spending plans and budgets
previously have led to Federal government
shutdowns, which may adversely affect the U.S. economy.
Prolonged government shutdown or reductions in force at
various governmental and regulatory authorities may inhibit our ability to evaluate
the economy, generally,
and affect
government workers who are not paid during such events, and where the absence
of government services and data could
adversely affect consumer and business sentiment, our
local economy, and our business.
Economic disruptions from
government actions on tariffs, immigration, population
growth and labor, wars and military actions, and the availability
of
petroleum and raw materials from foreign sources could adversely affect
the economy in various ways, including, for
example, supply chain disruptions, increased costs and inflation, and changes
in consumer behaviors.
Continuing increases
in government deficits may also increase inflation and the interest rates on
U.S. government debt. The interest rates on
business and consumer debt, including loans and mortgages, generally reflect
a premium over U.S. government debt, and
increased rates could adversely affect the economy,
generally.
Our business is subject to litigation that may result in
significant financial losses and/or harm to our reputation.
We face risks of
litigation in the ordinary course of operating our businesses. Plaintiffs in lawsuits against
us may seek very
large and/or indeterminate amounts, including punitive
and treble damages and legal fees. The ultimate outcome of any
litigation or threatened litigation and the amount or range of potential loss at particular
points in time may be difficult to
ascertain.
See “Item 3 legal Proceedings.”
ITEM 1B. UNRESOLVED
STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
We rely extensively
on various information systems and other electronic resources to operate our business. In
addition,
nearly all of our customers, service providers and other business partners on whom
we depend, including the providers of
our online banking, mobile banking and accounting systems, use their own
electronic information systems.
Any of these
systems can be compromised by employees, customers and other
authorized individuals, and bad actors using sophisticated
and constantly evolving sets of software, tools and strategies, which may include
artificial intelligence, to do so.
The
threats are domestic and international and range from small to large,
including state sponsored, terrorist and criminal
organizations with substantial funds, and technical
and other resources, and may increase during wars, armed conflicts and
heightened international tensions.
As a bank, we and our vendors, service providers and customers may be attractive targets,
and we confront continuous
cybersecurity threats.
Insurance to fully cover these risks is unavailable in sufficient amounts at reasonable
costs.
We
believe the more effective approach is taking active measures to detect,
deter and reduce cybersecurity threats, and be
prepared to address and remediate any breaches and prevent similar breaches
in the future.
See “Risks Related to
Information Security and Business Interruption” section of the Risk Factors included
in Item 1A of this Form 10-K for
additional information.
Accordingly, we have devoted
significant resources to assessing, identifying and managing risks associated with
cybersecurity threats, including:
•
Implementing an Information Security Program that establishes policies and
procedures for security
operations and governance;
•
Establishing an IT Steering Committee that includes participation by directors that
is responsible for security
administration, including reviewing assessments of our information
systems, existing controls, vulnerabilities
and potential improvements;
•
I
mplementing layers of controls and avoiding excessive reliance on any single
control;
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37
•
Employing a variety of preventative and detective tools designed to monitor,
block and provide alerts
regarding suspicious activity;
•
Continuously evaluating tools that can detect and help respond to cybersecurity
threats in real-time;
•
Leveraging people, processes and technology to manage and maintain cybersecurity
controls;
•
Performing initial and ongoing due diligence with respect to our third-party
service providers, including their
cybersecurity practices and safeguards, and service level standards
based on the risk they pos to the Bank;
•
Maintaining a vendor management program with pre-engagement and periodic
review processes thereafter,
and a third-party risk management program designed to identify, assess and manage
risks associated with
external service providers;
•
Monitoring our systems and related software and programming periodically
to update software and
programing, including updating data protection elements, and requiring
that our service providers also engage
in similar programs that are reasonably designed to deter cybersecurity
breaches;
•
Performing initial and ongoing due diligence with respect to our third-party
service providers, including their
cybersecurity practices and safeguards, and service level standards based
on the risk they pose to the Bank;
•
Engaging third-party cybersecurity consultants, who conduct periodic penetration
testing, vulnerability
assessments and other procedures to identify potential weaknesses in our
systems and processes; and
•
Conducting periodic cybersecurity training for our employees and the Compa
ny’s board of directors.
Our Information Security Program is a key part of our overall risk management
system, which is administered by our IT
Steering Committee and evaluated by our IT Steering Committee and
Chief Risk Officer.
The program includes
administrative, technical and physical safeguards to help protect the security
and confidentiality and availability of
customer records and information.
From time-to-time, we have identified cybersecurity threats that require
us to make changes to our processes and equipment
and implement additional safeguards. While none of these identified threats
or incidents have materially affected us, it is
possible that threats and incidents we identify in the future could have a material
adverse effect on our business strategy,
customer service, data privacy and security,
continuity of service and reputation, and our results of operations and financial
condition.
See Item 1A. “Risk Factors”.
The Company’s Chief Technology
Officer is responsible for the day-to-day management of cybersecurity risks we face and
oversees the IT Steering Committee, which is chaired by a director of
the Company’s board. The IT Steering Committee
oversees the information security assessment, development
of policies, standards and procedures, testing, training and
security report processes.
The IT Steering Committee is comprised of officers with the appropriate
expertise and authority
to oversee the Information Security Program, and includes the participation
of certain directors.
Our Chief Technology
Officer, along with the information
technology department, is accountable for managing our
enterprise information security and delivering our information security program.
The department, as a whole, consists of
information security professionals with varying degrees of education
and experience. The Chief Technology
Officer is
subject to professional education and certification requirements. In particular,
our Chief Technology Officer,
who is also
designated as our Information Security Officer,
has relevant expertise in the areas of information security and cybersecurity
risk management.
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38
In addition, the Company’s
Board, both as a whole and through directors participating in the IT Steering Committee,
is
responsible for the oversight of risk management, including cybersecurity
risks. In that role, the Company’s Board
and the
IT Steering Committee, with support from the Company’s
management and third-party cybersecurity advisors, are
responsible for implementing and maintaining risk management processes
designed and implemented by management that
are adequate and functioning as designed.
The Board reviews and approves an information security program, vendor
management policy (including third-party service providers), acceptable
use policy, incident response procedures
and
business continuity planning policy on at least an annual basis. All the aforementioned
policies are developed and
implemented by Company management. To
carry out their duties, the Board receives updates at least quarterly from the
Chief Technology
Officer regarding cybersecurity risks and the Company’s
efforts to prevent, detect, mitigate and
remediate any cybersecurity incidents.
ITEM 2. DESCRIPTION OF PROPERTY
The Bank conducts its business from its main office,
seven full-service branches,
and a loan production office.
The Bank owns its main campus in downtown Auburn, Alabama, which comprises
over 4 acres and includes the
AuburnBank Center, drive-through
facility, and parking deck.
The AuburnBank Center, which was constructed
in May
2022, has approximately 90,000 square feet of space.
The AuburnBank Center includes the Bank’s
main office, the Auburn
loan production office, and all of its back-office
operations.
The main office branch offers the full line
of bank services and
has one ATM.
The AuburnBank Center has approximately 46,000 square feet of Class A office
space and approximately
5,000 square feet of retail space available for lease to third party tenants,
of which approximately 32,000 square feet is
currently leased and occupied.
The Bank’s drive-through facility located
on the main office campus was constructed in
October 2012.
This drive-through facility has five drive-through lanes, including
an ATM,
and a walk-up teller window.
The parking deck has approximately 500 parking spaces, is open to the public and
charges hourly,
monthly, and special
event rates, and provides
parking needs for the Bank’s employees
and customers.
Of the 500 parking spaces,
approximately 100 to 150 parking spaces have been made available
to a third-party under a long-term lease.
The Opelika branch is located in Opelika, Alabama. This branch, built in
1991, is owned by the Bank and has
approximately 4,000 square feet of space. This branch offers
the full line of the Bank’s services and
has drive-through
windows and an ATM.
This branch offers parking for approximately 36 vehicles.
The Notasulga branch was opened in August 2001. This branch is located
in Notasulga, Alabama, about 15 miles west of
Auburn, Alabama. This branch is owned by the Bank and has approximately 1,344
square feet of space. The Bank leased
the land for this branch from a third party.
In May 2025, the Bank’s land lease renewed
for another one-year term. This
branch offers the full line of the Bank’s
services including safe deposit boxes and a drive-through window
and parking for
approximately 11 vehicles, including
a handicapped ramp.
In November 2002, the Bank opened a loan production office
in a leased space in Phenix City,
Alabama, about 35 miles
south of Auburn, Alabama. In November 2025, the Bank renewed
its lease for another year.
In February 2009, the Bank opened a branch located on Bent Creek Road
in Auburn, Alabama. This branch is owned by the
Bank and has approximately 4,000 square feet of space. This branch offers
the full line of the Bank’s services and
has
drive-through windows and a drive-up ATM.
This branch offers parking for approximately 29 vehicles.
In December 2011, the Bank opened a branch
located on Fob James Drive in Valley,
Alabama, about 30 miles northeast of
Auburn, Alabama.
This branch is owned by the Bank and has approximately 5,000 square feet of space.
This branch offers
the full line of the Bank’s services and
has drive-through windows and a drive-up ATM.
This branch offers parking for
approximately 35 vehicles.
Prior to December 2011, the Bank had operated
a loan production office in Valley,
which was
originally opened in September 2004.
The Bank operated a branch in the Corner Village
Shopping Center in Auburn from 2015 to the end of 2024.
After careful
consideration of the Bank’s customers,
branch usage, parking issues, the lack of a drive through window and the
close
proximity to our other locations in Auburn, the Bank closed the Corner
Village branch on December 31,
2024, and its lease
expired January 31, 2025.
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39
In September 2015, the Bank relocated its Auburn Wal
-Mart Supercenter branch in south Auburn, which had been
opened
in 2004, to a new building which the Bank built in 2015 at the intersection of
S. Donahue Avenue and E.
University Drive
in Auburn, Alabama.
The South Donahue branch has approximately 3,600 square feet of space.
The South Donahue
branch offers the full line of the Bank’s
services and has drive-through windows and an ATM.
This branch offers parking
for approximately 28 vehicles.
In May 2017, the Bank relocated its Opelika Kroger branch to a new location the
Bank purchased in August 2016 near the
Tiger Town
Retail Shopping Center and the intersection of U.S. Highway 280 and Frederick Road
in Opelika, Alabama.
The Tiger Town
branch, built in 2017, has approximately 5,500 square feet of space.
Prior to relocation, the Bank’s
Opelika Kroger branch was located inside the Kroger supermarket in
the Tiger Town
retail center in Opelika, Alabama. The
Opelika Kroger branch was originally opened in July 2007. The Tiger
Town branch offers
the full line of the Bank’s
services and has drive-through windows and an ATM.
This branch offers parking for approximately 36 vehicles.
In addition to the seven ATMs
at various branch locations, the Bank also has one ATM
located in Notasulga, Alabama.
The Bank had a 2,500 square feet loan production office on East Samford
Avenue in Auburn, Alabama.
When this loan
production office was relocated to the AuburnBank Center in June
2022, the Company entered into a three-year sublease
agreement during 2022.
The sublessee has renewed this sublease through October 2026.
ITEM 3.
LEGAL PROCEEDINGS
In the normal course of its business, the Company and the Bank from time to time
are involved in legal proceedings. The
Company’s management believe
there are no pending or threatened legal proceedings that, upon resolution,
are expected to
have a material adverse effect upon the Company’s
or the Bank’s financial condition or results
of operations.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
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40
PART
II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER
MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s Common
Stock is listed on the Nasdaq Global Market, under the symbol “AUBN”. As of March 10, 2025,
there were approximately 3,493,699 shares of the Company’s
Common Stock issued and outstanding, which were held by
approximately 330 shareholders of record. The following table sets forth,
for the indicated periods, the high and low closing
sale prices for the Company’s Common
Stock as reported on the Nasdaq Global Market, and the cash dividends declared to
shareholders during the indicated periods.
Closing
Cash
Price
Dividends
Per Share (1)
Declared
High
Low
2025
First Quarter
$
23.37
$
20.36
$
0.27
Second Quarter
25.28
19.48
0.27
Third Quarter
28.47
23.13
0.27
Fourth Quarter
27.98
24.00
0.27
2024
First Quarter
$
21.55
$
18.82
$
0.27
Second Quarter
19.25
16.63
0.27
Third Quarter
24.35
17.50
0.27
Fourth Quarter
24.57
20.06
0.27
(1)
The price information represents actual transactions.
The Company has paid cash dividends on its capital stock since becoming
the Bank’s sole stockholder.
Prior to forming
the Company, the Bank paid
cash dividends since its organization in 1907, except during the Depression years
of 1932 and
- Holders of Common Stock are entitled to receive such dividends
when, as and if may be declared by the Company’s
Board of Directors. The amount and frequency of cash dividends is determined
in the judgment of the Board based upon a
number of factors, including the Company’s
earnings, financial condition, liquidity,
capital and regulatory requirements and
other relevant factors and the availability of dividends payable by the Bank
consistent with amounts available therefore,
including the Bank’s earnings, financial
condition, liquidity, regulatory
and capital requirements and other relevant factors.
T
he Board currently intends to continue its present dividend policies.
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41
The amount of dividends payable by the Bank is limited by law and regulation.
The Company relies upon dividends from
the Bank to pay Company expenses and to pay dividends on Company common stock.
The need to maintain adequate
capital and liquidity in the Bank also limits the dividends that may be paid to the Company.
The Bank and the Company
can only pay dividends, repurchase stock and pay discretionary bonuses,
if our capital conservation buffer of CET1 capital
exceeds 2.5% and from our eligible retained income over the last four calendar
quarters.
Eligible retained income equals
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.
Federal Reserve policy could restrict future dividends from the Bank or on
Company Common Stock, depending on our
earnings and capital position, risks and likely needs.
The Alabama Banking Code also limits dividends payable by the
Bank.
See “Supervision and Regulation –Dividends and Distributions” and
“Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Capital Adequacy”
and “Risk Factors”
.
Issuer Purchases of Equity Securities
N
ot applicable.
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42
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
The following is a discussion of our financial condition at December 31,
2025 and 2024 and our results of operations for
the years ended December 31, 2025 and 2024. The purpose of this discussion
is to provide information about our financial
condition and results of operations which is not otherwise apparent
from the consolidated financial statements. The
following discussion and analysis should be read along with our consolidated
financial statements and the related notes
included elsewhere herein. In addition, this discussion and analysis contains
forward-looking statements, so you should
refer to Item 1A, “Risk Factors” and “Special Cautionary Notice Regarding
Forward-Looking Statements”.
This includes
Table 2 “Selected
Financial Data.”
OVERVIEW
The Company was incorporated in 1990 under the laws of the State of Delaware and
became a bank holding company after
it acquired its Alabama predecessor, which was a bank
holding company established in 1984. The Bank, the Company's
principal subsidiary,
is an Alabama state-chartered bank that is a member of the Federal Reserve System and
has operated
continuously since 1907. Both the Company and the Bank are headquartered
in Auburn, Alabama. The Bank conducts its
business primarily in East Alabama, including Lee County and surrounding
areas. The Bank operates full-service branches
in Auburn, Opelika, Notasulga and Valley,
Alabama.
The Bank also operates a loan production office in
Phenix City,
Alabama.
Summary of Results of Operations
Year ended December 31
(Dollars in thousands, except per share data)
2025
2024
Net interest income (a)
$
29,747
$
27,204
Less: tax-equivalent adjustment
73
79
Net interest income (GAAP)
29,674
27,125
Noninterest income
3,119
3,474
Total revenue
32,793
30,599
Provision for credit losses
631
36
Noninterest expense
22,951
22,166
Income tax expense (benefit)
1,956
2,000
Net earnings
$
7,255
$
6,397
Basic and diluted net earnings per share
$
2.08
$
1.83
(a) Tax-equivalent.
See "Table 1 - Explanation of Non-GAAP Financial Measures".
Financial Summary
The Company’s net earnings were
$7.3 million for the full year 2025, compared to $6.4 million for the full year 2024.
Basic and diluted net earnings per share were $2.08 per share for the full year 2025,
compared to $1.83 per share for the full
year 2024.
Net interest income (tax-equivalent) was $29.7 million in 2025, a
9% increase compared to $27.2 million in 2024. This
increase was primarily due to improved net interest margin
and a 2% increase in our interest-earning assets.
The
Company’s net interest margin
(tax-equivalent) was 3.27% in 2025, compared to 3.06% in 2024.
The increase in net
interest margin (tax-equivalent) was primarily due to improved
yields on interest-earning assets, and a decrease in our cost
of interest-bearing deposits.
At December 31, 2025, the Company’s
allowance for credit losses was $7.2 million, or 1.27% of total loans, compared
to
$6.9 million, or 1.22% of total loans, at December 31, 2024.
The Company recorded a provision for credit losses of $631 thousand
in 2025 compared to $36 thousand during 2024.
The
provision for credit losses in 2025 was primarily due to two loans that were individually
evaluated.
A specific reserve was
established for one loan and the other loan was partially charged
off.
The provision for credit losses under CECL is
reflective of the Company’s credit
risk profile and the future economic outlook and forecasts. Our CECL model is largely
influenced by economic factors including, most notably,
the anticipated unemployment rate.
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43
Noninterest income was $3.1 million in 2025 compared to $3.5
million in 2024.
The decrease was primarily related to a
decrease in mortgage lending income and other noninterest income
.
Noninterest expense was $23.0 million in 2025 compared to $22.2
million in 2024.
The increase was primarily related to
increases in salaries and benefits expense and other noninterest expense.
These increases were partially offset by a decrease
in net occupancy and equipment expense.
The provision for income tax expense was $2.0 million for an effective
tax rate of 21.24% for 2025, compared to
$2.0 million for an effective tax rate of 23.82% for 2024.
The Company’s effective
income tax rate is affected principally
by tax-exempt earnings from the Company’s
investments in municipal securities and loans, bank-owned life insurance,
and
New Markets Tax Credits.
The provision for income tax expense and the effective tax rates for
2024 included discrete tax
items associated with provision to return adjustments in conjunction with
the final 2023 tax return filing and the resolution
of state examination activities, which resulted in additional tax expense.
The Company paid cash dividends of $1.08 per share in 2025 and 2024.
At December 31, 2025,
the Bank’s regulatory
capital ratios were well above the minimum amounts required to be
“well capitalized” under current regulatory standards
with a total risk-based capital ratio of 17.14%, a tier 1 leverage ratio of 10.71%
and common equity tier 1 or (CET1) of
16.06%
at December 31, 2025.
CRITICAL ACCOUNTING POLICIES
The accounting and financial reporting policies of the Company conform with
U.S. generally accepted accounting
principles and with general practices within the banking industry.
In connection with the application of those principles, we
have made judgments and estimates which, in the case of the determination of our
allowance for credit losses, recurring and
non-recurring fair value measurements, and the valuation of deferred tax assets, were critical
to the determination of our
financial position and results of operations.
Allowance for Credit Losses – Loans
The allowance for credit losses is estimated under the CECL methodology set forth
in Financial Accounting Standards
Board (“FASB”) Accounting
Standards Codification (“ASC”) 326,
Financial Instruments – Credit Losses
. The allowance
for credit losses reflects management’s
estimate of the amount of credit losses expected to be recognized over the
remaining life of the loans in our portfolio. This evaluation requires significant
management judgment and is based upon
relevant available information related to historical default and loss experience,
current and projected economic conditions,
and other portfolio-specific and environmental risk factors. Losses are predicted
over a reasonable and supportable forecast
period, and at the end of the reasonable and supportable period losses revert
to long term historical averages. The allowance
for credit losses is measured on a collective basis for pools of loans with similar
risk characteristics, and on an individual
basis for loans that do not share similar risk characteristics with the collectively
evaluated pools. There are factors beyond
our control, such as changes in projected economic conditions, real estate markets or
particular industry conditions which
may materially impact asset quality and the adequacy of the allowance for
credit losses and thus the resulting provision for
credit losses. The allowance is adjusted through provision for credit losses and
decreased by charge-offs, net of recoveries
of amounts previously charged-off. See Note 1
- Summary of Significant Accounting Policies and Note 4 - Loans and
Allowance for Credit Losses in the notes to our consolidated financial statements
in this report.
Fair Value
Determination
U.S. GAAP requires management to value and disclose certain of the
Company’s assets and liabilities at fair value,
including investments classified as available-for-sale and
derivatives. ASC 820,
Fair Value
Measurements and Disclosures
,
which defines fair value, establishes a framework for measuring fair value
in accordance with U.S. GAAP and expands
disclosures about fair value measurements.
For more information regarding fair value measurements and disclosures,
please refer to Note 1 - Summary of Significant Accounting Policies and Note
14, Fair Value
in the notes to the
consolidated financial statements that accompany this report.
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44
Fair values are based on active market prices of identical assets or liabilities when available.
Comparable assets or
liabilities or a composite of comparable assets in active markets are used when
identical assets or liabilities do not have
readily available active market pricing.
However, some of the Company’s
assets or liabilities lack an available or
comparable trading market characterized by frequent transactions between
willing buyers and sellers. In these cases, fair
value is estimated using pricing models that use discounted cash flows and
other pricing techniques. Pricing models and
their underlying assumptions are based upon management’s
best estimates for appropriate discount rates, default rates,
prepayments, market volatility and other factors, taking into account
current observable market data and experience.
These assumptions may have a significant effect on the reported
fair values of assets and liabilities and the related income
and expense. As such, the use of different models and assumptions,
as well as changes in market conditions, could result in
materially different net earnings and retained earnings results.
Deferred Tax
Asset Valuation
A valuation allowance is recognized for a deferred tax asset if, based on the weight of
available evidence, it is more-likely-
than-not that some portion or the entire deferred tax asset will not be realized. The ultimate
realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods
in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. At December 31,
2025 we had net deferred tax assets of $6.9
million
included as “other assets”, including $6.5 million resulting from unrealized
losses in our securities portfolio.
Based upon
the level of taxable income over the last three years and projections for future
taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely
than not that we will realize the benefits of these
deductible differences at December 31, 2025.
The amount of the deferred tax assets considered realizable, however,
could
be reduced if estimates of future taxable income are reduced.
See Note 1 - Summary of Significant Accounting Policies
and Note 9 – Income Taxes
in the notes to the consolidated financial statements that accompany this report.
Average Balance
Sheet and Interest Rates
Year ended December 31
2025
2024
Average
Yield/
Average
Yield/
(Dollars in thousands)
Balance
Rate
Balance
Rate
Loans and loans held for sale
$
560,476
5.50%
$
568,733
5.23%
Securities - taxable
228,793
2.16%
248,072
2.19%
Securities - tax-exempt (a)
9,173
3.77%
10,084
3.70%
Total securities
237,966
2.23%
258,156
2.25%
Federal funds sold
26,535
4.25%
17,907
5.24%
Interest bearing bank deposits
83,648
4.28%
44,634
5.23%
Total interest-earning
assets
908,625
4.49%
889,430
4.36%
Deposits:
NOW
205,951
1.33%
192,702
1.39%
Savings and money market
253,668
0.97%
251,778
0.86%
Certificates of deposit
184,047
3.20%
195,097
3.46%
Total interest-bearing
deposits
643,666
1.72%
639,577
1.81%
Short-term borrowings
28
7.14%
628
0.48%
Total interest-bearing
liabilities
643,694
1.72%
640,205
1.81%
Net interest income and margin (a)
$
29,747
3.27%
$
27,204
3.06%
(a) Tax-equivalent.
See "Table 1 - Explanation
of Non-GAAP Financial Measures".
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45
RESULTS
OF OPERATIONS
Net Interest Income and Margin
Net interest income (tax-equivalent) was $29.7 million in 2025, a
9% increase compared to $27.2 million in 2024. This
increase was primarily due to improved net interest margin
and a 2% increase in our interest-earning assets.
The
Company’s net interest margin
(tax-equivalent) was 3.27% in 2025, compared to 3.06% in 2024.
The increase in net
interest margin (tax-equivalent) was primarily due to improved
yields on interest-earning assets, and a decrease in our cost
of interest-bearing deposits.
The Federal Reserve announced a 50-basis points rate reduction on September
18, 2024,
followed by two 25 basis points reduction in October and December 2024
and by three 25 basis points in September,
October and December 2025.
At year end the target federal funds rate ranged from
3.5% - 3.75%.
The tax-equivalent yield on total interest-earning assets increased by
13 basis points to 4.49% in 2025 compared to 4.36%
in 2024.
This increase was primarily due to changes in our asset mix, as cash and cash equivalents increased
and securities
declined.
Average interest-earning
assets were $908.6 million during 2025, a 2% increase compared to $889.4 million
during 2024.
The cost of total interest-bearing liabilities decreased by 9 basis points to 1.72%
in 2025 compared to 1.81% in 2024
following decreases to the federal funds rate.
The Company continues to deploy various asset liability management
strategies to manage its risk from interest rate
fluctuations.
Deposit and loan pricing remains competitive in our markets.
We believe that interest rates,
inflation and
monetary policy may continue to fluctuate in 2026
and may be challenging as a result.
Our ability to compete and manage
our deposits costs until our interest-earning assets reprice and we generate
new loans with current market interest rates will
be important to our net interest margin during 2026.
Provision for Credit Losses
The Company recorded a provision for credit losses of $631 thousand during
2025, compared to $36 thousand for 2024.
Provision expense is affected by organic loan
growth in our loan portfolio, our internal assessment of the credit quality
of
the loan portfolio, our expectations about future economic conditions
and net charge-offs.
Our CECL model is largely
influenced by economic factors including, the anticipated
Alabama unemployment rate, which may be affected by
government policies, including monetary,
fiscal and other policies, including tariffs.
The provision for credit losses in 2025
was primarily due to two loans that were individually evaluated.
A specific reserve was established for one loan and the
other loan was partially charged off.
Our allowance for credit losses reflects an amount we believe appropriate,
based on our allowance assessment
methodology, to adequately
cover all expected credit losses as of the date the allowance is determined.
At December 31,
2025, the Company’s allowance for
credit losses was $7.2 million, or 1.27% of total loans, compared to $6.9 million,
or
1.22% of total loans, at December 31, 2024.
Noninterest Income
Year ended December 31
(Dollars in thousands)
2025
2024
Service charges on deposit accounts
$
619
$
614
Mortgage lending
474
608
Bank-owned life insurance
414
403
Other
1,612
1,849
Total noninterest income
$
3,119
$
3,474
The Company’s noninterest income
from mortgage lending is primarily attributable to the (1) origination and sale of
new
mortgage loans, including refinancings and (2) servicing of mortgage
loans. Origination income, net, is comprised of gains
or losses from the sale of the mortgage loans originated, origination fees, underwriting
fees and other fees associated with
the origination of mortgage loans, which are netted against the commission expense
associated with these originations. The
Company’s customary practice
is to originate mortgage loans for sale in the secondary market and to either sell or retain
the
MSRs when the loan is sold.
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46
MSRs are recognized based on the fair value of the servicing right
on the date the corresponding mortgage loan is sold.
Subsequent to the date of transfer, the Company
has elected to measure its MSRs under the amortization method.
Servicing
fee income is reported net of any related amortization expense.
The Company evaluates MSRs for impairment quarterly.
Impairment is determined by grouping MSRs by common
predominant characteristics, such as interest rate and loan type.
If the aggregate carrying amount of a particular group of
MSRs exceeds the group’s aggregate
fair value, a valuation allowance for that group is established.
The valuation
allowance is adjusted as the fair value changes.
An increase in mortgage interest rates typically results in an increase in the
fair value of the MSRs while a decrease in mortgage interest rates typically results in
a decrease in the fair value of MSRs.
The following table presents a breakdown of the Company’s
mortgage lending income for 2025 and 2024.
Year ended December 31
(Dollars in thousands)
2025
2024
Origination income
$
154
$
261
Servicing fees, net
320
347
Total mortgage lending
income
$
474
$
608
The Company’s income from mortgage
lending typically fluctuates as mortgage interest rates, housing sales and
refinancings change.
Origination income decreased in 2025 compared to 2024 due to a decrease in mortgage
lending
demand as mortgage interest rates remain elevated.
Other noninterest income was $1.6 million in 2025, compared to $1.8 million in
2024.
The decrease in other noninterest
income was primarily due to decreased fee income on reciprocal deposits sold
through the Intrafi network.
Noninterest Expense
Year ended December 31
(Dollars in thousands)
2025
2024
Salaries and benefits
$
13,154
$
12,534
Net occupancy and equipment
2,353
2,508
Professional fees
1,276
1,188
FDIC and other regulatory assessments
569
564
Other
5,599
5,372
Total noninterest expense
$
22,951
$
22,166
Salaries and benefits increased during 2025 compared to 2024 primarily due
to routine annual increases in salaries and
wages.
The decrease in net occupancy and equipment expense was primarily
due to increased
leasing income associated with the
Company’s headquarters, which
totaled $1.4 million in 2025 compared to $1.0 million in 2024.
The increase in other noninterest expense was due to a variety of miscellaneous
items including increased information
technology and systems expenses and loan-related expenses.
Income Tax
Expense
The provision for income taxes expense was $2.0 million for an effective
tax rate of 21.24% for 2025, compared to
$2.0 million for an effective tax rate of 23.82% for 2024.
The Company’s effective
income tax rate is affected principally
by tax-exempt earnings from the Company’s
investments in municipal securities and loans, bank-owned life insurance,
and
New Markets Tax Credits.
The provision for income tax expense and the effective
tax rates for 2024 included discrete tax
items associated with provision to return adjustments in conjunction with
the final 2023 tax return filing and the resolution
o
f state examination activities, which resulted in additional tax expense.
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47
BALANCE SHEET ANALYSIS
Securities
Securities available-for-sale were $233.3 million at December 31, 2025,
compared to $243.0 million at December 31, 2024.
This decrease reflects a decrease in the amortized cost basis of securities available
-for-sale of $23.4 million, partially offset
by an increase of $13.7 million in the fair value of securities available-for
-sale.
The decrease in the amortized cost basis of
securities available-for-sale was primarily attributable to normal paydowns
and maturities.
The average annualized tax-
equivalent yields earned on total securities were 2.23%
in 2025 and 2.25% in 2024.
The following table shows the carrying value and weighted average yield of
securities available-for-sale as of December
31, 2025 according to contractual maturity.
Actual maturities of mortgage-backed securities (“MBS”) may differ from
contractual maturities because the mortgages underlying the MBS may be called
or prepaid in whole or in part, with or
without penalty.
December 31, 2025
1 year
1 to 5
5 to 10
After 10
Total
(Dollars in thousands)
or less
years
years
years
Fair Value
Agency obligations
$
—
35,580
18,204
—
53,784
Agency MBS
—
20,112
16,171
125,644
161,927
State and political subdivisions
—
1,590
9,160
6,798
17,548
Total available-for-sale
$
—
57,282
43,535
132,442
233,259
Weighted average yield (1):
Agency obligations
—
1.27%
1.99%
—
1.52%
Agency MBS
—
1.19%
1.83%
2.22%
2.06%
State and political subdivisions
—
1.95%
2.00%
2.42%
2.16%
Total available-for-sale
—
1.26%
1.93%
2.23%
1.94%
(1) Yields are calculated based on amortized cost.
Loans
December 31
(In thousands)
2025
2024
Commercial and industrial
$
58,400
63,274
Construction and land development
56,436
82,493
Commercial real estate
325,521
289,992
Residential real estate
116,554
118,627
Consumer installment
8,421
9,631
Total loans
565,332
564,017
Total loans, net of unearned
income, were $565.3 million at December 31, 2025, and $564.0 million
at December 31, 2024,
an increase of $1.3 million.
Four loan categories represented the majority of the loan portfolio at December 31, 2025:
commercial real estate (58%), residential real estate (21%), construction
and land development (10%), and commercial and
industrial (10%).
Approximately 18% of the Company’s
commercial real estate loans were classified as owner-occupied at
December 31, 2025.
Within the residential real estate portfolio segment
,
the Company had junior lien mortgages of approximately $12.3 million,
or 2%, and $11.2 million, or 2%, of total loans
at December 31, 2025 and 2024, respectively.
For residential real estate
mortgage loans with a consumer purpose, the Company had no loans
that required interest only payments at December 31,
2025 and 2024. The Company’s
residential real estate mortgage portfolio does not include any option ARM loans,
subprime loans, or any material amount of other consumer mortgage
products which are generally viewed as high risk.
The average yield earned on loans and loans held for sale was 5.50% in 2025
and 5.23% in 2024.
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48
The specific economic and credit risks associated with our loan portfolio include,
but are not limited to, the effects of
current economic conditions, including the levels of market
interest rates, supply chain disruptions, commercial office
occupancy levels, housing supply shortages, and effects of
inflation and tariffs on our borrowers’ cash flows, real estate
market sales volumes and liquidity,
valuations used in making loans and evaluating collateral, availability and cost of
financing properties, real estate industry concentrations, competitive pressures
from a wide range of other lenders,
deterioration in certain credits, fluctuations in market interest rates, reduced
collateral values or non-existent collateral, title
defects, inaccurate appraisals, financial deterioration of borrowers, fraud,
and any violation of applicable laws and
regulations.
Various
projects financed earlier that were based on lower interest rate assumptions than currently
in effect
may not be as profitable or successful at the higher interest rates currently
in effect and which may exist in the future.
See
“Risk Factors.”
The Company attempts to reduce these economic and credit risks through
its loan-to-value guidelines for collateralized
loans, investigating the creditworthiness of borrowers and monitoring borrowers’
financial position. Also, we have
established and periodically review,
our lending policies and procedures. Banking regulations limit a bank’s
credit exposure
by prohibiting unsecured loan relationships that exceed 10% of its capital; or
20% of capital, if loans in excess of 10% of
capital are fully secured. Under these regulations, we are prohibited from having
secured loan relationships in excess of
approximately $23.5 million. Furthermore, we have an internal limit for
aggregate credit exposure (loans outstanding plus
unfunded commitments) to a single borrower of $21.2 million. Our loan
policy requires that the Loan Committee of the
Board of Directors approve any loan relationships that exceed this internal
limit. At December 31, 2025, the Bank did not
have any loan relationships
exceeding our internal limit.
We periodically
analyze our commercial loan portfolio to determine if a concentration of
credit risk exists in any one or
more industries. We
use classification systems broadly accepted by the financial services industry
in order to categorize our
commercial borrowers. Loan concentrations to borrowers in the following
classes exceeded 25% of the Bank’s
total risk-
based capital at December 31, 2025 (and related balances at December
31, 2024).
December 31
(In thousands)
2025
2024
Lessors of 1-4 family residential properties
$
56,773
$
58,228
Multi-family residential properties
51,516
43,556
Hotel/motel
47,870
35,210
Shopping centers/strip malls
42,444
37,349
The Company maintains the allowance for credit losses at a level that management
believes appropriate to adequately cover
the Company’s estimate of expected
losses over the remaining life in the loan portfolio. The allowance for credit losses was
$7.2 million at December 31, 2025,
compared to $6.9 million at December 31, 2024, which management believed
to be
adequate at each of the respective dates.
Our allowance for credit losses as a percentage of total loans was 1.27% at
December 31, 2025, compared to 1.22% at December 31, 2024.
Our CECL models rely largely on projections of macroeconomic
conditions to estimate future credit losses.
Macroeconomic factors used in the model include the Alabama unemployment
rate, the Alabama home price index, the
national commercial real estate price index and the Alabama gross state product.
Projections of these macroeconomic
factors, obtained from an independent third party,
are utilized to predict quarterly rates of default.
See “Risk Factors”.
Under the CECL methodology the allowance for credit losses is measured on
a collective basis for pools of loans with
similar risk characteristics, and on an individual basis for loans that do not share
similar risk characteristics with the
collectively evaluated pools.
Losses are predicted over a period of time determined to be reasonable and
supportable, and
at the end of the reasonable and supportable period losses are reverted
to long term historical averages.
At December 31,
2025 and 2024, reasonable and supportable periods of 4 quarters were utilized
followed by an 8-quarter straight line
reversion period to long term averages.
See Note 4 to our Financial Statements.
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49
A summary of the changes in the allowance for credit losses on loans and
certain asset quality ratios for the years ended
December 31, 2025 and 2024 is presented below.
Year ended December 31
(Dollars in thousands)
2025
2024
Allowance for credit losses:
Balance at beginning of period
$
6,871
6,863
Charge-offs:
Commercial and industrial
(142)
(9)
Commercial real estate
(296)
—
Residential real estate
(7)
(61)
Consumer installment
(96)
(114)
Total charge
-offs
(541)
(184)
Recoveries:
Commercial and industrial
30
144
Residential real estate
84
9
Consumer installment
29
45
Total recoveries
143
198
Net (charge-offs) recoveries
(398)
14
Provision for credit losses - Loans
703
(6)
Ending balance
$
7,176
6,871
as a % of loans
1.27
%
1.22
as a % of nonperforming loans
1,489
%
1,366
Net charge-offs as a % of average loans
0.07
%
—
Nonperforming Assets
The Company had $0.5 million in nonperforming assets at both December
31, 2025 and 2024.
The table below provides information concerning total nonperforming
assets and certain asset quality ratios.
December 31
(Dollars in thousands)
2025
2024
Nonperforming assets:
Nonperforming (nonaccrual) loans
$
482
503
Total nonperforming
assets
$
482
503
as a % of loans and other real estate owned
0.09
%
0.09
as a % of total assets
0.05
%
0.05
Nonperforming loans as a % of total loans
0.09
%
0.09
Accruing loans 90 days or more past due
$
—
—
The table below provides information concerning the composition of
nonaccrual loans at December 31, 2025 and 2024,
respectively.
December 31
(In thousands)
2025
2024
Nonaccrual loans:
Commercial and industrial
$
—
99
Construction and land development
—
404
Commercial real estate
378
—
Residential real estate
104
—
Total nonaccrual
loans
$
482
503
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50
The Company discontinues the accrual of interest income when (1)
there is a significant deterioration in the financial
condition of the borrower and full repayment of principal and interest is not
expected or (2) the principal or interest is more
than 90 days past due, unless the loan is both well-secured and in the process
of collection.
There were no loans 90 days past due and still accruing interest at December 31, 2025
and 2024, respectively.
The Company had no other real estate owned at December 31, 2025 and 2024, respectively.
Deposits
December 31
(In thousands)
2025
2024
Noninterest bearing demand
$
268,026
260,874
NOW
214,827
199,883
Money market
170,352
153,916
Savings
92,920
89,904
Certificates of deposit under $250,000
97,458
103,594
Certificates of deposit and other time deposits of $250,000 or more
79,343
87,653
Total deposits
$
922,926
895,824
Total deposits were $922.9
million at December 31, 2025, compared to $895.8 million at December 31, 2024.
The 3%
increase in deposits compared to December 31, 2024 was primarily related
to an increase in money market and interest-
bearing checking accounts.
Noninterest-bearing deposits were 29% of total deposits at both December 31,
2025 and 2024.
The Company had no brokered deposits at December 31, 2025 and 2024.
The Company had no FHLB-Atlanta advances or
other wholesale borrowings outstanding at December 31, 2025 and 2024.
The average rates paid on total interest-bearing deposits were 1.72
%
in 2025 and 1.81% in 2024.
The Bank participates in the Certificates of Deposit Account Registry Service (the
“CDARS”) and the Insured Cash Sweep
product (“ICS”), which provide for reciprocal (“two-way”) transactions
among banks facilitated by IntraFi for the purpose
of improving FDIC insurance for our depositors.
The Company had reciprocal deposits on balance sheet of $9.8 million at
December 31, 2025, compared to $6.9 million at December 31, 2024.
At December 31, 2025, the Company had $79.7
million reciprocal deposits sold, compared to $74.1 million at December
31, 2024.
At December 31, 2025, estimated uninsured deposits totaled $392.9
million, or 43% of total deposits, compared to $359.7
million, or 40% of total deposits at December 31, 2024.
Uninsured amounts are estimated based on the portion of account
balances that exceed FDIC insurance limits.
The Bank’s uninsured deposits at December
31, 2025 and 2024 include
approximately $228.7 million and $223.1 million, respectively,
of deposits of state, county and local governments that are
collateralized by securities.
Deposits of state, county and local governments were 58% and 62% of our estimated uninsured
deposits at December 31, 2025 and 2024, respectively.
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51
The estimated uninsured time deposits by maturity as of December
31, 2025 are presented below.
(Dollars in thousands)
December 31, 2025
Maturity of:
3 months or less
$
15,624
Over 3 months through 6 months
31,140
Over 6 months through 12 months
28,306
Over 12 months
4,273
Total estimated uninsured
time deposits
$
79,343
Other Borrowings
The Company had no long-term debt at December 31, 2025 and 2024.
The Bank utilizes short and long-term non-deposit
borrowings
from time to time. Short-term borrowings generally consist of federal funds purchased
and securities sold under
agreements to repurchase with an original maturity of one year or less.
The Bank had available federal funds lines totaling
$65.2 million at December 31, 2025 and 2024 with no federal funds borrow
ed.
The Company had no securities sold under
agreements to repurchase, which are entered into on behalf of certain
customers, at December 31, 2025 and 2024.
The
Bank is eligible to borrow from the FRB’s discount
window, but had no such
borrowings at December 31, 2025 and 2024.
The Bank never borrowed from the Federal Reserve’s
Bank Term Facility Program
(“BTFP”) which ceased making new
loans on March 11, 2024.
The Bank is a member of the FHLB-Atlanta and has borrowed from the
FHLB-Atlanta, and in the future may borrow from
time to time under the FHLB-Atlanta’s
advance program.
FHLB-Atlanta advances include both fixed and variable terms,
and provide various maturities, and generally are secured by eligible
assets.
The Bank had no borrowings under FHLB-
Atlanta’s advance program
at December 31, 2025 and 2024, respectively.
At those dates, the Bank had $304.9 million and
$296.9 million, respectively,
of available lines of credit at the FHLB-Atlanta.
CAPITAL ADEQUACY
At December 31, 2025, the Company’s
consolidated stockholders’ equity (book value) was $92.1 million, or
$26.35 per
share, compared to $78.3 million, or $22.41 per share, at December 31, 2024. The
increase from December 31, 2024 was
primarily driven by net earnings of $7.3 million and other comprehensive
income of $10.2 million due to a decrease in
unrealized losses on securities available-for-sale, net of tax, which was partially
offset by cash dividends paid of
$3.8 million.
Unrealized losses on securities do not affect the Bank’s
capital for regulatory capital purposes.
The Company paid cash dividends of $1.08 per share in 2025 and 2024.
The Company and Bank are subject to the Basel III regulatory capital framework
which includes a capital conservation
buffer of CET1 capital of 2.5% that is added to the minimum requirements
for capital adequacy purposes.
A banking
organization with a capital conservation buffer
of 2.5% or less is subject to limitations on “distributions” from “eligible
retained earnings”, including dividend payments,
share repurchases and certain discretionary bonus payments. At
December 31, 2025 and 2024, the Bank had a capital conservation buffer
of 9.14% and 7.81%, respectively.
The Federal Reserve has treated us as a “small bank holding company’ under the Federal Reserve’s
Small Bank Holding
Company Policy.
Accordingly, our capital adequacy
is evaluated at the Bank level, and not for the Company and its
consolidated subsidiaries. The Bank’s
tier 1 leverage ratio was 10.71%, CET1 risk-based capital ratio was 16.06%, tier 1
risk-based capital ratio was 16.06%, and total risk-based capital ratio was 17.14
%
at December 31, 2025. These ratios
exceed the minimum regulatory capital percentages of 5.0% for tier 1 leverage
ratio, 6.5% for CET1 risk-based capital
ratio, 8.0% for tier 1 risk-based capital ratio, and 10.0% for total risk-based
capital ratio to be considered “well capitalized.”
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52
MARKET AND LIQUIDITY RISK MANAGEMENT
Management’s objective is to manage
assets and liabilities to provide a satisfactory,
consistent level of profitability within
the framework of established liquidity,
loan, investment, borrowing, and capital policies. The Bank’s
Asset Liability
Management Committee (“ALCO”) is charged with the
responsibility of monitoring these policies, which are designed to
ensure an acceptable asset/liability composition. Two
critical areas of focus for ALCO are interest rate risk and liquidity
risk management.
Interest Rate Risk Management
In the normal course of business, the Company is exposed to market risk arising from
fluctuations in interest rates because
assets and liabilities may mature or reprice at different times and
at different rates of change.
ALCO measures and
evaluates the interest rate risk so that we can meet customer demands for various types
of loans and deposits. ALCO
determines
the most appropriate amounts of on-balance sheet and off-balance sheet
items. Measurements used to help
manage interest rate sensitivity include an earnings simulation and an
economic value of equity model.
Earnings simulation
Management believes that interest rate risk is best estimated by our earnings simulation
modeling. On at least a quarterly
basis, we simulate the following 12-month time period to determine a baseline
net interest income forecast and the
sensitivity of this forecast to changes in interest rates. The baseline forecast assumes an
unchanged or flat interest rate
environment. Forecasted levels of earning assets, interest-bearing
liabilities, and off-balance sheet financial instruments are
combined with ALCO forecasts of market interest rates for the next 12 months
and other factors in order to produce various
earnings simulations and estimates.
To help limit interest
rate risk, we have guidelines for earnings at risk which seek to limit the variance of
net interest
income from gradual changes in interest rates.
For changes up or down in rates from management’s
flat interest rate
forecast over the next 12 months, policy limits for net interest income variances are
as follows:
+/- 20% for a gradual change of 400 basis points
+/- 15% for a gradual change of 300 basis points
+/- 10% for a gradual change of 200 basis points
+/- 5% for a gradual change of 100 basis points
The following table reports the variance of net interest income over the next 12 months
assuming a gradual change in
interest rates up or down when compared to the baseline net interest income
forecast at December 31, 2025.
Changes in Interest Rates
Net Interest Income % Variance
400 basis points
4.67
%
300 basis points
3.95
200 basis points
2.76
100 basis points
1.40
(100) basis points
(1.97)
(200) basis points
(3.13)
(300) basis points
(4.13)
(400) basis points
(5.16)
At December 31, 2025, our earnings simulation model indicated that
we were in compliance with the policy guidelines
noted above.
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53
Economic Value
of Equity
Economic value of equity (“EVE”) measures the extent that estimated economic
values of our assets, liabilities and off-
balance sheet items will change as a result of interest rate changes. Economic values
are estimated by discounting expected
cash flows from assets, liabilities and off-balance sheet items, which are
used to establish a base case EVE. In contrast with
our earnings simulation model which evaluates interest rate risk over a 12-month
timeframe, EVE uses a terminal horizon
which allows for the re-pricing of all assets, liabilities, and off-balance
sheet items. Further, EVE is measured using values
as of a point in time and does not reflect any actions that ALCO might take in responding
to or anticipating changes in
interest rates, or market and competitive conditions.
To help limit interest
rate risk, we have stated policy guidelines for an instantaneous basis point change
in interest rates,
such that our EVE should not decrease from our base case by more than the following:
35% for an instantaneous change of +/- 400 basis points
30% for an instantaneous change of +/- 300 basis points
25% for an instantaneous change of +/- 200 basis points
15% for an instantaneous change of +/- 100 basis points
The following table reports the variance of EVE assuming an immediate
change in interest rates up or down when
compared to the baseline EVE at December 31, 2025.
Changes in Interest Rates
EVE % Variance
400 basis points
3.76
%
300 basis points
4.08
200 basis points
3.44
100 basis points
2.21
(100) basis points
(3.41)
(200) basis points
(9.01)
(300) basis points
(17.83)
(400) basis points
(27.26)
At December 31, 2025, our EVE model indicated that we were in compliance
with the policy guidelines noted above.
Each of the above analyses may not, on its own, be an accurate indicator of how our
net interest income will be affected by
changes in interest rates. Income associated with interest-earning
assets and costs associated with interest-bearing liabilities
may not be affected uniformly by changes in interest rates.
In addition, the magnitude and duration of changes in interest
rates may have a significant impact on net interest income. For example,
although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates, and other
economic and market factors, including market perceptions. Interest
rates on certain types of assets and liabilities fluctuate
in advance of changes in general market rates, while interest rates on other types
of assets and liabilities may lag behind
changes in general market rates. In addition, certain assets, such as adjustable-rate
mortgage loans, have features (generally
referred to as “interest rate caps and floors”) which limit changes in interest rates.
Prepayment and early withdrawal levels
also could deviate significantly from those assumed in calculating the maturity of
certain instruments. The ability of many
borrowers to service their debts also may decrease during periods of rising interest
rates or economic stress, which may
differ across industries and economic sectors.
Depositors and borrowers may also change their deposit and loan
preferences and behaviors as a result of changes and expected changes in interest rates.
ALCO reviews each of the above interest rate sensitivity analyses along with several
different interest rate scenarios in
seeking satisfactory,
consistent levels of profitability within the framework of the Company’s
established liquidity,
loan,
investment, borrowing, and capital policies.
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54
The Company may also use derivative financial instruments to improve
the balance between interest-sensitive assets and
interest-sensitive liabilities and as one tool to manage interest rate sensitivity while continuing
to meet the credit and
deposit needs of our customers. From time to time, the Company may enter
into interest rate swaps (“swaps”) to facilitate
customer transactions and meet their financing needs. These swaps qualify
as derivatives, and may be designated as
hedging instruments. At December 31, 2025, the Company had one derivative
contract to assist in managing interest rate
sensitivity.
The Company had no derivative contracts at December 31, 2024.
Liquidity Risk Management
Liquidity is the Company’s ability to
convert assets into cash equivalents in order to meet daily cash flow requirements,
primarily for deposit withdrawals, loan demand and maturing obligations.
Without proper management of its liquidity,
the
Company could experience higher costs of obtaining funds due to insufficient
liquidity, while excessive liquidity
can lead
to a decline in earnings due to the cost of foregoing alternative higher-yielding
investment opportunities.
Liquidity is managed at two levels. The first is the liquidity of the Company.
The second is the liquidity of the Bank. The
management of liquidity at both levels is essential, because the Company
and the Bank are separate and distinct legal
entities with different funding needs and sources, and each are subject
to regulatory guidelines and requirements. The
Company depends upon dividends from the Bank for liquidity to pay its operating
expenses, debt obligations and
dividends. The Bank’s payment of
dividends depends on its earnings, liquidity,
capital and the absence of any regulatory
restrictions.
The primary source of funding and liquidity for the Company has been dividends
received from the Bank. The Company
depends upon dividends from the Bank for liquidity to pay its operating
expenses, debt obligations, if any,
and cash
dividends on, and repurchases of, Company common stock.
The Bank’s payment of dividends
depends on its earnings,
liquidity, capital and the
absence of any regulatory restrictions.
If needed, the Company could also issue common stock or
other securities.
Primary sources of funding for the Bank include customer deposits, other
borrowings, interest payments on earning assets,
repayments
and maturities of securities and loans, sales of securities, and the sale of loans, particularly
residential mortgage
loans. Primary uses of funds include repayment of maturing obligations
and growing the loan portfolio.
The Bank has access to federal funds lines from various banks and borrowings
from the Federal Reserve discount window,
although it was not used by the Bank.
In addition to these sources, the Bank is eligible to participate in the FHLB-Atlanta’s
advance program to obtain funding for growth and liquidity.
Advances include both fixed and variable terms and may
be
taken out with varying maturities. At December 31, 2025, the Bank
had no FHLB-Atlanta advances outstanding and
available credit from the FHLB-Atlanta of $304.9 million. At December
31, 2025, the Bank also had $65.2 million of
available federal funds lines with no borrowings outstanding.
The following table presents additional information about our contractual
obligations as of December 31, 2025, which by
their terms had contractual maturity and termination dates subsequent
to December 31, 2025:
Payments due by period
1 year
1 to 3
3 to 5
More than
(Dollars in thousands)
Total
or less
years
years
5 years
Contractual obligations:
Deposit maturities (1)
$
922,926
910,388
9,726
2,812
—
Operating lease obligations
157
55
102
—
—
Total
$
923,083
910,443
9,828
2,812
—
(1) Deposits with no stated maturity (demand, NOW, money market, and savings deposits) are presented
in the "1 year or less" column
Management believes that the Company and the Bank have adequate
sources of liquidity to meet all known contractual
obligations and unfunded commitments, including loan commitments and reasonable
borrower, depositor,
and creditor
requirements over the next 12 months.
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55
Off-Balance Sheet Arrangements
At December 31, 2025, the Bank had outstanding standby letters of credit of $1.0
million and unfunded loan commitments
outstanding of $48.1 million. Because these commitments generally
have fixed expiration dates and may expire without
being drawn upon, the total commitment level does not necessarily represent
future cash requirements. If needed to fund
these outstanding commitments, the Bank could use its cash and cash
equivalents, deposits with other banks, liquidate
federal funds sold or a portion of its securities available-for-sale, or draw on its available
credit facilities or raise deposits.
Residential mortgage lending and servicing activities
We primarily
sell conforming residential mortgage loans in the secondary market to Fannie Mae
while retaining the
servicing of these loans (MSRs). The sale agreements for these residential mortgage
loans with Fannie Mae and other
investors include various representations and warranties regarding
the origination and characteristics of the residential
mortgage loans. Although the representations and warranties vary
among investors, they typically cover ownership of the
loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against
the property securing the loan,
compliance with loan criteria set forth in the applicable agreement, compliance
with applicable federal, state, and local
laws, among other matters.
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.
As of December 31, 2025, the unpaid principal balance of residential mortgage
loans, which we have originated and sold,
but retained the servicing rights (MSRs) totaled $188.8 million. Although
these loans are generally sold on a non-recourse
basis, except for breaches of customary seller representations and warranties,
we may have to repurchase residential
mortgage loans in cases where we breach such representations or warranties
or the other terms of the sale, such as where we
fail to deliver required documents or the documents we deliver are defective.
Investors also may require the repurchase of a
mortgage loan when an early payment default underwriting review reveals
significant underwriting deficiencies, even if the
mortgage loan has subsequently been brought current. Repurchase demands are
typically reviewed on an individual loan by
loan basis to validate the claims made by the investor and to determine if a contractually
required repurchase event has
occurred. We
seek to reduce and manage the risks of potential repurchases or other claims by mortgage
loan investors
through our underwriting, quality assurance and servicing practices, including
good communications with our residential
mortgage investors.
We service all residential
mortgage loans originated and sold by us to Fannie Mae. As servicer,
our primary duties are to:
(1) collect payments due from borrowers; (2) advance certain delinquent
payments of principal and interest; (3) maintain
and administer any hazard, title, or primary mortgage insurance policies relating
to the mortgage loans; (4) maintain any
required escrow accounts for payment of taxes and insurance and
administer escrow payments; and (5) foreclose on
defaulted mortgage loans or take other actions to mitigate the potential losses to
investors consistent with the agreements
governing our rights and duties as servicer.
The agreement under which we act as servicer generally specifies our
standards of responsibility for actions taken by us in
such capacity and provides protection against expenses and liabilities incurred
by us when acting in compliance with the
respective servicing agreements. However,
if we commit a material breach of our obligations as servicer,
we may be subject
to termination if the breach is not cured within a specified period following notice.
The standards governing servicing and
the possible remedies for violations of such standards are determined
by servicing guides issued by Fannie Mae as well as
our contracts with Fannie Mae. Remedies could include repurchase of an affected
loan.
Although to date repurchase requests related to representation and warranty
provisions, and servicing activities have been
limited, it is possible that requests to repurchase mortgage loans may increase
in frequency if investors more aggressively
pursue all means of recovering losses on their purchased loans. As of December
31, 2025, we believe that this exposure is
not material due to the historical level of repurchase requests and loss trends,
the results of our quality control reviews, and
the fact that 99% of our residential mortgage loans serviced for Fannie
Mae were current as of such date. We
maintain
ongoing communications with our investors and will continue to evaluate
this exposure by monitoring the level and number
of repurchase requests as well as the delinquency rates in our investor portfolios.
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56
The Company was not required to repurchase any loans during 2025 and
2024 as a result of representation and warranty
provisions contained in the Company’s
sale agreements with Fannie Mae, and had no pending repurchase or make-whole
requests at December 31, 2025.
Effects of Inflation and Changing Prices
The consolidated financial statements and related consolidated financial
data presented herein have been prepared in
accordance with GAAP and practices within the banking industry which
require the measurement of financial position and
operating results in terms of historical dollars without considering
the changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, virtually all
the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates have a more significant impact
on a financial institution’s performance
than the effects of general levels of inflation.
Inflation can increase our noninterest expenses. It also can affect
our customers’ behaviors, the mix of deposits between
interest and noninterest bearing, the levels of interest rates we have to pay on
our deposits and other borrowings, and the
interest rates we earn on our earning assets. The difference between
our interest expense and interest income is also affected
by the shape of the yield curve and the speeds and amounts at which our various assets and
liabilities, respectively, reprice
in response to interest rate changes. The yield curve was inverted during
most of 2024, until September, when it began
to
normalize.
An inverted yield curve means shorter term interest rates are higher than longer term interest
rates. This results
in a lower spread between our costs of funds and our interest income. In addition,
net interest income could be affected by
asymmetrical changes in the different interest rate indexes,
given that not all of our assets or liabilities are priced with the
same index. Higher market interest rates and reductions in the securities held by
the Federal Reserve to reduce inflation
generally reduce economic activity may reduce loan demand and growth,
and may adversely affect unemployment rates.
Inflation and related changes in market interest rates, as the Federal Reserve maintains
interest rates to meet its longer-term
inflation goal of 2%, also can adversely affect the values
and liquidity of our loans and securities, the value of collateral
securing loans to our borrowers, and the success of our borrowers and such borrowers’
available cash to pay interest on and
principal of our loans to them.
See “Supervision and Regulation – Fiscal and Monetary Policies” for
more information regarding changes in monetary
policy and interest rates.
CURRENT ACCOUNTING DEVELOPMENTS
The following ASUs have been issued by the FASB
but are not yet effective.
ASU 2025-01,
Income Statement Reporting Comprehensive Income
- Expense Disaggregation Disclosures
(Subtopic 220-
40): Clarifying the Effective Date,
clarifies the effective date of ASU 2024-03,
Income Statement Reporting Comprehensive
Income - Expense Disaggregation Disclosures
(Subtopic 220-40): Disaggregation of
Income Statement Expenses
to
stipulate that ASU 2024-03 is effective for public business entities for
annual reporting periods beginning after December
15, 2026 and interim reporting periods beginning after December 15,
2027, with early adoption permitted. ASU 2025-01
will be effective for the Company beginning January 1, 2027
for the Company’s annual consolidated
financial statements
on Form 10-K and January 1, 2028 for the Company’s
quarterly consolidated financial statements on Form 10-Q
and is not
expected to have a significant impact on the Company’s
consolidated financial statements.
ASU 2025-06,
Intangibles - Goodwill and Other - Internal-Use Software
(Subtopic 350-40),
removes all references to
prescriptive and sequential software development stages and clarifies that the
threshold for when an entity is required to
start capitalizing software costs is when (1) management has authorized
and committed to funding the software project and
(2) it is probable that the project will be completed and the software will be used to perform
the function intended. ASU
2025-06 will be effective for the Company beginning
January 1, 2028, with early adoption permitted, and is not expected to
have a significant impact on the Company’s
consolidated financial statements.
ASC 2025-11,
Interim Reporting (Topic
270): Narrow-Scope Improvement
s,
is intended to provide clarity about the current
interim reporting requirements, provides a list of the interim disclosures required
by all other Codification topics and
establishes a disclosure principle that requires entities to disclose events since the
end of the last annual reporting period
that have a material impact
on the entity. ASC 2025-11
will be effective for the Company beginning January 1, 2028, with
early adoption permitted, and is not expected to have a significant impact on the Company’s
consolidated financial
s
tatements.
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57
Table 1
– Explanation of Non-GAAP Financial Measures
In addition to results presented in accordance with GAAP,
this annual report on Form 10-K includes certain designated net
interest income amounts presented on a tax-equivalent basis, a non-GAAP financial
measure, including the presentation of
total revenue and the calculation of the efficiency ratio.
The Company believes the presentation of net interest income on a tax-equivalent
basis provides comparability of net
interest income from both taxable and tax-exempt sources and facilitates comparability
within the industry. Although
the
Company believes these non-GAAP financial measures enhance investors’
understanding of its business and performance,
these non-GAAP financial measures should not be considered an alternative
to GAAP.
The reconciliation of these non-
GAAP financial measures from GAAP to non-GAAP is presented below.
Year ended December 31
(In thousands)
2025
2024
2023
2022
2021
Net interest income (GAAP)
$
29,674
27,125
26,328
27,166
23,990
Tax-equivalent adjustment
73
79
417
456
470
N
et interest income (Tax-equivalent)
$
29,747
27,204
26,745
27,622
24,460
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58
Table 2
- Selected Financial Data
Year ended December 31
(Dollars in thousands, except per share amounts)
2025
2024
2023
2022
2021
Income statement
Tax-equivalent interest income (a)
$
40,841
38,811
34,791
30,001
26,977
Total interest expense
11,094
11,607
8,046
2,379
2,517
Tax equivalent net interest income (a)
29,747
27,204
26,745
27,622
24,460
Provision for credit losses
631
36
135
1,000
(600)
Total noninterest income
3,119
3,474
(2,981)
6,506
4,288
Total noninterest expense
22,951
22,166
22,594
19,823
19,433
Net earnings before income taxes and
tax-equivalent adjustment
9,284
8,476
1,035
13,305
9,915
Tax-equivalent adjustment
73
79
417
456
470
Income tax expense (benefit)
1,956
2,000
(777)
2,503
1,406
Net earnings
$
7,255
6,397
1,395
10,346
8,039
Per share data:
Basic net earnings
$
2.08
1.83
0.40
2.95
2.27
Diluted net earnings
2.08
1.83
0.40
2.95
2.27
Cash dividends declared
$
1.08
1.08
1.08
1.06
1.04
Weighted average shares outstanding - basic
3,493,699
3,493,690
3,498,030
3,510,869
3,545,310
Weighted average shares outstanding - diluted
3,495,036
3,493,690
3,498,030
3,510,869
3,545,310
Shares outstanding
3,493,699
3,493,699
3,493,614
3,503,452
3,520,485
Stockholders' equity (book value)
$
26.35
22.41
21.90
19.42
29.46
Common stock price
High
$
28.47
24.57
24.50
34.49
48.00
Low
19.48
16.63
18.80
22.07
31.32
Period-end
$
26.95
23.49
21.28
23.00
32.30
To earnings ratio (b)
12.96
12.84
53.20
7.80
14.23
To book value
102.28
104.82
97.17
118.43
109.64
Performance ratios:
Return on average equity
8.61
%
8.21
2.05
12.48
7.54
Return on average assets
0.73
%
0.65
0.14
0.96
0.78
Dividend payout ratio
51.92
%
59.02
270.00
35.93
45.81
Average equity to average assets
8.45
%
7.93
6.66
7.72
10.39
Asset Quality:
Allowance for credit losses as a % of:
Loans
1.27
%
1.22
1.23
1.14
1.08
Nonperforming loans
1,489
%
1,366
753
211
1,112
Nonperforming assets as a % of:
Loans and other real estate owned
0.09
%
0.09
0.16
0.54
0.18
Total assets
0.05
%
0.05
0.09
0.27
0.07
Nonperforming loans as % of loans
0.09
%
0.09
0.16
0.54
0.10
Net charge-offs as a % of average loans
0.07
%
—
0.01
0.04
0.02
Capital Adequacy (c):
CET 1 risk-based capital ratio
16.06
%
14.80
14.52
15.39
16.23
Tier 1 risk-based capital ratio
16.06
%
14.80
14.52
15.39
16.23
Total risk-based capital ratio
17.14
%
15.81
15.52
16.25
17.06
Tier 1 leverage ratio
10.71
%
10.49
9.72
10.01
9.35
Other financial data:
Net interest margin (a)
3.27
%
3.06
2.89
2.81
2.55
Effective income tax (benefit) rate
21.24
%
23.82
(125.73)
19.48
14.89
Efficiency ratio (d)
69.83
%
72.25
95.08
58.08
67.60
Selected period end balances:
Securities
$
233,259
243,012
270,910
405,304
421,891
Loans, net of unearned income
565,354
564,017
557,294
504,458
458,364
Allowance for credit losses
7,176
6,871
6,863
5,765
4,939
Total assets
1,018,797
977,324
975,255
1,023,888
1,105,150
Total deposits
922,926
895,824
896,243
950,337
994,243
Total stockholders’ equity
92,053
78,292
76,507
68,041
103,726
(a) Tax-equivalent.
See "Table 1 - Explanation of Non-GAAP Financial Measures".
(b) Calculated by dividing period end share price by
earnings per share for the previous four quarters.
(c) Regulatory capital ratios presented are for the Company's
wholly-owned subsidiary, AuburnBank.
(
d) Efficiency ratio is the result of noninterest expense divided by
the sum of noninterest income and tax-equivalent net interest income.
Table of Contents
59
Table 3
- Average
Balance and Net Interest Income Analysis
Year ended December 31
2025
2024
Interest
Interest
Average
Income/
Yield/
Average
Income/
Yield/
(Dollars in thousands)
Balance
Expense
Rate
Balance
Expense
Rate
Interest-earning assets:
Loans and loans held for sale (1)
$
560,476
$
30,840
5.50%
$
568,733
$
29,735
5.23%
Securities - taxable
228,793
4,949
2.16%
248,072
5,430
2.19%
Securities - tax-exempt (2)
9,173
346
3.77%
10,084
373
3.70%
Total securities
237,966
5,295
2.23%
258,156
5,803
2.25%
Federal funds sold
26,535
1,127
4.25%
17,907
939
5.24%
Interest bearing bank deposits
83,648
3,579
4.28%
44,634
2,334
5.23%
Total interest-earning
assets
908,625
40,841
4.49%
889,430
38,811
4.36%
Cash and due from banks
15,414
17,779
Other assets
72,438
75,059
Total assets
$
996,477
$
982,268
Interest-bearing liabilities:
Deposits:
NOW
$
205,951
2,740
1.33%
$
192,702
2,680
1.39%
Savings and money market
253,668
2,461
0.97%
251,778
2,168
0.86%
Certificates of deposit
184,047
5,891
3.20%
195,097
6,756
3.46%
Total interest-bearing
deposits
643,666
11,092
1.72%
639,577
11,604
1.81%
Short-term borrowings
28
2
7.14%
628
3
0.48%
Total interest-bearing
liabilities
643,694
11,094
1.72%
640,205
11,607
1.81%
Noninterest-bearing deposits
265,978
262,224
Other liabilities
2,578
1,918
Stockholders' equity
84,227
77,921
Total liabilities and
and stockholders' equity
$
996,477
$
982,268
Net interest income and margin
$
29,747
3.27%
$
27,204
3.06%
(1) Average loan
balances are shown net of unearned income and loans on nonaccrual status have
been included
in the computation of average balances.
(2) Yields on tax-exempt securities have been
computed on a tax-equivalent basis using an income tax rate
of 21%.
See Table 1 - Explanation of Non-GAAP
Financial Measures."
Table of Contents
60
Table 4
- Volume
and Rate Variance
Analysis
Year ended December 31, 2025 vs. 2024
Year ended December 31, 2024 vs. 2023
Net
Due to change in
Net
Due to change in
(Dollars in thousands)
Change
Rate (2)
Volume (2)
Change
Rate (2)
Volume (2)
Interest income:
Loans and loans held for sale
$
1,105
1,559
(454)
$
4,810
2,463
2,347
Securities - taxable
(481)
(64)
(417)
(1,778)
133
(1,911)
Securities - tax-exempt (1)
(27)
7
(34)
(1,612)
(57)
(1,555)
Total securities
(508)
(57)
(451)
(3,390)
76
(3,466)
Federal funds sold
188
(178)
366
689
24
665
Interest bearing bank deposits
1,245
(424)
1,669
1,911
26
1,885
Total interest income
$
2,030
900
1,130
$
4,020
2,589
1,431
Interest expense:
Deposits:
NOW
$
60
(116)
176
$
773
783
(10)
Savings and money market
293
275
18
36
359
(323)
Certificates of deposit
(865)
(511)
(354)
2,821
2,128
693
Total interest-bearing
deposits
(512)
(352)
(160)
3,630
3,270
360
Short-term borrowings
(1)
42
(43)
(69)
(56)
(13)
Total interest expense
(513)
(310)
(203)
3,561
3,214
347
Net interest income
$
2,543
1,210
1,333
$
459
(625)
1,084
(1) Yields on tax-exempt securities have been
computed on a tax-equivalent basis using an income
tax rate of 21%.
See "Table 1 - Explanation
of Non-GAAP Financial Measures."
(
2) Changes that are not solely a result of volume or rate have been allocated
to volume.
Table of Contents
61
Table 5
- Net Charge-Offs (Recoveries) to Average
Loans
2025
2024
Net
Net
Net
(recovery)
Net
charge-off
(recoveries)
Average
charge-off
charge-offs
Average
(recovery)
(Dollars in thousands)
charge-off
Loans
ratio
(recoveries)
Loans
ratio
Commercial and industrial
$
112
58,986
0.19
%
$
(135)
71,279
(0.19)
%
Construction and land development
—
82,964
—
—
70,342
—
Commercial real estate
296
293,149
0.10
—
297,140
—
Residential real estate
(77)
117,252
(0.07)
52
118,856
0.04
Consumer installment
67
9,011
0.74
69
10,381
0.66
Total
$
398
561,362
0.07
%
$
(14)
567,998
—
%
Table of Contents
62
Table 6
- Loan Maturities
December 31, 2025
1 year
1 to 5
5 to 15
After 15
(Dollars in thousands)
or less
years
years
years
Total
Commercial and industrial
$
17,529
15,596
23,764
1,511
58,400
Construction and land development
36,103
18,842
1,491
—
56,436
Commercial real estate
56,098
154,297
110,603
4,523
325,521
Residential real estate
6,533
33,027
26,682
50,312
116,554
Consumer installment
2,084
5,264
1,073
—
8,421
Total loans
$
118,347
227,026
163,613
56,346
565,332
Table of Contents
63
Table 7
- Sensitivities to Changes in Interest Rates on Loans Maturing in More
Than One Year
December 31, 2025
Variable
Fixed
(Dollars in thousands)
Rate
Rate
Total
Commercial and industrial
$
330
40,541
40,871
Construction and land development
13,627
6,706
20,333
Commercial real estate
18,289
251,134
269,423
Residential real estate
50,365
59,656
110,021
Consumer installment
189
6,148
6,337
Total loans
$
82,800
364,185
446,985
Table of Contents
64
Table 8
- Allocation of Allowance for Credit Losses
2025
2024
(Dollars in thousands)
Amount
%*
Amount
%*
Commercial and industrial
$
1,129
10.3
$
1,244
11.2
Construction and land development
1,304
10.0
1,059
14.6
Commercial real estate
3,777
57.6
3,842
51.3
Residential real estate
837
20.6
588
21.0
Consumer installment
129
1.5
138
1.7
Total allowance for
credit losses
$
7,176
$
6,871
*
Loan balance in each category expressed as a percentage of total loans.
Table of Contents
65
ITEM 7A.
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The information called for by ITEM 7A is set forth in ITEM 7 under the
caption “Market and Liquidity Risk Management”
and is incorporated herein by reference.
ITEM 8.
FINANCIAL STATEMENTS
AND SUPPLEMENTARY
DATA
Index
Page
Report of Independent Registered Public Accounting Firm
(PCAOB ID:
149
)
66
Consolidated Balance Sheets
68
Consolidated Statements of Earnings
69
Consolidated Statements of Comprehensive Income
70
Consolidated Statements of Stockholders’ Equity
71
Consolidated Statements of Cash Flows
72
Notes to Consolidated Financial Statements
73
Table of Contents
66
Report of Independent Registered Public Accounting Firm
To the Stockholders
and Board of Directors of
Auburn National Bancorporation, Inc. and Subsidiaries
Opinion on the Financial Statements
We
have audited
the accompanying
consolidated balance
sheets of
Auburn National
Bancorporation, Inc.
and Subsidiaries
(the
“Company”)
as
of
December
31,
2025
and
2024,
the
related
consolidated
statements
of
earnings,
comprehensive
income,
stockholders'
equity
and
cash
flows
for
the
years then
ended,
and
the
related
notes
to
the
consolidated
financial
statements (collectively,
the “financial
statements”).
In our
opinion,
the financial
statements present
fairly,
in all
material
respects, the financial
position of the
Company as of
December 31, 2025
and 2024, and
the results of
its operations
and its
cash
flows
for
each
of
the
two
years
in
the
period
ended
December
31,
2025,
in
conformity
with
accounting
principles
generally accepted in the United States of America.
Basis for Opinion
These financial statements are
the responsibility of the
Company’s management.
Our responsibility is to express
an opinion
on
the
Company’s
financial
statements
based
on
our
audits.
We
are
a
public
accounting
firm
registered
with
the
Public
Company
Accounting
Oversight
Board
(United
States)
(PCAOB)
and
are
required
to
be
independent
with
respect
to
the
Company
in
accordance
with
U.S.
federal
securities
laws
and
the
applicable
rules
and
regulations
of
the
Securities
and
Exchange Commission and the PCAOB.
We
conducted
our
audits
in
accordance
with
the
standards
of
the
PCAOB.
Those
standards
require
that
we
plan
and
perform the
audit to
obtain reasonable
assurance about
whether the
financial statements
are free
of material
misstatement,
whether
due
to
error
or
fraud.
The
Company
is
not
required
to
have,
nor
were
we
engaged
to
perform,
an
audit
of
its
internal control over financial reporting. As part of
our audits, we are required to obtain an understanding of internal
control
over
financial
reporting
but
not
for
the
purpose
of
expressing
an
opinion
on
the
effectiveness
of
the
Company’s
internal
control over financial reporting. Accordingly,
we express no such opinion.
Our audits included
performing procedures to
assess the risks of
material misstatement of
the financial statements,
whether
due to error or
fraud, and performing
procedures that respond
to those risks. Such
procedures included examining,
on a test
basis, evidence
regarding
the amounts
and disclosures
in the
financial statements.
Our audits
also included
evaluating
the
accounting principles used
and significant estimates made
by management, as well
as evaluating the overall
presentation of
the financial statements. We
believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit
matters communicated
below are matters
arising from
the current period
audit of the
financial statements
that
were
communicated
or
required
to
be
communicated
to
the
audit
committee
and
that:
(1)
relate
to
accounts
or
disclosures that
are material
to the
financial statements
and (2)
involved our
especially challenging,
subjective or
complex
judgments. The
communication of
critical audit
matters does
not alter
in any
way our
opinion on
the financial
statements,
taken
as a
whole,
and
we
are not,
by communicating
the critical
audit
matters below,
providing
separate
opinions
on the
critical audit matters or on the accounts or disclosures to which they
relate.
Table of Contents
67
Allowance for Credit Losses
As described in Note 4 to the Company’s
consolidated financial statements, the Company has a gross
loan portfolio of $565
million and
related allowance
for credit
losses of
$7.2 million
as of
December 31,
- As
described by
the Company
in
Note 1, the allowance
for credit losses is estimated
by management using
relevant available information,
from both internal
and external
sources, relating
to past
events, current
conditions, and
reasonable and
supportable forecasts.
The Company’s
credit loss assumptions
are estimated using a discounted
cash flow ("DCF") model
for each loan segment,
except consumer
loans.
The
weighted
average
remaining
life
method
is
used
to
estimate
credit
loss
assumptions
for
consumer
loans.
The
DCF
model
calculates
an
expected
life-of-loan
loss
percentage
by
considering
the
forecasted
probability
that
a
borrower
will default
(the “PD”),
adjusted for
relevant forecasted
macroeconomic factors,
and loss
given default
(“LGD”), which
is
the
estimate
of
the
amount
of
net
loss
in
the
event
of
default.
This
model
utilizes
historical
correlations
between
default
experience
and
certain
macroeconomic
factors
as
determined
through
a
statistical
regression
analysis.
Projections
of
macroeconomic
factors
are
obtained
from
an independent
third
party
and
are utilized
to predict
quarterly
rates
of default
based on the statistical PD models.
The weighted average remaining life
method uses an annual charge
-off rate over several
vintages to
estimate credit
losses. Additionally,
the allowance
for credit
losses calculation
includes subjective
adjustments
for qualitative risk factors that are believed likely to cause estimated credit losses to differ
from historical experience.
We
identified the
Company’s
estimate of
the allowance
for credit
losses (“ACL”)
as a
critical audit
matter.
The principal
considerations for our determination
of the allowance for credit
losses as a critical audit
matter related to the high
degree of
subjectivity
in
the
Company’s
judgments
in
determining
the
macroeconomic
data
in
the
reasonable
and
supportable
forecasts, as
well as
the qualitative
factors. Auditing
these complex
judgments and
assumptions by
the Company
involves
especially challenging
auditor judgment
due to
the nature
and extent
of audit
evidence and
effort required
to address
these
matters, including the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included
the following:
●
We
obtained
an
understanding
of
the
Company’s
process
for
establishing
the
ACL,
including
the
selection
and
application of forecasts and the basis
for development and related adjustments
of the qualitative factor components
of the ACL.
●
We
evaluated
the
reasonableness
of
management’s
application
of
qualitative
factor
adjustments
to
the
ACL,
including
the
comparison
of
factors
considered
by
management
to
third
party
or
internal
sources
as
well
as
evaluated the appropriateness and level of the qualitative factor adjustments.
●
We
assessed the overall
trends in credit
quality,
including adjustments for
the qualitative factors
by comparing the
overall allowance for credit losses to those recorded by the Company’s
peer institutions.
●
We
evaluated
subsequent
events
and
transactions
and
considered
whether
they
corroborated
or
contradicted
the
Company’s conclusion.
/s/
Elliott Davis, LLC
We have served
as the Company's auditor since 2015.
Greenville, South Carolina
M
arch 17, 2026
Table of Contents
68
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31
(Dollars in thousands, except share data)
2025
2024
Assets:
Cash and due from banks
$
22,335
$
15,142
Federal funds sold
21,322
37,200
Interest-bearing bank deposits
104,175
41,012
Cash and cash equivalents
147,832
93,354
Securities available-for-sale
233,259
243,012
Loans held for sale
172
—
Loans, net of unearned income
565,354
564,017
Allowance for credit losses
(7,176)
(6,871)
Loans, net
558,178
557,146
Premises and equipment, net
45,600
45,931
Bank-owned life insurance
17,927
17,513
Other assets
15,829
20,368
Total assets
$
1,018,797
$
977,324
Liabilities:
Deposits:
Noninterest-bearing
$
268,026
$
260,874
Interest-bearing
654,900
634,950
Total deposits
922,926
895,824
Accrued expenses and other liabilities
3,818
3,208
Total liabilities
926,744
899,032
Stockholders' equity:
Preferred stock of $
0.01
par value; authorized
200,000
shares;
issued shares - none
—
—
Common stock of $
0.01
par value; authorized
8,500,000
shares;
issued
3,957,135
shares
39
39
Additional paid-in capital
3,864
3,802
Retained earnings
119,241
115,759
Accumulated other comprehensive loss, net
(19,390)
(29,607)
Less treasury stock, at cost -
463,436
shares at both
December 31, 2025 and 2024
(11,701)
(11,701)
Total stockholders’
equity
92,053
78,292
Total liabilities and stockholders’
equity
$
1,018,797
$
977,324
S
ee accompanying notes to consolidated financial statements
Table of Contents
69
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
Year ended December 31
(Dollars in thousands, except share and per share data)
2025
2024
Interest income:
Loans, including fees
$
30,840
$
29,735
Securities:
Taxable
4,949
5,430
Tax-exempt
273
294
Federal funds sold and interest-bearing bank deposits
4,706
3,273
Total interest income
40,768
38,732
Interest expense:
Deposits
11,092
11,604
Short-term borrowings
2
3
Total interest expense
11,094
11,607
Net interest income
29,674
27,125
Provision for credit losses
631
36
Net interest income after provision for credit
losses
29,043
27,089
Noninterest income:
Service charges on deposit accounts
619
614
Mortgage lending
474
608
Bank-owned life insurance
414
403
Other
1,612
1,849
Total noninterest income
3,119
3,474
Noninterest expense:
Salaries and benefits
13,154
12,534
Net occupancy and equipment
2,353
2,508
Professional fees
1,276
1,188
FDIC and other regulatory assessments
569
564
Other
5,599
5,372
Total noninterest expense
22,951
22,166
Earnings before income taxes
9,211
8,397
Income tax expense
1,956
2,000
Net earnings
$
7,255
$
6,397
Net earnings per share:
Basic and diluted
$
2.08
$
1.83
Weighted average shares
outstanding:
Basic
3,493,699
3,493,690
Diluted
3,495,036
3,493,690
S
ee accompanying notes to consolidated financial statements
Table of Contents
70
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Year ended December 31
(Dollars in thousands)
2025
2024
Net earnings
$
7,255
$
6,397
Other comprehensive income (loss), net of tax:
Unrealized net holding gain (loss) on securities, net of
tax expense of $
3,427
and tax benefit of $
195
for the years
ended December 31, 2025 and 2024, respectively
10,217
(578)
Other comprehensive income (loss)
10,217
(578)
Comprehensive income
$
17,472
$
5,819
S
ee accompanying notes to consolidated financial statements
Table of Contents
71
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
Accumulated
Common
Additional
other
Shares
Common
paid-in
Retained
comprehensive
Treasury
(Dollars in thousands, except share data)
Outstanding
Stock
capital
earnings
(loss) income
stock
Total
Balance, December 31, 2023
3,493,614
$
39
3,801
113,398
(29,029)
(11,702)
$
76,507
Cumulative effect of change in
accounting standard
—
—
—
(263)
—
—
(263)
Net earnings
—
—
—
6,397
—
—
6,397
Other comprehensive loss
—
—
—
—
(578)
—
(578)
Cash dividends paid ($
1.08
per share)
—
—
—
(3,773)
—
—
(3,773)
Sale of treasury stock
85
—
1
—
—
1
2
Balance, December 31, 2024
3,493,699
$
39
$
3,802
$
115,759
$
(29,607)
$
(11,701)
$
78,292
Net earnings
—
—
—
7,255
—
—
7,255
Other comprehensive income
—
—
—
—
10,217
—
10,217
Cash dividends paid ($
1.08
per share)
—
—
—
(3,773)
—
—
(3,773)
Stock-based compensation
—
—
62
—
—
—
62
Balance, December 31, 2025
3,493,699
$
39
$
3,864
$
119,241
$
(19,390)
$
(11,701)
$
92,053
S
ee accompanying notes to consolidated financial statements
Table of Contents
72
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended December 31
(In thousands)
2025
2024
Cash flows from operating activities:
Net earnings
$
7,255
$
6,397
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provision for credit losses
631
36
Depreciation and amortization
2,113
1,933
Premium amortization and discount accretion, net
1,377
1,505
Deferred tax (benefit) expense
(129)
438
Net gain on sale of loans held for sale
(154)
(261)
Loans originated for sale
(7,074)
(10,439)
Proceeds from sale of loans
7,005
10,622
Increase in cash surrender value of bank owned life insurance
(414)
(403)
Stock-based compensation
62
—
Net decrease (increase) in other assets
995
(1,168)
Net increase in accrued expenses and other liabilities
682
2,149
Net cash provided by operating activities
$
12,349
$
10,809
Cash flows from investing activities:
Proceeds from maturities, paydowns and calls of securities available-for
-sale
22,020
25,620
Increase in loans, net
(1,735)
(6,709)
Net purchases of premises and equipment
(1,485)
(2,089)
Decrease in FHLB stock
—
32
Net cash provided by investing activities
$
18,800
$
16,854
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposits
7,152
(9,849)
Net increase in interest-bearing deposits
19,950
9,430
Net decrease in federal funds purchased and securities sold
under agreements to repurchase
—
(1,486)
Dividends paid
(3,773)
(3,773)
Net cash provided by (used in) financing activities
$
23,329
$
(5,678)
Net change in cash and cash equivalents
$
54,478
$
21,985
Cash and cash equivalents at beginning of period
93,354
71,369
Cash and cash equivalents at end of period
$
147,832
$
93,354
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
$
11,155
$
11,520
Income taxes
676
1,244
S
ee accompanying notes to consolidated financial statements
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73
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Business
Auburn National Bancorporation, Inc. (the “Company”) is a bank holding company
whose primary business is conducted
by its wholly-owned subsidiary,
AuburnBank (the “Bank”). AuburnBank is a commercial bank located in
Auburn,
Alabama. The Bank provides a full range of banking services in its primary
market area, Lee County,
which includes the
Auburn-Opelika Metropolitan Statistical Area.
Basis of Presentation
The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries, which are
managed as a single business segment. Significant intercompany transactions
and accounts are eliminated in consolidation.
Revenue Recognition
The Company’s sources of
income that fall within the scope of Accounting Standards Codification (“ASC”) 606,
Revenue
from Contracts with Customers,
include service charges on deposits, interchange fees and
gains, and losses on sales of
other real estate, all of which are presented as components of noninterest income.
The following is a summary of the
revenue streams that fall within the scope of ASC 606:
Service charges on deposits and ATM
and interchange fees – Fees from these services are either transaction-based, for
which the performance obligations are satisfied when the individual transaction
is processed, or set periodic service
charges, for which the performance obligations are satisfied
over the period the service is provided. Transaction-based
fees
are recognized at the time the transaction is processed, and periodic service
charges are recognized over the service period.
Gains on sales of other real estate
–
A gain on sale should be recognized when a contract for sale exists and control of the
asset has been transferred to the buyer.
ASC 606 lists several criteria required to conclude that a contract for sale exists,
including a determination that the institution will collect substantially all of
the consideration to which it is entitled. In
addition to the loan-to-value, the analysis is based on various other factors, including the credit quality
of the borrower, the
structure of the loan, and any other factors that may affect
collectability.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities as of the balance sheet date and the reported
amounts of income and expense during the
reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to
significant change in the near term include the determination of
the allowance for credit losses, fair value measurements,
valuation of other real estate owned, and valuation of deferred tax assets.
Reclassifications
Certain amounts reported in the prior period have been reclassified to conform
to the current-period presentation. These
reclassifications had no impact on the Company’s
previously reported net earnings or total stockholders’ equity.
Subsequent Events
The Company has evaluated the effects of events or transactions
through the date of this filing that have occurred
subsequent to December 31, 2025. The Company does not believe there
are any material subsequent events that would
require further recognition or disclosure.
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74
Accounting Standards Adopted in 2025
Accounting Standards Update (“ASU”) 2023-09,
Income Taxes
(Topic
740): Improvements to Income Tax
Disclosures.
The
amendments in this Update enhance the transparency and decision usefulness of
income tax disclosures.
For public
business entities, the new standard was effective for annual periods
beginning after December 15, 2024.
The Company has
adopted ASU 2023-09.
Issued not yet effective accounting standards
The following ASUs have been issued by the Financial Accounting Standards
Board (“FASB”) but are
not yet effective.
ASU 2025-01,
Income Statement Reporting Comprehensive Income
- Expense Disaggregation Disclosures
(Subtopic 220-
40): Clarifying the Effective Date,
clarifies the effective date of ASU 2024-03,
Income Statement Reporting Comprehensive
Income - Expense Disaggregation Disclosures
(Subtopic 220-40): Disaggregation of
Income Statement Expenses
to
stipulate that ASU 2024-03 is effective for public business entities for
annual reporting periods beginning after December
15, 2026 and interim reporting periods beginning after December 15,
2027, with early adoption permitted. ASU 2025-01
will be effective for the Company beginning January 1, 2027
for the Company’s annual consolidated
financial statements
on Form 10-K and January 1, 2028 for the Company’s
quarterly consolidated financial statements on Form 10-Q
and is not
expected to have a significant impact on the Company’s
consolidated financial statements.
ASU 2025-06,
Intangibles - Goodwill and Other - Internal-Use Software
(Subtopic 350-40),
removes all references to
prescriptive and sequential software development stages and clarifies that the
threshold for when an entity is required to
start capitalizing software costs is when (1) management has authorized
and committed to funding the software project and
(2) it is probable that the project will be completed and the software will be used to perform
the function intended. ASU
2025-06 will be effective for the Company beginning
January 1, 2028, with early adoption permitted, and is not expected to
have a significant impact on the Company’s
consolidated financial statements.
ASC 2025-11,
Interim Reporting (Topic
270): Narrow-Scope Improvements,
is intended to provide clarity about the current
interim reporting requirements, provides a list of the interim disclosures required
by all other Codification topics and
establishes a disclosure principle that requires entities to disclose events since the
end of the last annual reporting period
that have a material impact on the entity.
ASC 2025-11 will be effective
for the Company beginning January 1, 2028, with
early adoption permitted, and is not expected to have a significant impact on the Company’s
consolidated financial
statements.
Cash Equivalents
Cash equivalents include cash on hand, cash items in process of collection,
amounts due from banks, including interest
bearing deposits with other banks, and federal funds sold.
Securities
Securities are classified based on management’s
intention at the date of purchase. At December 31, 2025, all of the
Company’s securities were classified
as available-for-sale. Securities available-for-sale are used as part of the Company’s
interest rate risk and liquidity management strategy,
and they may be sold in response to changes in interest rates, changes
in prepayment risks or other factors. All securities classified as available-for-sale are recorded
at fair value with any
unrealized gains and losses reported in accumulated other comprehensive income
(loss), net of the deferred income tax
effects. Interest and dividends on securities, including
the amortization of premiums and accretion of discounts are
recognized in interest income using the effective interest method.
Premiums are amortized to the earliest call date while
discounts are accreted over the estimated life of the security.
Realized gains and losses from the sale of securities are
determined using the specific identification method.
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75
For any securities classified as available-for-sale that are in an unrealized loss position
at the balance sheet date, the
Company assesses whether or not it intends to sell the security,
or more likely than not will be required to sell the security,
before recovery of its amortized cost basis. If either of these criteria are met, the security's
amortized cost basis is written
down to fair value through net income. If neither criterion is met, the Company
evaluates whether any portion of the decline
in fair value is the result of credit deterioration. Such evaluations consider the
extent to which the amortized cost of the
security exceeds its fair value, changes in credit ratings and any other known
adverse conditions related to the specific
security. If the evaluation
indicates that a credit loss exists, an allowance for credit losses is recorded for
the amount by
which the amortized cost basis of the security exceeds the present value
of cash flows expected to be collected, limited by
the amount by which the amortized cost exceeds fair value. Any impairment not
recognized in the allowance for credit
losses is recognized in other comprehensive income.
The Company has elected to exclude accrued interest receivable on
investment securities from the estimate of credit losses.
Accrued interest receivable is written off through interest income
when deemed uncollectible.
Accrued interest receivable totaled $0.8 million and $0.9 million at December
31, 2025 and
2024, respectively.
Loans held for sale
The Company originates residential mortgage loans for sale.
Such loans are carried at the lower of cost or estimated fair
value in the aggregate.
Loan sales are recognized when the transaction closes, the proceeds are collected,
and ownership is
transferred.
Continuing involvement, through the sales agreement, consists of the
right to service the loan for a fee for the
life of the loan, if applicable.
Gains on the sale of loans held for sale are recorded net of related costs, such as
commissions, and reflected as a component of mortgage lending income
in the consolidated statements of earnings.
The Bank makes various representations and warranties to the purchaser of
the residential mortgage loans they originated
and sells, primarily to Fannie Mae.
Every loan closed by the Bank’s mortgage
center is run through Fannie Mae or other
purchasing government sponsored enterprise (“GSE”) automated
underwriting system.
Any exceptions noted during this
process are remedied prior to sale.
These representations and warranties also apply to underwriting the real
estate appraisal
opinion of value for the collateral securing these loans.
Failure by the Company to comply with the underwriting and/or
appraisal standards could result in the Company being required to
repurchase the mortgage loan or to reimburse the investor
for losses incurred (make whole requests) if the Company cannot cure such
failure within the specified period following
discovery.
Loans
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff are reported
at amortized cost. Amortized cost is the principal balance outstanding,
net of purchase premiums and discounts and
deferred fees and costs. Accrued interest receivable related to loans
is recorded in other assets on the consolidated balance
sheets. Interest income is accrued on the unpaid principal balance. Loan origination
fees, net of certain direct origination
costs, are deferred and recognized in interest income using methods that approximate
a level yield without anticipating
prepayments.
The Company discontinues the accrual of interest income when (1) there
is a significant deterioration in the financial
condition of the borrower and full repayment of principal and interest is not
expected or (2) the principal or interest is more
than 90 days past due, unless the loan is both well-secured and in the process
of collection.
All accrued but unpaid interest is reversed against interest income when
a loan is placed on nonaccrual status. Interest
received on such loans is accounted for using the cost-recovery method,
until the loan qualifies for return to accrual.
Loans
are returned to accrual status when all the principal and interest amounts contractually
due are brought current, there is a
sustained period of repayment performance, and future payments are
reasonably assured. Otherwise, under the cost
recovery method, interest income is not recognized until the loan
balance is reduced to zero.
Allowance for Credit Losses – Loans
The allowance for credit losses is a valuation account that is deducted from
the loans' amortized cost basis to present the net
amount expected to be collected on the loans.
Loans are charged off against the allowance when management
confirms the
loan balance is uncollectible. Expected recoveries do not exceed the aggregate
of amounts previously charged-off and
expected to be charged-off.
The Company has elected to exclude accrued interest receivable on loans from the estimate of
credit losses.
Accrued interest receivable is written off through interest
income when deemed uncollectible.
Accrued
interest receivable totaled $2.0 million at both December 31, 2025
and 2024.
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76
The allowance for credit losses represents management’s
estimate of lifetime credit losses inherent in loans as of the
balance sheet date. The allowance for credit losses is estimated by management
using relevant available information, from
both internal and external sources, relating to past events, current conditions,
and reasonable and supportable forecasts.
The Company’s loan loss estimation
process includes procedures to appropriately consider the unique characteristics of
its
respective loan segments (commercial and industrial, construction and land development,
commercial real estate,
residential real estate, and consumer loans).
These segments are further disaggregated into loan classes, the level at which
credit quality is monitored.
See Note 4, Loans and Allowance for Credit Losses, for additional information
about our loan
portfolio.
Credit loss assumptions are estimated using a discounted cash flow ("DCF") model
for each loan segment, except consumer
loans.
The weighted average remaining life method is used to estimate credit loss assumptions
for consumer loans.
The DCF model calculates an expected life-of-loan loss percentage by considering
the forecasted probability that a
borrower will default (the “PD”), adjusted for relevant forecasted macroeconomic
factors, and loss given default (“LGD”),
which is the estimate of the amount of net loss in the event of default.
This model utilizes historical correlations between
default experience and certain macroeconomic factors as determined
through a statistical regression analysis.
The
forecasted Alabama unemployment rate is considered in the model for commercial
and industrial, construction and land
development, commercial real estate, and residential real estate loans.
In addition, forecasted changes in the Alabama
home price index is considered in the model for construction and land development
and residential real estate loans.
Forecasted changes in the national commercial real estate (“CRE”) price index
is considered in the model for commercial
real estate and multifamily loans; and forecasted changes in the Alabama
gross state product is considered in the model for
multifamily loans.
Projections of these macroeconomic factors, obtained from an independent third party,
are utilized to
predict quarterly rates of default based on the statistical PD models.
Expected credit losses are estimated over the contractual term of the
loan, adjusted for expected prepayments and principal
payments (“curtailments”) when appropriate. Management's determination
of the contract term excludes expected
extensions, renewals, and modifications, unless the extension or renewal
option is included in the contract at the reporting
date and is not unconditionally cancellable by the Company.
To the extent the lives of the loans
in the portfolio extend
beyond the period for which a reasonable and supportable forecast can be
made (which is 4 quarters for the Company), the
Company reverts, on a straight-line basis back to the historical rates over
an 8-quarter reversion period.
During the first quarter of 2025, as part of the Company’s
ongoing model monitoring procedures, the annual loss driver
analysis and prepayment, curtailment and funding studies were performed.
The analysis and studies resulted in changes for
all DCF models, which were incorporated in the calculation.
The Company performs a refresh of the inputs in the
calculation on an annual basis.
The weighted average remaining life method was deemed most appropriate
for the consumer loan segment because
consumer loans contain many different payment
structures, payment streams and collateral.
The weighted average
remaining life method uses an annual charge-off rate
over several vintages to estimate credit losses.
The average annual
charge-off rate is applied to the contractual
term adjusted for prepayments.
Additionally, the
allowance for credit losses calculation includes subjective adjustments for qualitative
risk factors that are
believed likely to cause estimated credit losses to differ from
historical experience. These qualitative adjustments may
increase reserve levels and include adjustments for lending management
experience and risk tolerance, loan review and
audit results, asset quality and portfolio trends, loan portfolio growth,
industry concentrations, trends in underlying
collateral, external factors and economic conditions not already captured.
Loans secured by real estate with balances equal to or greater than $500 thousand and
loans not secured by real estate with
balances equal to or greater than $250 thousand that do not share risk
characteristics are evaluated on an individual basis.
When management determines that foreclosure is probable and
the borrower is experiencing financial difficulty,
the
expected credit losses are based on the estimated fair value of collateral held
at the reporting date, adjusted for selling costs
as appropriate.
For loans evaluated on an individual basis that are not collateral dependent, the allowance
is measured
using the present value of expected future cash flows, discounted at the loan’s
effective interest rate.
Expected cash flows
are developed using probability of default
and loss given default assumptions specific to the borrower.
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77
Allowance for Credit Losses – Unfunded Commitments
Financial instruments include off-balance sheet credit
instruments, such as commitments to make loans and commercial
letters of credit issued to meet customer financing needs. The Company’s
exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for off
-balance sheet loan commitments is represented by the
contractual amount of those instruments. Such financial instruments are
recorded when they are funded.
The Company records an allowance for credit losses on off
-balance sheet credit exposures, unless the commitments to
extend credit are unconditionally cancelable, through a charge
to provision for credit losses in the Company’s
consolidated
statements of earnings. The allowance for credit losses on off-balance
sheet credit exposures is estimated by loan segment
at each balance sheet date under the current expected credit loss model using
the same methodologies as portfolio loans,
taking into consideration the likelihood that funding will occur as well as any third-party
guarantees. The allowance for
unfunded commitments is included in other liabilities on the Company’s
consolidated balance sheets.
Premises and Equipment
Land is carried at cost. Land improvements, buildings and improvements,
and furniture, fixtures, and equipment are carried
at cost, less accumulated depreciation computed on a straight-line method
over the estimated useful lives of the assets or the
expected terms of the leases, if shorter.
Expected terms include lease option periods to the extent that the exercise of such
options is reasonably assured.
Nonmarketable equity investments
Nonmarketable equity investments include equity securities that are not
publicly traded and securities acquired for various
purposes. The Bank is required to maintain certain minimum levels of equity investments
in (i) Federal Reserve Bank of
Atlanta based on the Bank’s capital stock
and surplus, and the (ii) Federal Home Bank of Atlanta (“FHLB – Atlanta”)
based on various factors including, the Bank’s
total assets, its borrowings and outstanding letters of credit from the
FHLB -
Atlanta and its “acquired member asset” sales to FHLB - Atlanta.
These nonmarketable equity securities are accounted for
at cost which equals par or redemption value. These securities do not have
a readily determinable fair value as their
ownership is restricted and there is no market for these securities. These securities can only
be redeemed or sold at their par
value by the respective issuer bank or, in
the case of FHLB – Atlanta stock upon FHLB – Atlanta approved sale to another
member of FHLB – Atlanta and law applicable to the member.
The Company records these nonmarketable equity securities
as a component of other assets, which are periodically evaluated for impairment.
Management considers these
nonmarketable equity securities to be long-term investments. Accordingly,
when evaluating these securities for impairment,
management considers the ultimate recoverability of the par value rather
than by recognizing temporary declines in value.
Transfers of Financial Assets
Transfers of an entire financial asset (i.e. loan sales), a group
of entire financial assets, or a participating interest in an entire
financial asset (i.e. loan participations sold) are accounted for as sales when control
over the assets have been surrendered.
Control over transferred assets is deemed to be surrendered when (1)
the assets have been isolated from the Company,
(2) the transferee obtains the right (free of conditions that constrain it from
taking that right) to pledge or exchange the
transferred assets, and (3) the Company does not maintain effective
control over the transferred assets through an
agreement to repurchase them before their maturity.
Mortgage Servicing Rights
The Company recognizes as assets the rights to service mortgage loans which it originates
and sells to others, principally
Fannie Mae.
These servicing rights are called “MSRs”.
The Company determines the fair value of MSRs on sold loans at
the date the loan is transferred.
An estimate of the Company’s MSRs is determined
using assumptions that market
participants would use in estimating future net servicing income, including
estimates of prepayment speeds, discount rate,
default rates, cost to service, escrow account earnings, contractual servicing
fee income, ancillary income, and late fees.
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78
Subsequent to the date of sale of the residential mortgage loans, the Company has
elected to measure its MSRs on such sold
mortgage loans under the amortization method.
Under the amortization method, MSRs are amortized in proportion to, and
over the period of, estimated net servicing income.
The amortization of MSRs is analyzed monthly and is adjusted to
reflect changes in prepayment speeds, as well as other factors.
MSRs are evaluated for impairment based on the fair value
of those assets.
Impairment is determined by stratifying MSRs into groupings based
on predominant risk characteristics,
such as interest rate and loan type.
If, by individual stratum, the carrying amount of the MSRs exceeds fair value, a
valuation allowance is established through a charge to
earnings.
The valuation allowance is adjusted as the fair value
changes.
MSRs are included in the other assets category in the accompanying consolidated balance
sheets at the lower of
cost or fair value.
See Note 14 “Fair Value”
Derivatives as Part of Designated Accounting Hedges
The Company applies hedge accounting to certain derivative instruments
used for risk management purposes, primarily
interest rate risk. To
qualify for hedge accounting, a derivative instrument must be highly effective
at reducing the risk
associated with the hedged exposure, and the hedging relationship must be formally
documented at its inception. The
Company uses regression analysis to assess the effectiveness of each hedging
relationship, unless the hedge qualifies for
other methods of assessing effectiveness (e.g., shortcut or
critical terms match), both at inception and throughout the life of
the hedge transaction.
The Company has a derivative instrument designated as part of a fair value
accounting hedge. This derivative consists of a
pay-fixed, receive-floating interest rate swap, and was entered into
to hedge changes in the fair value of a fixed-rate loan for
interest rate risk resulting from changes in a benchmark interest rate. In a qualifying
fair value hedge, the Company records
periodic changes in the fair value of the derivative instrument in current period
earnings. Simultaneously,
periodic changes
in the fair value of the hedged risk are also recorded in current period
earnings. Together,
these periodic changes in the fair
value of the derivative instrument and the fair value of the hedged risk are included
in the same line item of the
consolidated statements of earning associated with the hedged item,
and offset each other. Interest accruals
on both the
derivative instrument and the hedged item are also recorded in the same line item,
which effectively converts the designated
fixed-rate asset to a floating-rate asset. The Company structures interest rate
swaps associated with fair value hedges to
match the critical terms of the hedged items, thereby maximizing the economic
and accounting effectiveness of the hedging
relationships, resulting in the expectation that the hedging relationship will be highly
effective. If a fair value hedging
relationship ceases to qualify for hedge accounting, hedge accounting is discontinued
and future changes in the fair value of
the derivative instrument are recognized in current period earnings, until the
derivative is settled with the counterparty.
In
addition, all remaining basis adjustments resulting from periodic changes
in the fair value of the hedged risk, previously
recorded as a component of the carrying amount of the hedged item, are
amortized or accreted into interest income using
the interest method over the remaining life of the hedged item.
Income Taxes
Deferred tax assets and liabilities are the expected future tax amounts
for the temporary differences between carrying
amounts and tax bases of assets and liabilities, computed using enacted tax
rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
The net deferred tax asset is reflected as a component of other
assets in the accompanying consolidated balance sheets.
Income tax expense or benefit for the year is allocated among continuing operations
and other comprehensive income
(loss), as applicable. The amount allocated to continuing operations is the income
tax effect of the pretax income or loss
from continuing operations that occurred during the year,
plus or minus income tax effects of (1) changes in certain
circumstances that cause a change in judgment about the realization of deferred
tax assets in future years, (2) changes in
income tax laws or rates, and (3) changes in income tax status, subject to certain
exceptions.
The amount allocated to other
comprehensive income (loss) is related solely to changes in the valuation allowance
on items that are normally accounted
for in other comprehensive income (loss) such as unrealized gains or
losses on available-for-sale securities.
In accordance with ASC 740,
Income Taxes
, a tax position is recognized as a benefit only if it is “more likely than not” that
the tax position would be sustained in a tax examination, with a tax examination being
presumed to occur. The amount
recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax
positions not meeting the “more likely than not” test, no tax benefit is recorded.
It is the Company’s policy to recognize
interest and penalties related to income tax matters in income tax expense. The
Company and its wholly-owned subsidiaries
file consolidated Federal and State of Alabama income tax returns.
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79
Fair Value
Measurements
ASC 820,
Fair Value
Measurements,
which defines fair value, establishes a framework for measuring fair value
in U.S.
generally accepted accounting principles and expands disclosures about
fair value measurements. ASC 820 applies only to
fair-value measurements that are already required
or permitted by other accounting standards.
The definition of fair value
focuses on the exit price, i.e., the price that would be received to sell an asset or paid to transfer a
liability in an orderly
transaction between market participants at the measurement date,
not the entry price, i.e., the price that would be paid to
acquire the asset or received to assume the liability at the measurement date.
The statement emphasizes that fair value is a
market-based measurement; not an entity-specific measurement.
Therefore, the fair value measurement should be
determined based on the assumptions that market participants would
use in pricing the asset or liability.
For more
information related to fair value measurements, please refer to Note 14, Fair
Value.
NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE
Basic net earnings per share is computed by dividing net earnings by
the weighted average common shares outstanding for
the year.
Diluted net earnings per share reflects the potential dilution that could occur upon exercise
of securities or other
rights for, or convertible into, shares of the
Company’s common stock.
During 2025, the Company granted 3,030 restricted
stock units (“RSUs”), which represent potential common shares.
These RSUs are included in the computation of diluted
net earnings per share using the treasury stock method.
No such securities were outstanding during the year ended
December 31, 2024.
The basic and diluted net earnings per share computations for the respective
years are presented below.
Year ended December 31
(Dollars in thousands, except share and per share data)
2025
2024
Basic:
Net earnings
$
7,255
$
6,397
Weighted average
common shares outstanding
3,493,699
3,493,690
Basic net earnings per share
$
2.08
$
1.83
Diluted:
Net earnings
$
7,255
$
6,397
Weighted average
common shares outstanding
3,493,699
3,493,690
Dilutive effect of restricted stock units
1,337
—
Weighted average
common shares outstanding, diluted
3,495,036
3,493,690
Diluted net earnings per share
$
2.08
$
1.83
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80
NOTE 3: SECURITIES
At December 31, 2025 and 2024, respectively,
all securities within the scope of ASC 320,
Investments – Debt and Equity
Securities
were classified as available-for-sale.
The fair value and amortized cost for securities available-for-sale by
contractual maturity at December 31, 2025 and 2024, respectively,
are presented below.
1 year
1 to 5
5 to 10
After 10
Fair
Gross Unrealized
Amortized
(Dollars in thousands)
or less
years
years
years
Value
Gains
Losses
Cost
December 31, 2025
Agency obligations (a)
$
—
35,580
18,204
—
53,784
—
4,727
$
58,511
Agency MBS (a)
—
20,112
16,171
125,644
161,927
—
19,063
180,990
State and political subdivisions
—
1,590
9,160
6,798
17,548
1
2,103
19,650
Total available-for-sale
$
—
57,282
43,535
132,442
233,259
1
25,893
$
259,151
December 31, 2024
Agency obligations (a)
$
—
26,655
25,756
—
52,411
—
7,734
$
60,145
Agency MBS (a)
10
19,863
14,904
138,899
173,676
—
28,901
202,577
State and political subdivisions
—
966
8,244
7,715
16,925
—
2,901
19,826
Total available-for-sale
$
10
47,484
48,904
146,614
243,012
—
39,536
$
282,548
(a) Includes securities issued by U.S. government agencies or government
sponsored entities.
Expected lives of
these securities may differ from contractual maturities because (i)
issuers may have the right to call or repay such securities
obligations with or without prepayment penalties and (ii) loans included in Agency
MBS generally have the right to prepay
such loans in whole or in part at any time.
Securities with aggregate fair values of $
209.4
million and $
222.3
million at December 31, 2025 and 2024, respectively,
were pledged to secure public deposits, securities sold under agreements
to repurchase, FHLB advances, and for other
purposes required or permitted by law.
Included in other assets on the accompanying consolidated balance sheets are nonmarketable
equity investments.
The
carrying amounts of nonmarketable equity investments were $
1.4
million at both December 31, 2025 and 2024,
respectively.
Nonmarketable equity investments include FHLB-Atlanta stock, Federal
Reserve Bank stock, and stock in a
privately held financial institution.
Fair Value
and Gross Unrealized Losses
The fair values and gross unrealized losses on securities at December
31, 2025 and 2024, respectively,
segregated by those
securities that have been in an unrealized loss position for less than 12 months and
12 months or more are presented below.
Less than 12 Months
12 Months or Longer
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
(Dollars in thousands)
Value
Losses
Value
Losses
Value
Losses
December 31, 2025:
Agency obligations
$
—
—
53,784
4,727
53,784
$
4,727
Agency MBS
—
—
161,840
19,063
161,840
19,063
State and political subdivisions
—
—
14,827
2,103
14,827
2,103
Total
$
—
—
230,451
25,893
230,451
$
25,893
December 31, 2024:
Agency obligations
$
—
—
52,411
7,734
52,411
$
7,734
Agency MBS
7
—
173,669
28,901
173,676
28,901
State and political subdivisions
1,798
17
14,776
2,884
16,574
2,901
Total
$
1,805
17
240,856
39,519
242,661
$
39,536
Table of Contents
81
For the
securities in
the previous
table, the
Company assesses
whether or
not it
intends to
sell the
security,
or more
likely
than not
will be
required to
sell the
security,
before recovery
of its
amortized cost
basis.
Unrealized losses
have not
been
recognized into income
as the decline
in fair value
is largely due
to changes in
interest rates and
not credit quality.
For the
securities
in
the
previous
table,
as
of
December
31,
2025,
management
does
not intend
to
sell
and
it
is
likely
that
management will not be required to sell the securities prior to their anticipated recovery.
Agency Obligations
Investments
in
agency
obligations
are
guaranteed
of
full
and
timely
payments
by
the
issuing
agency.
Based
on
management's
analysis
and
judgement,
there
were
no
credit
losses attributable
to
the
Company’s
investments
in
agency obligations at December 31, 2025.
Agency MBS
Investments in
agency MBS
are issued
by Ginnie
Mae, Fannie
Mae, and
Freddie Mac.
Each of
these agencies
provide a
guarantee of full and
timely payments of principal
and interest by the issuing
agency.
Based on management's analysis
and
judgement, there were no credit losses attributable to the Company’s
investments in agency MBS at December 31, 2025.
State and Political Subdivisions
Investments
in
state
and
political
subdivisions
are
securities
issued
by
various municipalities
in
the
United
States.
The
majority
of
the
portfolio was
rated
AA
or
higher,
with
no
securities
rated
below
investment
grade
at
December
31,
2025.
Based
on
management's
analysis
and
judgement,
there
were
no
credit
losses
attributable
to
the
Company’s
investments in state and political subdivisions at December 31, 2025.
Realized Gains and Losses
The Company had no realized gains or losses on sale of securities during the years
ended December 31, 2025 and 2024,
respectively.
NOTE 4: LOANS AND ALLOWANCE
FOR CREDIT LOSSES
December 31
(In thousands)
2025
2024
Commercial and industrial
$
58,400
$
63,274
Construction and land development
56,436
82,493
Commercial real estate:
Owner occupied
59,568
55,346
Hotel/motel
47,870
35,210
Multifamily
51,516
43,556
Other
166,567
155,880
Total commercial
real estate
325,521
289,992
Residential real estate:
Consumer mortgage
59,781
60,399
Investment property
56,773
58,228
Total residential real
estate
116,554
118,627
Consumer installment
8,421
9,631
Total loans, net of unearned
income before basis adjustment
565,332
564,017
Basis adjustment associated with fair value hedge (1)
22
—
Total loans, net of unearned
income
565,354
564,017
(1) Represent the basis adjustment associated with application of hedge accounting
on certain loans. The basis adjustment
will be allocated to the amortized cost of associated loans within the portfolio if
the hedge accounting is discontinued.
Refer to
Note 12 Derivative Instruments
for additional information.
Table of Contents
82
Loans secured by real estate were approximately
88.2
% of the total loan portfolio at December 31, 2025.
At December 31,
2025, the Company’s geographic
loan distribution was concentrated primarily in Lee County,
Alabama and surrounding
areas.
The loan portfolio segment is defined as the level at which an entity develops
and documents a systematic method for
determining its allowance for credit losses. As part of the Company’s
quarterly assessment of the allowance, the loan
portfolio is disaggregated into the following portfolio segments:
commercial and industrial, construction and land
development, commercial real estate, residential real estate and consumer installment.
Where appropriate, the Company’s
loan portfolio segments are further disaggregated into classes. A class is generally
determined based on the initial
measurement attribute, risk characteristics of the loan, and an entity’s
method for monitoring and determining credit risk.
The following describe the risk characteristics relevant to each of the portfolio
segments and classes.
Commercial and industrial (“C&I”) —
includes loans to finance business operations, equipment purchases, or
other needs
for small and medium-sized commercial customers. Also
included in this category are loans to finance agricultural
production.
Generally, the primary source of repayment
is the cash flow from business operations and activities of the
borrower.
Construction and land development (“C&D”) —
includes both loans and credit lines for the purpose of purchasing,
carrying and developing land into commercial developments or residential
subdivisions. Also included are loans and lines
for construction of residential, multi-family and commercial buildings.
Generally, the primary source
of repayment is
dependent upon the sale or refinancing of the real estate collateral.
Commercial real estate
(“CRE”) —
includes loans disaggregated in these classes:
Owner occupied
– includes loans secured by business facilities to finance business operations, equipment
and
owner-occupied facilities primarily for small and medium-sized
commercial customers.
Generally,
the primary source
of loan repayment are the cash flows from the business operations and activities of the borrower,
who owns the
property.
Hotel/motel
– includes loans for hotels and motels.
Generally, the primary source
of repayment is dependent upon
income generated from the real estate collateral.
The underwriting of these loans takes into consideration the
occupancy and rental rates, as well as the financial health of the borrower.
Multifamily
– primarily includes loans to finance income-producing multifamily
properties. Loans in this class include
loans for 5 or more unit residential property and apartments leased to residents. Generally,
the primary source of
repayment is dependent upon income generated from the real estate collateral. The underwriting
of these loans takes
into consideration the occupancy and rental rates, as well as the financial health of the borrower.
Other
– primarily includes loans to finance income-producing commercial
properties. Loans in this class include loans
for neighborhood retail centers,
medical and professional offices, single retail stores, industrial
buildings, and
warehouses leased generally to local businesses and residents. Generally,
the primary source of repayment is dependent
upon income generated from the real estate collateral. The underwriting of these
loans takes into consideration the
occupancy and rental rates as well as the financial health of the borrower.
Residential real estate (“RRE”) —
includes loans disaggregated into two classes:
Consumer mortgage
– primarily includes
first or second lien mortgages and home equity lines to consumers that are
secured by a primary residence or second home. These loans are underwritten in accordance
with the Bank’s general
loan policies and procedures which require, among other things, proper documentation
of each borrower’s financial
condition, satisfactory credit history and property value.
Investment property
– primarily includes loans to finance income-producing 1-4 family residential
properties.
Generally, the primary source of repayment
is dependent upon income generated from leasing the property securing the
loan. The underwriting of these loans takes into consideration the rental rates as well as
the financial health of the
borrower.
Table of Contents
83
Consumer installment —
includes loans to individuals both secured by personal property and unsecured.
Loans include
personal lines of credit, automobile loans, and other retail loans.
These loans are underwritten in accordance with the
Bank’s general loan policies and procedures
which require, among other things, proper documentation of each borrower’s
financial condition, satisfactory credit history,
and if applicable, property value.
The following is a summary of current, accruing past due and nonaccrual loans by portfolio
class as of December 31, 2025
and 2024.
Accruing
Accruing
Total
30-89 Days
Greater than
Accruing
Non-
Total
(In thousands)
Current
Past Due
90 days
Loans
Accrual
Loans
December 31, 2025:
Commercial and industrial
$
58,394
6
—
58,400
—
$
58,400
Construction and land development
56,395
41
—
56,436
—
56,436
Commercial real estate:
Owner occupied
59,085
105
—
59,190
378
59,568
Hotel/motel
47,870
—
—
47,870
—
47,870
Multifamily
51,516
—
—
51,516
—
51,516
Other
166,567
—
—
166,567
—
166,567
Total commercial
real estate
325,038
105
—
325,143
378
325,521
Residential real estate:
Consumer mortgage
58,993
720
—
59,713
68
59,781
Investment property
56,737
—
—
56,737
36
56,773
Total residential real
estate
115,730
720
—
116,450
104
116,554
Consumer installment
8,348
73
—
8,421
—
8,421
Total
$
563,905
945
—
564,850
482
$
565,332
December 31, 2024:
Commercial and industrial
$
63,163
12
—
63,175
99
$
63,274
Construction and land development
82,089
—
—
82,089
404
82,493
Commercial real estate:
Owner occupied
55,346
—
—
55,346
—
55,346
Hotel/motel
35,210
—
—
35,210
—
35,210
Multifamily
43,556
—
—
43,556
—
43,556
Other
155,880
—
—
155,880
—
155,880
Total commercial
real estate
289,992
—
—
289,992
—
289,992
Residential real estate:
Consumer mortgage
59,677
722
—
60,399
—
60,399
Investment property
58,179
49
—
58,228
—
58,228
Total residential real
estate
117,856
771
—
118,627
—
118,627
Consumer installment
9,579
52
—
9,631
—
9,631
Total
$
562,679
835
—
563,514
503
$
564,017
Table of Contents
84
Credit Quality Indicators
The credit quality of the loan portfolio is summarized no less frequently than
quarterly using categories similar to the
standard asset classification system used by the federal banking agencies.
These categories are utilized to develop the
associated allowance for credit losses using historical losses adjusted for
qualitative and environmental factors and are
defined as follows:
●
Pass – loans which are well protected by the current net worth and paying
capacity of the obligor (or guarantors, if
any) or by the fair value, less cost to acquire and sell, of any underlying collateral.
●
Special Mention – loans with potential weakness that may,
if not reversed or corrected, weaken the credit or
inadequately protect the Company’s
position at some future date. These loans are not adversely classified and do
not expose an institution to sufficient risk to warrant an
adverse classification.
●
Substandard Accruing – loans that exhibit a well-defined weakness which
presently jeopardizes debt repayment,
even though they are currently performing. These loans are characterized
by the distinct possibility that the
Company may incur a loss in the future if these weaknesses are not corrected.
Nonaccrual – includes loans where management has determined that full payment
of principal and interest is not expected.
The following tables present credit quality indicators for the loan portfolio
segments and classes by year of origination as of
December 31, 2025 and 2024.
Table of Contents
85
(Dollars in thousands)
2025
2024
2023
2022
2021
Prior to
2021
Revolving
Loans
Total
Loans
December 31, 2025:
Commercial and industrial
Pass
$
9,403
5,035
5,126
7,055
10,379
17,219
3,950
$
58,167
Special mention
74
4
7
—
—
—
—
85
Substandard
—
—
7
139
2
—
—
148
Nonaccrual
—
—
—
—
—
—
—
—
Total commercial and industrial
9,477
5,039
5,140
7,194
10,381
17,219
3,950
58,400
Current period gross charge-offs
40
—
99
3
—
—
—
142
Construction and land development
Pass
31,315
14,175
7,321
2,080
69
711
765
$
56,436
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total construction and land development
31,315
14,175
7,321
2,080
69
711
765
56,436
Current period gross charge-offs
—
—
—
—
—
—
—
—
Commercial real estate:
Owner occupied
Pass
9,755
1,312
11,889
6,235
13,830
11,618
2,682
$
57,321
Special mention
620
—
—
—
—
—
750
1,370
Substandard
—
499
—
—
—
—
—
499
Nonaccrual
—
—
—
—
—
378
—
378
Total owner occupied
10,375
1,811
11,889
6,235
13,830
11,996
3,432
59,568
Current period gross charge-offs
—
—
—
—
—
296
—
296
Hotel/motel
Pass
5,012
14,161
6,143
8,976
2,948
10,630
—
$
47,870
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total hotel/motel
5,012
14,161
6,143
8,976
2,948
10,630
—
47,870
Current period gross charge-offs
—
—
—
—
—
—
—
—
Table of Contents
86
(Dollars in thousands)
2025
2024
2023
2022
2021
Prior to
2021
Revolving
Loans
Total
Loans
December 31, 2025:
Multi-family
Pass
1,254
3,615
12,550
20,560
1,726
8,652
142
48,499
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
3,017
—
3,017
Nonaccrual
—
—
—
—
—
—
—
—
Total multi-family
1,254
3,615
12,550
20,560
1,726
11,669
142
51,516
Current period gross charge-offs
—
—
—
—
—
—
—
—
Other
Pass
25,027
41,004
12,501
28,033
17,244
24,310
17,589
165,708
Special mention
—
364
—
—
495
—
—
859
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total other
25,027
41,368
12,501
28,033
17,739
24,310
17,589
166,567
Current period gross charge-offs
—
—
—
—
—
—
—
—
Residential real estate:
Consumer mortgage
Pass
6,413
4,344
16,249
16,527
2,263
10,977
1,692
58,465
Special mention
—
—
—
—
—
184
65
249
Substandard
—
—
—
—
—
754
245
999
Nonaccrual
—
—
68
—
—
—
—
68
Total consumer mortgage
6,413
4,344
16,317
16,527
2,263
11,915
2,002
59,781
Current period gross charge-offs
—
—
4
—
—
1
—
5
Investment property
Pass
9,332
8,045
10,016
9,849
6,790
10,375
1,999
56,406
Special mention
—
—
—
—
—
—
—
—
Substandard
236
—
—
91
4
—
—
331
Nonaccrual
—
—
36
—
—
—
—
36
Total investment property
9,568
8,045
10,052
9,940
6,794
10,375
1,999
56,773
Current period gross charge-offs
—
—
2
—
—
—
—
2
Consumer installment
Pass
4,121
1,981
972
780
137
81
304
8,376
Special mention
—
7
2
—
—
—
—
9
Substandard
8
7
21
—
—
—
—
36
Nonaccrual
—
—
—
—
—
—
—
—
Total consumer installment
4,129
1,995
995
780
137
81
304
8,421
Current period gross charge-offs
42
45
9
—
—
—
—
96
Total loans
Pass
101,632
93,672
82,767
100,095
55,386
94,573
29,123
557,248
Special mention
694
375
9
—
495
184
815
2,572
Substandard
244
506
28
230
6
3,771
245
5,030
Nonaccrual
—
—
104
—
—
378
—
482
Total loans
$
102,570
94,553
82,908
100,325
55,887
98,906
30,183
$
565,332
Total current period gross charge-offs
$
82
45
114
4
—
296
—
541
Table of Contents
87
Year of Origination
2024
2023
2022
2021
2020
Prior to
2020
Revolving
Loans
Total
Loans
(Dollars in thousands)
December 31, 2024:
Commercial and industrial
Pass
$
11,290
7,265
8,488
9,677
4,659
16,989
4,425
62,793
Special mention
49
74
—
—
—
—
—
123
Substandard
50
21
181
7
—
—
—
259
Nonaccrual
—
99
—
—
—
—
—
99
Total commercial and industrial
11,389
7,459
8,669
9,684
4,659
16,989
4,425
63,274
Current period gross charge-offs
—
—
9
—
—
—
—
9
Construction and land development
Pass
31,144
29,520
16,504
1,794
1,434
104
1,589
82,089
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
404
—
—
—
—
—
—
404
Total construction and land development
31,548
29,520
16,504
1,794
1,434
104
1,589
82,493
Current period gross charge-offs
—
—
—
—
—
—
—
—
Commercial real estate:
Owner occupied
Pass
1,921
11,206
6,776
17,114
3,396
12,030
1,552
53,995
Special mention
—
249
—
—
591
—
—
840
Substandard
511
—
—
—
—
—
—
511
Nonaccrual
—
—
—
—
—
—
—
—
Total owner occupied
2,432
11,455
6,776
17,114
3,987
12,030
1,552
55,346
Current period gross charge-offs
—
—
—
—
—
—
—
—
Hotel/motel
Pass
480
6,480
5,303
3,079
1,299
14,437
4,132
35,210
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total hotel/motel
480
6,480
5,303
3,079
1,299
14,437
4,132
35,210
Current period gross charge-offs
—
—
—
—
—
—
—
—
Table of Contents
88
Year of Origination
2024
2023
2022
2021
2020
Prior to
2020
Revolving
Loans
Total
Loans
(Dollars in thousands)
December 31, 2024:
Multi-family
Pass
3,739
6,041
17,037
1,863
3,493
6,400
4,983
43,556
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total multi-family
3,739
6,041
17,037
1,863
3,493
6,400
4,983
43,556
Current period gross charge-offs
—
—
—
—
—
—
—
—
Other
Pass
43,753
21,085
32,521
21,249
16,743
16,289
4,120
155,760
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
120
—
—
120
Nonaccrual
—
—
—
—
—
—
—
—
Total other
43,753
21,085
32,521
21,249
16,863
16,289
4,120
155,880
Current period gross charge-offs
—
—
—
—
—
—
—
—
Residential real estate:
Consumer mortgage
Pass
5,885
18,389
18,434
2,466
2,565
10,590
808
59,137
Special mention
243
—
—
—
2
486
—
731
Substandard
—
—
—
—
—
531
—
531
Nonaccrual
—
—
—
—
—
—
—
—
Total consumer mortgage
6,128
18,389
18,434
2,466
2,567
11,607
808
60,399
Current period gross charge-offs
—
—
—
—
—
61
—
61
Investment property
Pass
10,339
10,824
10,651
8,305
11,435
4,794
1,317
57,665
Special mention
—
—
—
—
—
—
—
—
Substandard
278
40
93
9
143
—
—
563
Nonaccrual
—
—
—
—
—
—
—
—
Total investment property
10,617
10,864
10,744
8,314
11,578
4,794
1,317
58,228
Current period gross charge-offs
—
—
—
—
—
—
—
—
Consumer installment
Pass
5,015
2,057
1,911
296
90
113
67
9,549
Special mention
—
9
—
9
—
—
—
18
Substandard
39
15
10
—
—
—
—
64
Nonaccrual
—
—
—
—
—
—
—
—
Total consumer installment
5,054
2,081
1,921
305
90
113
67
9,631
Current period gross charge-offs
25
42
42
1
—
4
—
114
Total loans
Pass
113,566
112,867
117,625
65,843
45,114
81,746
22,993
559,754
Special mention
292
332
—
9
593
486
—
1,712
Substandard
878
76
284
16
263
531
—
2,048
Nonaccrual
404
99
—
—
—
—
—
503
Total loans
$
115,140
113,374
117,909
65,868
45,970
82,763
22,993
564,017
Total current period gross charge-offs
$
25
42
51
1
—
65
—
184
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89
Allowance for Credit Losses
The allowance for credit losses is estimated under the Current Expected
Credit Losses (“CECL”) methodology set forth in
FASB ASC 326,
Financial Instruments – Credit Losses.
Under the CECL methodology,
the allowance for credit losses is
measured on a collective basis for pools of loans with similar risk characteristics,
and for loans that do not share similar risk
characteristics with the collectively evaluated pools, evaluations are
performed on an individual basis.
The composition of the provision for credit losses for the respective periods
is presented below.
Year ended December 31,
(Dollars in thousands)
2025
2024
Provision for credit losses:
Loans
$
703
$
(6)
Reserve for unfunded commitments
(72)
42
Total provision for credit
losses
$
631
$
36
The following table details the changes in the allowance for credit losses by portfolio
segment for the years ended
December 31, 2025 and 2024.
(in thousands)
Commercial
and industrial
Construction
and land
Development
Commercial
Real Estate
Residential
Real Estate
Consumer
Installment
Total
Balance, December 31, 2023
$
1,288
960
3,921
546
148
$
6,863
Charge-offs
(9)
—
—
(61)
(114)
(184)
Recoveries
144
—
—
9
45
198
Net recoveries (charge-offs)
135
—
—
(52)
(69)
14
Provision for credit losses
(179)
99
(79)
94
59
(6)
Balance, December 31, 2024
$
1,244
1,059
3,842
588
138
$
6,871
Charge-offs
(142)
—
(296)
(7)
(96)
(541)
Recoveries
30
—
—
84
29
143
Net (charge-offs) recoveries
(112)
—
(296)
77
(67)
(398)
Provision for credit losses
(3)
245
231
172
58
703
Balance, December 31, 2025
$
1,129
1,304
3,777
837
129
$
7,176
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90
The Company did not recognize any interest income on nonaccrual loans during
2025 and 2024.
The Company designates individually evaluated loans on nonaccrual status as collateral
-dependent loans, as well as other
loans that management of the Company designates as having higher risk.
Collateral-dependent loans are loans for which
the repayment is expected to be provided substantially through the operation
or sale of the collateral and the borrower is
experiencing financial difficulty.
These loans do not share common risk characteristics and are not included within the
collectively evaluated loans for determining the allowance for credit
losses.
Under CECL, for collateral-dependent loans,
the Company has adopted the practical expedient to measure the allowance
for credit losses based on the fair value of
collateral.
The allowance for credit losses is calculated on an individual loan basis based
on the shortfall between the fair
value of the loan’s collateral, which
is adjusted for liquidation costs/discounts, and amortized costs.
If the fair value of the
collateral exceeds the amortized cost, no allowance is required.
The following table presents the amortized cost basis of collateral dependent loans,
which are individually evaluated to
determine expected credit losses for the years ended December 31, 2025 and 2024:
(Dollars in thousands)
Real Estate
Business Assets
Total Loans
December 31, 2025:
Commercial real estate
$
378
—
$
378
Total
$
378
—
$
378
December 31, 2024:
Commercial and industrial
$
—
99
$
99
Construction and land development
404
—
404
Total
$
404
99
$
503
At December 31, 2025, the Company had one additional individually
evaluated commercial real estate loan in the amount
of $
3.0
million that was not considered collateral dependent and was accruing in accordance with
its contractual terms.
This loan had a calculated allowance of $
0.5
million at December 31, 2025.
The allowance for this loan was measured
using the present value of expected future cash flows, discounted at the loan’s
effective interest rate.
Expected cash flows
were developed using probability of default and loss given default assumptions
specific to the borrower.
The gross interest income which would have been recorded under the original terms
of those nonaccrual loans had they
been accruing interest, amounted to approximately $
15
thousand and $
14
thousand for the years ended December 31, 2025
and 2024, respectively.
The following table summarizes the Company’s
nonaccrual loans by major categories as of December 31, 2025 and 2024.
Nonaccrual loans
Nonaccrual loans
Total
(Dollars in thousands)
with no Allowance
with an Allowance
Nonaccrual Loans
December 31, 2025
Commercial real estate
378
—
378
Residential real estate
—
104
104
Total
$
378
104
$
482
December 31, 2024
Commercial and industrial
—
99
99
Construction and land development
404
—
404
Total
$
404
99
$
503
The Company had no modifications to loans made to borrowers experiencing
financial difficulty at December 31, 2025 and
2024.
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91
NOTE 5: PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2025 and 2024 is presented
below.
December 31
(Dollars in thousands)
2025
2024
Land and improvements
$
12,800
12,800
Buildings and improvements
38,035
36,978
Furniture, fixtures, and equipment
4,613
4,335
Construction in progress
184
38
Total premises and
equipment
55,632
54,151
Less:
accumulated depreciation
(10,032)
(8,220)
Premises and equipment, net
$
45,600
45,931
Depreciation expense was approximately $
1.8
million and $
1.7
million for the years ended December 31, 2025 and 2024,
respectively, and is a component
of net occupancy and equipment expense in the consolidated statements of earnings.
NOTE 6: LEASES
The Company leases excess retail and office space
in its headquarters building to third-party tenants under noncancelable
operating lease agreements. These leases generally include fixed rental
payments with scheduled escalation provisions over
the respective lease terms.
The Company accounts for these arrangements as operating leases in accordance
with Accounting Standards Codification
(“ASC”) Topic 842,
Leases
. Lease income is recognized on a straight-line basis over the terms of the
leases when
collectability is probable. Differences between contractual
rental payments and lease income recognized are recorded as
deferred rent within other assets or other liabilities in the consolidated balance
sheets.
Tenant leases also require
reimbursement of the tenants’ allocated portion of operating expenses associated with the
building, including utilities, maintenance, property taxes, insurance
and other common area costs. These reimbursements
represent variable lease payments and are recognized as income when received
.
Certain tenant leases include the right to use parking spaces within the Company’s
parking deck located on the same
property as the headquarters building. These parking arrangements are considered
part of the overall lease arrangement and
are included in the lease consideration.
Lease income is recorded as a reduction of net occupancy and equipment
expense in the consolidated statements of
earnings. For the years ended December 31, 2025 and 2024, total lease income
was $
1.4
million and $
1.0
million,
respectively.
Future minimum lease payments to be received under noncancelable operating
leases as of December 31, 2025 were as
follows:
(Dollars in thousands)
Minimum lease
payments to be
rceived
2026
$
931
2027
953
2028
975
2029
976
2030
934
Thereafter
1,937
Total minimum
lease payments to be received
$
6,706
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92
NOTE 7: MORTGAGE SERVICING
RIGHTS, NET
MSRs are recognized
based on the
fair value of
the servicing rights
on the date
the corresponding mortgage
loans are sold.
An
estimate
of
the
Company’s
MSRs
is
determined
using
assumptions
that
market
participants
would
use
in
estimating
future net servicing
income, including estimates
of prepayment speeds,
discount rates,
default rates, cost
to service, escrow
account earnings,
contractual servicing
fee income,
ancillary income,
and late
fees.
Subsequent to
the date
of transfer,
the
Company
has
elected
to
measure
its
MSRs
under
the
amortization
method.
Under
the
amortization
method,
MSRs
are
amortized in proportion
to, and over
the period of,
estimated net servicing
income. Servicing
fee income is
recorded net of
related amortization expense and recognized in earnings as part of mortgage
lending income.
The Company has recorded MSRs related to loans sold without recourse
to Fannie Mae.
The Company generally sells
conforming, fixed-rate, closed-end, residential mortgages to Fannie Mae.
MSRs are included in other assets on the
accompanying consolidated balance sheets.
The Company evaluates MSRs for impairment on a quarterly basis.
Impairment is determined by stratifying MSRs into
groupings based on predominant risk characteristics, such as interest rate and
loan type.
If, by individual stratum, the
carrying amount of the MSRs exceeds fair value, a valuation allowance is established.
The valuation allowance is adjusted
as the fair value changes.
Changes in the valuation allowance are recognized in earnings as a component
of mortgage
lending income.
The following table details the changes in amortized MSRs and the related valuation
allowance for the years ended
December 31, 2025 and 2024.
Year ended December 31
(Dollars in thousands)
2025
2024
Beginning balance
$
892
992
Additions, net
51
79
Amortization expense
(172)
(179)
Ending balance
$
771
892
Valuation
allowance included in MSRs, net:
Beginning of period
$
—
—
End of period
—
—
Fair value of amortized MSRs:
Beginning of period
$
2,204
2,382
End of period
2,034
2,204
Data and assumptions used in the fair value calculation related to MSRs at December
31, 2025 and 2024, respectively,
are
presented below.
December 31
(Dollars in thousands)
2025
2024
Unpaid principal balance
$
190,713
205,915
Weighted average
prepayment speed (CPR)
8.2
%
7.3
Discount rate (annual percentage)
9.5
%
10.0
Weighted average
coupon interest rate
3.7
%
3.6
Weighted average
remaining maturity (months)
237
242
Weighted average
servicing fee (basis points)
25.0
25.0
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93
At December 31, 2025, the weighted average amortization period
for MSRs was
6.8
years.
Estimated amortization expense
for each of the next five years is presented below.
(Dollars in thousands)
December 31, 2025
2026
$
106
2027
92
2028
80
2029
70
2030
61
NOTE 8:
DEPOSITS
At December 31, 2025, the scheduled maturities of certificates of deposit
and other time deposits are presented below.
(Dollars in thousands)
December 31, 2025
2026
$
164,263
2027
7,493
2028
2,233
2029
672
2030
2,140
Thereafter
—
Total certificates of
deposit and other time deposits
$
176,801
Additionally, at December
31, 2025 and 2024, approximately $
79.3
million and $
87.7
million, respectively, of certificates
of deposit and other time deposits were issued in denominations greater
than $250 thousand.
At December 31, 2025 and 2024, the amount of deposit accounts in overdraft
status that were reclassified to loans on the
accompanying consolidated balance sheets was not material.
NOTE 9:
INCOME TAXES
For the years ended December 31, 2025 and 2024 the components of
income tax expense from continuing operations are
presented below.
Year ended December 31
(Dollars in thousands)
2025
2024
Current income tax expense
Federal
$
1,676
991
State
409
571
Total current
income tax expense
2,085
1,562
Deferred income tax (benefit) expense:
Federal
(102)
473
State
(27)
(35)
Total deferred income
tax (benefit) expense
(129)
438
Total income
tax expense
$
1,956
2,000
Cash paid for income taxes, net of refunds, consists of the following:
Year ended December 31
(Dollars in thousands)
2025
2024
Federal
$
346
725
State - Alabama
330
519
Total
676
1,244
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94
Total income
tax expense differs from the amounts computed by applying the statutory
federal income tax rate of 21% to
earnings before income taxes.
A reconciliation of the differences for the years ended
December 31, 2025 and 2024, is
presented below.
2025
2024
Percent of
Percent of
pre-tax
pre-tax
(Dollars in thousands)
Amount
earnings
Amount
earnings
Earnings before income taxes
$
9,211
8,397
Income taxes at U.S. federal statutory rate
1,935
21.0
%
1,763
21.0
%
State income taxes, net of federal tax effect (1)
299
3.2
388
4.6
Tax credits:
New Markets Tax Credit
(2)
(58)
(0.6)
(58)
(0.7)
Nontaxable or nondeductible items:
Tax-exempt interest
(203)
(2.2)
(290)
(3.5)
Bank-owned life insurance
(87)
(0.9)
(85)
(1.0)
Return-to-provision adjustment
—
—
263
3.1
Other
70
0.7
19
0.3
Total income
tax expense
$
1,956
21.2
%
2,000
23.8
%
(1) State taxes in Alabama made up the majority (greater than 50 percent) of
the tax effect in this category.
(2) Tax credit investments
includes tax credits and the amortization of and projected tax losses from tax
credit investments.
At December 31, 2025 and 2024, the Company had a net deferred tax
asset of $6.9 million and $10.2 million, respectively,
included in other assets on the consolidated balance sheet.
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at December
31, 2025 and 2024 are presented
below.
December 31
(Dollars in thousands)
2025
2024
Deferred tax assets:
Allowance for credit losses
$
1,802
1,726
Unrealized loss on securities
6,502
9,929
Accrued bonus
270
207
Right of use liability
39
58
Other
78
99
Total deferred tax
assets
8,691
12,019
Deferred tax liabilities:
Premises and equipment
1,180
1,212
Originated mortgage servicing rights
194
224
Right of use asset
39
58
Other
384
333
Total deferred tax
liabilities
1,797
1,827
Net deferred tax asset
$
6,894
10,192
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95
A valuation allowance is recognized for a deferred tax asset if, based on the weight of
available evidence, it is more-likely-
than-not that some portion of the entire deferred tax asset will not be realized.
The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences
become deductible.
Management considers the scheduled reversal of deferred tax liabilities, projected
future taxable
income and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and
projection for future taxable income over the periods which the temporary
differences resulting in the remaining deferred
tax assets are deductible, management believes it is more-likely-than-not
that the Company will realize the benefits of these
deductible differences at December 31, 2025.
The amount of the deferred tax assets considered realizable, however,
could
be reduced in the near term if estimates of future taxable income are reduced.
The change in the net deferred tax asset for the years ended December 31, 2025
and 2024, is presented
below.
Year ended December 31
(Dollars in thousands)
2025
2024
Net deferred tax asset (liability):
Balance, beginning of year
$
10,192
10,252
Cumulative effect of change in accounting standard
—
183
Deferred tax expense (benefit) related to continuing operations
129
(438)
Stockholders' equity,
for accumulated other comprehensive (income) loss
(3,427)
195
Balance, end of year
$
6,894
10,192
ASC 740,
Income Taxes,
defines the threshold for recognizing the benefits of tax return positions in the financial
statements
as “more-likely-than-not” to be sustained by the taxing authority.
This section also provides guidance on the de-
recognition, measurement, and classification of income tax uncertainties
in interim periods.
As of December 31, 2025, the
Company had no unrecognized tax benefits related to federal or state income tax matters.
The Company does not anticipate
any material increase or decrease in unrecognized tax benefits during
2026 relative to any tax positions taken prior to
December 31, 2025.
As of December 31, 2025, the Company has accrued no interest and no penalties related to uncertain
tax positions.
It is the Company’s policy to recognize
interest and penalties related to income tax matters in income tax
expense.
The Company and its subsidiaries file consolidated U.S. federal and
State of Alabama income tax returns.
The Company is
currently open to audit under the statute of limitations by the Internal Revenue Service
and the State of Alabama for the
years ended December 31, 2022 through 2025.
NOTE 10:
EMPLOYEE BENEFIT PLAN
The Company sponsors a qualified defined contribution retirement plan,
the Auburn National Bancorporation, Inc. 401(k)
Plan (the "Plan").
Eligible employees may contribute up to 100% of eligible compensation, subject to
statutory limits upon
completion of 2 months of service.
Furthermore, the Company allows employer Safe Harbor contributions.
Participants are
immediately vested in employer Safe Harbor contributions. The
Company's matching contributions on behalf of
participants were equal to $1.00 for each $1.00 contributed by participants,
up to 3% of each participant's
eligible
compensation, and $0.50 for every $1.00 contributed by participants, above
3% up to 5% of each participant's
eligible
compensation, for a maximum matching contribution of 4% of the participants' eligible
compensation. Company matching
contributions to the Plan were approximately $
0.3
million for the years ended December 31, 2025 and 2024, respectively,
and are included in salaries and benefits expense.
NOTE 11:
STOCK-BASED COMPENSATI
ON
The Company maintains an equity incentive plan (the “Plan”) pursuant to
which restricted stock units (“RSUs”) may be
granted to executive officers and key employees. Each
RSU represents the right to receive one share of the Company’s
common stock upon vesting. RSUs do not represent an ownership interest
in the Company’s common
stock and do not
provide voting rights prior to vesting. Awards
are evidenced by individual award agreements and are subject to the terms of
the Plan.
On July 24, 2025, the Company granted
3,030
RSUs with a grant-date fair value of $
28.34
per unit, based on the closing
market price of the Company’s common
stock on Nasdaq on the date of grant, for aggregate grant-date fair value of $
86
thousand. The RSUs vest in full on March 10, 2026 (the “Vesting
Date”), subject to continued employment through the
V
esting Date.
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96
The award agreement provides for dividend equivalents. Dividend equivalents
are additional RSUs credited upon the
payment of cash dividends on the Company’s
common stock. The number of RSUs issued as dividend equivalents is
determined based on the number of RSUs held on the dividend payment
date multiplied by the cash dividend per share,
divided by the closing price of the Company’s
common stock on the dividend payment date. RSUs issued as dividend
equivalents vest on the same terms and conditions as the underlying RSUs.
The incremental compensation cost associated
with such dividend equivalents was not material to the Company’s
consolidated financial statements.
The vesting of RSUs, including any dividend equivalents, may be
accelerated upon certain events, including death or
disability (100% vesting), retirement (pro rata vesting), termination without
cause (pro rata vesting), or a change in control
in which the awards are not assumed by the surviving entity.
Except as provided in the award agreement, unvested RSUs
are forfeited upon termination of employment. In the event of termination
for cause, the Compensation Committee may
require the return of shares or other amounts received in respect of RSUs that vested
during the period constituting cause.
RSUs are nontransferable and are subject to the Company’s
insider trading policy and other restrictive covenants contained
in the applicable
award agreement.
Compensation cost for RSUs is recognized on a straight-line basis over the
requisite service period. The Company accounts
for forfeitures as they occur. There
were no forfeitures related to these RSUs during the year ended December 31, 2025.
For the year ended December 31, 2025, the Company recognized $
62
thousand of stock-based compensation expense
related to these RSUs. Such expense is included in salaries and benefits expense
in the Consolidated Statements of
Earnings, with a corresponding increase to additional paid-in capital.
As of December 31, 2025, unrecognized compensation cost related to these RSUs totaled $
24
thousand, which is expected
to be recognized through the vesting date of March 10, 2026.
NOTE 12: DERIVATIVE
INSTRUMENTS
From time to time, the Company may enter into interest rate swaps to facilitate customer transactions
and manage the
Company’s exposure to interest rate risk associated
with changes in the Secured Overnight Financing Rate (“SOFR”).
The
Company does not enter into derivative instruments for speculative or
trading purposes.
In December 2025, the Company entered into a pay-fixed, receive-variable
interest rate swap with a notional amount of
approximately $10.0 million. The swap was designated as a fair value hedge
of changes in the fair value of a specified loan
attributable to changes in the benchmark interest rate (SOFR).
Under the terms of the swap, the Company pays a fixed rate of interest and receives
a variable rate based on SOFR. The
hedge was designated as a fair value hedge under ASC 815,
Derivatives and Hedging
, and qualified for the shortcut
method. Accordingly,
the Company assumes no hedge ineffectiveness, and changes in the fair
value of the derivative are
recognized in earnings in the same income statement line item as the changes
in the fair value of the hedged loan
attributable to the hedged risk.
The following table presents the fair value of derivative instruments designated
as hedging instruments as of December 31,
2025:
Balance Sheet
Fair Value
Fair Value
(Dollars in thousands)
Location
Asset
Liability
December 31, 2025:
Interest rate swap (fair value hedge)
Other Liabilities
$
—
$
22
Total interest rate swap
agreements
$
—
$
22
Accrued interest receivable related to the interest rate swap of $
0.1
million is included in Other Assets as of December 31,
2025.
The Company had no derivative instruments not designated as hedging
instruments at December 31, 2025.
Table of Contents
97
The following table presents the effect of fair value hedge accounting
on the Consolidated Statements of Earnings for the
year ended December 31, 2025:
Amount of Gain
Amount of Gain
(Loss) Recognized
Location of Gain
(Loss) Recognized
in Income on Hedged
(Loss) Recognized
in Income on Hedged
Item Attributable
(Dollars in thousands)
in Income
Item
to Hedged Risk
Year
ended December 31, 2025:
Interest rate swap (fair value hedge)
Interest Income (Loans)
$
(22)
$
22
Total interest rate swap
agreements
$
(22)
$
22
The carrying amount of the loan designated as the hedged item in the fair value hedge
is included in Loans, net of unearned
income on the Consolidated Balance Sheet and includes a cumulative basis adjustment
for changes in fair value attributable
to the hedged risk.
As of December 31, 2025, the carrying amount of the hedged loan was $
10.0
million, which included a
cumulative fair value hedge basis adjustment of $22 thousand.
Because the hedge qualified for the shortcut method, the hedge relationship
was assumed to be perfectly effective, and
therefore no hedge ineffectiveness was recognized
during the year ended December 31, 2025.
The Company is exposed to credit risk in the event of nonperformance by
the counterparty to the interest rate swap. The
Company manages this risk by transacting with a counterparty that meets established
credit standards. The Company does
not anticipate nonperformance by the counterparty.
The derivative is subject to a master netting arrangement; however,
the Company does not offset derivative assets and
liabilities on the Consolidated Balance Sheets.
NOTE 13:
COMMITMENTS AND CONTINGENT LIABILITIES
Credit-Related Financial Instruments
The Company is party to credit-related financial instruments with off
-balance sheet risk in the normal course of business to
meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit.
Such commitments involve, to varying degrees, elements of credit and interest rate risk in
excess of the
amount recognized in the consolidated balance sheets.
The Company’s exposure to
credit loss is represented by the contractual amount of these commitments.
The Company
follows the same credit policies in making commitments as it does for on-balance
sheet instruments.
At December 31, 2025 and 2024, the following financial instruments were
outstanding whose contract amount represents
credit risk.
December 31
(Dollars in thousands)
2025
2024
Commitments to extend credit
$
48,061
$
84,667
Standby letters of credit
1,001
738
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98
Commitments to extend credit are agreements to lend to a customer provided
there is no violation of any condition
established in the commitment agreement and provided the
commitments are not otherwise cancelable by the Bank.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee.
The
commitments for lines of credit may expire without being drawn upon.
Therefore, total commitment amounts do not
necessarily represent future cash requirements.
The amount of collateral obtained, if it is deemed necessary by the
Company, is based on
management’s credit evaluation of the customer.
The Company records an allowance for credit
losses on off-balance sheet exposures, unless the commitments to
extend credit are unconditionally cancelable, through a
charge to provision for credit losses in the Company’s
Consolidated Statement of Earnings.
The allowance for credit losses
related to unfunded commitments was $
0.3
million at both December 31, 2025 and 2024, respectively,
and is included in
other liabilities on the Company’s
Consolidated Balance Sheet.
See “Note 1: Summary of Significant Accounting Policies –
Allowance for credit losses – Unfunded commitments.”
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer
to a third party.
The credit risk involved in issuing letters of credit is essentially the same as that involved
in extending loan
facilities to customers.
The Company holds various assets as collateral, including accounts receivable,
inventory,
equipment, marketable securities, and property to support those commitments
for which collateral is deemed necessary.
The Company has a recorded a liability for the estimated fair value of these
standby letters of credit in the amount of $
12
thousand and $
13
thousand at December 31, 2025 and 2024, respectively.
Contingent Liabilities
The Company and the Bank are involved in various legal proceedings, arising
in connection with their business.
In the
opinion of management, based upon consultation with legal counsel, the
ultimate resolution of these proceedings will not
have a material adverse effect upon the consolidated financial
condition or results of operations of the Company and the
Bank.
NOTE 14: FAIR VALUE
Fair Value
Hierarchy
“Fair value” is defined by ASC 820,
Fair Value
Measurements and Disclosures
, as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction occurring in the principal
market (or most advantageous
market in the absence of a principal market) for an asset or liability at the measurement
date.
GAAP establishes a fair
value hierarchy for valuation inputs that gives the highest priority to
quoted prices in active markets for identical assets or
liabilities and the lowest priority to unobservable inputs.
The fair value hierarchy is as follows:
Level 1—inputs to the valuation methodology are quoted prices, unadjusted,
for identical assets or liabilities in active
markets.
Level 2—inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are not
active, or inputs that are observable for the
asset or liability, either directly
or indirectly.
Level 3—inputs to the valuation methodology are unobservable and reflect
the Company’s own assumptions about
the
inputs market participants would use in pricing the asset or liability.
Level changes in fair value measurements
Transfers between levels of the fair value hierarchy
are generally recognized at the end of the reporting period.
The
Company monitors the valuation techniques utilized for each category
of financial assets and liabilities to ascertain when
transfers between levels have been affected.
The nature of the Company’s financial
assets and liabilities generally is such
that transfers in and out of any level are expected to be infrequent. For the years ended
December 31, 2025 and 2024, there
were no transfers between levels and no changes in valuation techniques for
the Company’s financial assets and liabilities.
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99
Assets and liabilities measured at fair value on a recurring
basis
Securities available-for-sale
Fair values of securities available for sale were primarily measured
using Level 2 inputs.
For these securities, the Company
obtains pricing from third party pricing services.
These third-party pricing services consider observable data that may
include broker/dealer quotes, market spreads, cash flows, market consensus
prepayment speeds, benchmark yields, reported
trades for similar securities, credit information and the securities’ terms and conditions.
On a quarterly basis, management
reviews the pricing received from the third-party pricing services for
reasonableness given current market conditions.
As
part of its review, management
may obtain non-binding third party broker quotes to validate the fair value measurements.
In addition, management will periodically submit pricing provided by
the third-party pricing services to another
independent valuation firm on a sample basis.
This independent valuation firm will compare the price provided by
the
third-party pricing service with its own price and will review the significant assumptions
and valuation methodologies used
with management.
Interest Rate Swaps
The fair values of the Company’s interest
rate swaps are estimated using a discounted cash flow model.
The model
considers the present value of expected future cash flows under the
terms of the swap and incorporates observable market
data such as: relevant interest rate swap curves, benchmark yield curves
(e.g.: SOFR-based or other market-based curves),
and forward interest rate expectations over the contractual term of the instruments.
Because the significant inputs used in
valuing the interest rate swaps are observable in active markets, the Company
classifies these instruments with Level 2 of
the fair value hierarchy.
The following table presents the balances of the assets and liabilities measured at fair
value on a recurring basis as of
December 31, 2025 and 2024, respectively,
by caption, on the accompanying consolidated balance sheets by ASC 820
valuation hierarchy (as described above).
Quoted Prices in
Significant
Active Markets
Other
Significant
for
Observable
Unobservable
Identical Assets
Inputs
Inputs
(Dollars in thousands)
Amount
(Level 1)
(Level 2)
(Level 3)
December 31, 2025:
Securities available-for-sale:
Agency obligations
$
53,784
—
53,784
—
Agency MBS
161,927
—
161,927
—
State and political subdivisions
17,548
—
17,548
—
Total securities available
-for-sale
233,259
—
233,259
—
Total
assets at fair value
$
233,259
—
233,259
—
Other liabilities - interest rate swaps
22
—
22
—
Total
liabilities at fair value
$
22
—
22
—
December 31, 2024:
Securities available-for-sale:
Agency obligations
$
52,411
—
52,411
—
Agency MBS
173,676
—
173,676
—
State and political subdivisions
16,925
—
16,925
—
Total securities available
-for-sale
243,012
—
243,012
—
Total
assets at fair value
$
243,012
—
243,012
—
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100
Assets and liabilities measured at fair value on a nonrecurring
basis
Collateral Dependent Loans
Collateral dependent loans are measured at the fair value of the collateral securing
loan less estimated selling costs.
The
fair value of real estate collateral is determined based on real estate appraisals which
are generally based on recent sales of
comparable properties which are then adjusted for property specific factors.
Non-real estate collateral is valued based on
various sources, including third party asset valuations and internally determined
values based on cost adjusted for
depreciation and other judgmentally determined discount factors.
Collateral dependent loans are classified within Level 3
of the hierarchy due to the unobservable inputs used in determining their
fair value such as collateral
values and the
borrower’s underlying financial condition.
Mortgage servicing rights, net
Mortgage servicing rights, net, included in other assets on the accompanying consolidated
balance sheets, are carried at the
lower of cost or estimated fair value.
MSRs do not trade in an active market with readily observable prices.
To determine
the fair value of MSRs, the Company engages an independent third
party.
The independent third party’s valuation
model
calculates the present value of estimated future net servicing income using assumptions
that market participants would use
in estimating future net servicing income, including estimates of prepayment
speeds, discount rate, default rates, cost to
service, escrow account earnings, contractual servicing fee income,
ancillary income, and late fees.
Periodically, the
Company will review broker surveys and other market research to validate
significant assumptions used in the model.
The
significant unobservable inputs include prepayment speeds or the constant prepayment
rate (“CPR”) and the weighted
average discount rate.
Because the valuation of MSRs requires the use of significant unobservable inputs, all of the
Company’s MSRs are classified
within Level 3 of the valuation hierarchy.
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101
The following table presents the balances of the assets and liabilities measured
at fair value on a nonrecurring basis as of
December 31, 2025 and 2024, respectively,
by caption, on the accompanying consolidated balance sheets and by ASC 820
valuation hierarchy (as described above):
Quoted Prices in
Active Markets
Other
Significant
for
Observable
Unobservable
Identical Assets
Inputs
Inputs
(Dollars in thousands)
Amount
(Level 1)
(Level 2)
(Level 3)
December 31, 2025:
Loans, net
(1)
$
378
—
—
378
Other assets
(2)
771
—
—
771
Total assets at fair value
$
1,149
—
—
1,149
December 31, 2024:
Loans, net
(1)
$
503
—
—
503
Other assets
(2)
892
—
—
892
Total assets at fair value
$
1,395
—
—
1,395
(1)
Loans considered collateral dependent under ASC 326,
Financial Instruments - Credit Losses.
(2)
Represents MSRs, net carried at lower of cost or estimated fair value.
Quantitative Disclosures for Level 3 Fair Value
Measurements
At December 31, 2025 and 2024, the Company had no Level 3 assets measured at fair value on
a recurring basis.
For Level
3 assets measured at fair value on a non-recurring basis as of December 31, 2025
and 2024, the significant unobservable
inputs used in the fair value measurements are presented below.
Weighted
Carrying
Significant
Average
(Dollars in thousands)
Amount
Valuation Technique
Unobservable Input
Range
of Input
December 31, 2025:
Collateral dependent loans
$
378
Appraisal
Appraisal discounts
10.0
-
10.0
%
10.0
%
Mortgage servicing rights, net
771
Discounted cash flow
Prepayment speed or CPR
6.8
-
8.4
%
8.2
%
Discount rate
9.5
-
11.5
%
9.5
%
December 31, 2024:
Collateral dependent loans
$
503
Appraisal
Appraisal discounts
10.0
-
10.0
%
10.0
%
Mortgage servicing rights, net
892
Discounted cash flow
Prepayment speed or CPR
6.7
-
11.2
%
7.3
%
Discount rate
10.0
-
12.0
%
10.0
%
Fair Value
of Financial Instruments
ASC 825,
Financial Instruments
, requires disclosure of fair value information about financial instruments,
whether or not
recognized on the face of the balance sheet, for which it is practicable to estimate
that value. The assumptions used in the
estimation of the fair value of the Company’s
financial instruments are explained below.
Where quoted market prices are
not available, fair values are based on estimates using discounted cash flow
analyses. Discounted cash flows can be
significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. The
following fair value estimates cannot be substantiated by comparison
to independent markets and should not be considered
representative of the liquidation value of the Company’s
financial instruments, but rather are good faith estimates of the fair
value of financial instruments held by the Company.
ASC 825 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements.
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102
The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments:
Loans, net
Fair values for loans were calculated using discounted cash flows. The discount
rates reflected current rates at which similar
loans would be made for the same remaining maturities.
Expected future cash flows were projected based on contractual
cash flows, adjusted for estimated prepayments.
The fair value of loans was measured using an exit price notion.
Loans held for sale
Loans held for sale are recorded at the lower of cost or fair value.
Fair values are determined using quoted secondary
market prices for similar loans.
Time Deposits
Fair values for time deposits were estimated using discounted cash flows.
The discount rates were based on rates currently
offered for deposits with similar remaining maturities.
The carrying value, related estimated fair value, and placement in the fair value hierarchy
of the Company’s financial
instruments at December 31, 2025 and 2024 are presented below.
This table excludes financial instruments for which the
carrying amount approximates fair value.
Financial assets for which fair value approximates carrying value included
cash
and cash equivalents.
Financial liabilities for which fair value approximates carrying value included
noninterest-bearing
demand deposits, interest-bearing demand deposits, and savings deposits.
Fair value approximates carrying value in these
financial liabilities due to these products having no stated maturity.
Additionally, financial liabilities for which
fair value
approximates carrying value included overnight borrowings such
as federal funds purchased and securities sold under
agreements to repurchase.
The following table summarizes our fair value estimates:
Fair Value Hierarchy
Carrying
Estimated
Level 1
Level 2
Level 3
(Dollars in thousands)
amount
fair value
inputs
inputs
Inputs
December 31, 2025:
Financial Assets:
Loans, net (1)
$
558,178
$
542,382
$
—
$
—
$
542,382
Loans held for sale
172
179
—
179
—
Financial Liabilities:
Time Deposits
$
176,801
$
176,137
$
—
$
176,137
$
—
December 31, 2024:
Financial Assets:
Loans, net (1)
$
557,146
$
532,344
$
—
$
—
$
532,344
Financial Liabilities:
Time Deposits
$
191,247
$
190,363
$
—
$
190,363
$
—
(1) Represents loans, net and the allowance for credit losses.
The fair value of loans was measured using an
exit price notion.
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103
NOTE 15: RELATED PARTY
TRANSACTIONS
The Bank has made, and expects in the future to continue to make in the ordinary
course of business, loans to directors and
executive officers of the Company,
the Bank, and their immediate families and affiliates.
These persons, corporations, and
firms have had transactions in the ordinary course of business with the Company
and Bank, including borrowings, all of
which management believes were on substantially the same terms, including
interest rates and collateral, as those prevailing
at the time of comparable transactions with unaffiliated persons and
did not involve more than the normal risk of
collectability or present other unfavorable features.
A summary of such outstanding loans is presented below:
(Dollars in thousands)
2025
2024
Beginning balance
$
1,761
1,897
New loans/advances
—
442
Repayments
(149)
(578)
Changes in directors and executive officers
(303)
—
End balance
$
1,309
1,761
During 2025 and 2024, certain executive officers
,
directors and principal shareholders of the Company and the Bank,
including companies and related parties with which they are affiliated,
were deposit customers of the bank.
Total deposits
for these persons at December 31, 2025 and 2024 amounted to $
7.4
million and $
9.9
million, respectively.
NOTE 16: REGULATORY
RESTRICTIONS AND CAPITAL
RATIOS
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 consolidated assets.
The Federal Reserve treats the Company as a
small banking holding company under the Small BHC Policy.
As a result, the Company’s capital adequacy
is evaluated on
a bank only basis.
The Bank remains subject to regulatory capital requirements of the Alabama
Banking Department and the Federal Reserve.
Failure to meet minimum capital requirements can initiate certain mandatory
- and possibly additional discretionary -
actions by regulators that, if undertaken, could have a direct material effect
on the Company’s financial statements.
Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and certain
off-balance sheet items as calculated
under regulatory accounting and capital rules practices. The capital amounts
and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, necessary
capital to support risks and other factors.
Notwithstanding the minimum capital requirements, Federal Reserve Regulation
Q states that a Federal Reserve-regulated
institution must maintain capital commensurate with the level and nature of all risks to
which such institution is exposed.
Federal Reserve Regulation Q limits “distributions” and discretionary
bonus payments from eligible retained income” by
sate 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, 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:
(A) The Board-regulated institution's net income, calculated in accordance
with the instructions to the institution’s
FR Y–
9C or Call Report, for the four calendar quarters preceding the current calendar
quarter, net of any distributions and
associated tax effects not already reflected in net income; and
(B) The average of the Board-regulated institution’s
net income, calculated in accordance with the instructions to the
institutions’ FR Y–9C or Call Report, as applicable, for the four calendar
quarters preceding the current calendar quarter.
The Bank’s Call Report is used for
its calculation of “eligible retained income”.
As of December 31, 2025, 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 that changes the Bank’s
regulatory capital status.
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104
The actual capital amounts and ratios for the Bank and the aforementioned
minimums as of December 31, 2025 and 2024
are presented below.
Minimum for capital
Minimum to be
Actual
adequacy purposes
well capitalized
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
At December 31, 2025:
Tier 1 Leverage Capital
$
110,150
10.71
%
$
41,145
4.00
%
$
51,432
5.00
%
CET1 Risk-Based Capital
110,150
16.06
30,872
4.50
44,593
6.50
Tier 1 Risk-Based Capital
110,150
16.06
41,163
6.00
54,884
8.00
Total Risk-Based Capital
117,582
17.14
54,884
8.00
68,605
10.00
At December 31, 2024:
Tier 1 Leverage Capital
$
106,288
10.49
%
$
40,543
4.00
%
$
50,679
5.00
%
CET1 Risk-Based Capital
106,288
14.80
32,307
4.50
46,665
6.50
Tier 1 Risk-Based Capital
106,288
14.80
43,075
6.00
57,434
8.00
Total Risk-Based Capital
113,487
15.81
57,434
8.00
71,792
10.00
Dividends paid by the Bank are a principal source of funds available to the Company
for payment of dividends to its
stockholders and for other needs which are restricted by Alabama and Federal law and
regulations as described above.
Capital adequacy and liquidity considerations could further limit the availability
of dividends from the Bank. At December
31, 2025, the Bank could have declared additional dividends of approximately
$6.5 million without prior approval of
regulatory authorities.
As a result of this limitation, approximately $
84.3
million of the Company’s investment
in the Bank
was restricted from transfer in the form of dividends.
NOTE 17: AUBURN NATIONAL
BANCORPORATION
(PARENT COMPANY)
The Parent Company’s condensed
balance sheets and related condensed statements of earnings and
cash flows are as
follows.
CONDENSED BALANCE SHEETS
December 31
(Dollars in thousands)
2025
2024
Assets:
Cash and due from banks
$
728
1,001
Investment in bank subsidiary
90,760
76,852
Other assets
602
532
Total assets
$
92,090
78,385
Liabilities:
Accrued expenses and other liabilities
$
37
93
Total liabilities
37
93
Stockholders' equity
92,053
78,292
Total liabilities and stockholders'
equity
$
92,090
78,385
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105
CONDENSED STATEMENTS
OF EARNINGS
Year ended December 31
(Dollars in thousands)
2025
2024
Income:
Dividends from bank subsidiary
$
3,773
3,773
Noninterest income
—
1
Total income
3,773
3,774
Expense:
Noninterest expense
265
258
Total expense
265
258
Earnings before income tax expense and equity
in undistributed earnings of bank subsidiary
3,508
3,516
Income tax benefit
(56)
(46)
Earnings before equity in undistributed earnings
of bank subsidiary
3,564
3,562
Equity in undistributed earnings of bank subsidiary
3,691
2,835
Net earnings
$
7,255
6,397
CONDENSED STATEMENTS
OF CASH FLOWS
Year ended December 31
(Dollars in thousands)
2025
2024
Cash flows from operating activities:
Net earnings
$
7,255
6,397
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Net increase in other assets
(8)
(9)
Net decrease in other liabilities
(56)
(56)
Equity in undistributed earnings of bank subsidiary
(3,691)
(2,835)
Net cash provided by operating activities
3,500
3,497
Cash flows from financing activities:
Dividends paid
(3,773)
(3,773)
Net cash used in financing activities
(3,773)
(3,773)
Net change in cash and cash equivalents
(273)
(276)
Cash and cash equivalents at beginning of period
1,001
1,277
Cash and cash equivalents at end of period
$
728
1,001
Supplemental Disclosure of Noncash Investing Activities
During the year ended December 31, 2025, the Parent Company
recorded $62 thousand of stock-based compensation
related to restricted stock units granted to employees of the Bank.
The transaction was recorded as an increase in additional
paid-in capital with a corresponding intercompany receivable and
represents a noncash capital contribution to the Bank.
Table of Contents
106
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934
(the “Exchange Act”), the Company’s
management, under the supervision and with the participation of its principal
executive and principal financial officer,
conducted an evaluation as of the end of the period covered by this report,
of the effectiveness of the Company’s
disclosure
controls and procedures as defined in Rule 13a-15(e) under
the Exchange Act. Based on that evaluation, and the results of
the audit process described below,
the Chief Executive Officer and Chief Financial Officer
concluded that the Company’s
disclosure controls and procedures were effective to ensure
that information required to be disclosed in the Company’s
reports under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the
SEC’s rules and regulations,
and that such information is accumulated and communicated to the Company’s
management,
including the Chief Executive Officer and the Chief Financial Officer,
as appropriate, to allow timely decisions regarding
disclosure.
Management’s Report on Internal Control
Over Financial Reporting
The Company’s management is responsible
for establishing and maintaining adequate internal control over financial
reporting. The Company’s internal
control system was designed to provide reasonable assurance to the Company’s
management and board of directors regarding the preparation and fair
presentation of published financial statements. All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
Under the direction of the Company’s
Chief Executive Officer and Chief Financial Officer,
management has assessed the
effectiveness of the Company’s
internal control over financial reporting as of December 31, 2025 in
accordance with the
criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”) in Internal
Control – Integrated Framework (2013). Based on this assessment, management
has concluded that such internal control
over financial reporting was effective as of December 31,
2025.
This annual report does not include an attestation report of the Company’s
independent registered public accounting firm
regarding internal control over financial reporting because the Company
is a smaller reporting company.
Changes in Internal Control Over Financial Reporting
During the period covered by this report, there has not been any change
in the Company’s internal controls over financial
reporting that has materially affected, or is reasonably likely to materially
affect, the Company’s
internal controls over
financial reporting.
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107
ITEM 9B.
OTHER INFORMATION
Trading Plans.
None.
Insider Trading Policy.
The Company maintains an Insider Trading
Policy that was reviewed, amended and approved most
recently on March 17, 2026.
This Policy applies to employees and officers of the Company and its subsidiaries
(collectively, the
“Company”), (2) members of the boards of directors of the Company,
the Bank and subsidiaries (the
“Board”), advisory directors and Board observers, and (3) consultants
or independent contractors whose business
relationship with the Company provides access to Material Nonpublic
Information regarding the Company,
and certain of
their family members.
It also includes a Policy on Company Trading in its Securities to promote
compliance with Nasdaq
listing standards and any insider trading laws, which are applicable to the Company.
A complete copy of the Insider
Trading Policy is filed as Exhibit 19.1 to this Annual
Report on Form 10-K.
ITEM 9C.
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT
PREVENT INSPECTION
None.
Table of Contents
108
PART
III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is set forth under the headings “Proposal
One: Election of Directors - Information about
Nominees for Directors,” and “Executive Officers,”
“Additional Information Concerning the Company’s
Board of
Directors and Committees,” “Executive Compensation,” “Audit Committee
Report” and “Compliance with Section 16(a) of
the Securities Exchange Act of 1934” in our Proxy Statement, and
is incorporated herein by reference.
The Board of Directors has adopted a Code of Conduct and Ethics applicable
to the Company’s directors, officers
and
employees, including the Company’s
principal executive officer, principal
financial and principal accounting officer,
controller and other senior financial officers performing
similar functions. The Code of Conduct and Ethics, as well as the
charters for the Audit Committee, Compensation Committee, and the Nominating
and Corporate Governance Committee
are updated from time to time, and can be found by hovering over the heading
“Our Story” on the Company’s website,
www.auburnbank.com
, and then clicking on “Investor Relations”, and then clicking on “Governance
Documents”.
In
addition, this information is available in print to any shareholder who requests
it. Written requests for a copy of the
Company’s Code of Conduct and
Ethics or the Audit Committee, Compensation Committee, or Nominating
and Corporate
Governance Committee Charters may be sent to Auburn National Bancorporation,
Inc., 100 N. Gay Street, Auburn,
Alabama 36830, Attention: Marla Kickliter,
Senior Vice President of Compliance
and Internal Audit. Requests may also be
made via telephone by contacting Marla Kickliter,
Senior Vice President of Compliance
and Internal Audit, or Laura
Carrington, Vice President
of Human Resources, at (334) 821-9200.
ITEM 11.
EXECUTIVE COMPENSATION
Information required by this item is set forth under the headings “Corporate
Governance,” “Executive Officers” and
“Executive Compensation”
in the Proxy Statement, and is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER
MATTERS
Information required by this item is set forth under the headings “Proposal
One: Election of Directors - Information about
Nominees for Directors and Executive Officers,”
“Equity Compensation Plan Information” and “Stock Ownership by
Certain Persons” in the Proxy Statement, and is incorporated herein
by reference.
ITEM 13. CERTAIN
RELATIONSHIPS
AND RELATED
TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information required by this item is set forth under the headings “Proposal
One: Election of Directors – Information about
Nominees for Directors and Executive Officers,” “Corporate
Governance” and “Certain Transactions and
Business
Relationships” in the Proxy Statement, and is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTING
FEES AND SERVICES
Information required by this item is set forth under the heading Proposal 4:
“Ratification of Independent Public
A
ccountants” in our Proxy Statement, and is incorporated herein by reference.
Table of Contents
109
PART
IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
(a)
List of all Financial Statements
The following consolidated financial statements and report of independent
registered public accounting firm of the
Company are included in this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm (Elliott Davis, LLC, Greenville,
South Carolina, PCAOB
Firm ID: 149)
Consolidated Balance Sheets as of December 31, 2025 and 2024
Consolidated Statements of Earnings for the years ended December 31,
2025 and 2024
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2025 and 2024
Consolidated Statements of Stockholders’ Equity for the years ended
December 31, 2025 and 2024
Consolidated Statements of Cash Flows for the years ended December
31, 2025 and 2024
Notes to the Consolidated Financial Statements
(b)
Exhibits
3.1.
Certificate of Incorporation of Auburn National Bancorporation, Inc. (incorporated by reference from
Registrant's Form 10-Q dated June 30, 2002 (File No. 000-26486)).
3.2.
Amended and Restated Bylaws of Auburn National Bancorporation, Inc., adopted as of November 13, 2007
(incorporated by reference from Registrant’s Form 10-K dated March 31, 2008 (File No. 000-26486)).
4.1.
Description of the Registrant’s Securities
10.1.
to Company’s Current Report on Form 8-K dated December 10, 2024 (File. No. 000-26486)
10.2.
Incorporated by reference to the Company's Current Report on Form 8-K dated July
30, 2025 (File. No. 000-26486)
19.1
21.1
23.1
Consent of Independent Registered Public Accounting Firm
31.1
Certification signed by the Chief Executive Officer pursuant to SEC Rule 13a-14(a).
31.2
Certification signed by the Chief Financial Officer pursuant to SEC Rule 13a-14(a).
32.1
Act of 2002 by David A. Hedges, President and Chief Executive Officer *
32.2
Act of 2002 by W. James Walker, IV, Senior Vice President and Chief Financial Officer.*
97.1
Form 10-K/A dated April 12, 2024 (File No. 000-26486))
Table of Contents
110
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy
Extension Schema Document
101.CAL
Inline XBRL Taxonomy
Extension Calculation Linkbase Document
101.LAB
Inline XBRL Taxonomy
Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy
Extension Presentation Linkbase Document
101.DEF
Inline XBRL Taxonomy
Extension Definition Linkbase Document
104
Cover Page Interactive Data File (formatted as inline XBRL and contained
in Exhibit 101
*
The certifications attached as exhibits 32.1 and 32.2 to this annual report on
Form 10-K are “furnished” to the Securities
and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and shall not be deemed “filed”
by the Company for purposes of Section 18 of the Securities Exchange
Act of 1934, as amended.
(c)
Financial Statement Schedules
All financial statement schedules required pursuant to this item were either included
in the financial information set
forth in (a) above or are inapplicable and therefore have been omitted.
ITEM 16.
FORM 10-K SUMMARY
N
one.
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Auburn, State of
Alabama, on March 17, 2026.
AUBURN NATIONAL
BANCORPORATION,
INC.
(Registrant)
By:
/S/ DAVID
A. HEDGES
David A. Hedges
President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/S/ DAVID
A. HEDGES
David A. Hedges
President and Chief Executive Officer
(Principal Executive Officer)
March 17, 2026
/S/ W. JAMES
WALKER,
IV
W. James Walker,
IV
SVP,
Chief Financial Officer
(Principal Financial and Accounting Officer)
March 17, 2026
/S/ ROBERT W.
DUMAS
Robert W.
Dumas
Chairman of the Board
March 17, 2026
/S/ C. WAYNE
ALDERMAN
C. Wayne Alderman
Director
March 17, 2026
/S/ TERRY W.
ANDRUS
Terry W.
Andrus
Director
March 17, 2026
/S/ J. TUTT BARRETT
J. Tutt Barrett
Director
March 17, 2026
/S/ WALTON
T. CONN, JR.
Walton T.
Conn, Jr.
Director
March 17, 2026
/S/ WILLIAM F. HAM, JR.
William F.
Ham, Jr.
Director
March 17, 2026
/S/ DAVID
E. HOUSEL
David E. Housel
Director
March 17, 2026
/S/ MICHAEL A. LAWLER
Michael A. Lawler
Director
March 17, 2026
/S/ SANDRA J. SPENCER
Sandra J. Spencer
Director
March 17, 2026
/S/ ANNE M. MAY
Anne M. May
Director
March 17, 2026
EX-4.1
AUBURN NATIONAL
BANCORPORATION,
INC AND SUBSIDIARIES
EXHIBIT 4.1
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
The following summarizes the terms of certain securities of Auburn National Bancorporation,
Inc., a Delaware corporation
(the “Company”). The Company’s
common stock is registered under Section 12(b) of the Securities Exchange Act
of 1934,
as amended (the “Exchange Act”). The following summary does not
purport to be complete and is qualified in its entirety
by reference to the Company’s Certificate of
Incorporation (as amended, the “Charter”) and Amended and
Restated Bylaws
(as amended, the “Bylaws”), each previously filed with the U.S. Securities and
Exchange Commission, as well as reference
to federal and state banking laws and regulations and the Delaware General
Corporations Law (the “DGCL”).
Authorized Capital
The Company’s authorized
capital stock consists of 8,500,000 shares of common stock, $.01 par value per share
and
200,000 shares of preferred stock, $.01 par value per share.
Common Stock
Voting
Rights.
Each holder of common stock is entitled to one vote for each share held on all matters on which
our
shareholders are entitled to vote. Directors are elected by a majority vote, and no
shareholder has the right to cumulative
voting with respect to the election of directors.
Dividend Rights.
Subject to the prior rights of holders of any then-outstanding shares of preferred
stock, each share of
common stock has equal rights to participate in dividends when, as and if
declared by the board of directors out of funds
legally available therefor.
Liquidation Rights.
Subject to the prior rights of creditors and the satisfaction of any liquidation preference
granted to the
holders of any outstanding shares of preferred stock, if any,
in the event of a liquidation, the holders of common stock will
be entitled to share ratably in any assets remaining after payment of all debts and other
liabilities.
Other.
Holders of common stock have no redemption or subscription,
conversion or preemptive rights.
Exchange and Trading Symbol.
The common stock is listed for trading on the NASDAQ Global Market under
the symbol
“AUBN.”
Transfer Agent and Registrar.
The transfer agent and registrar for the common stock is Computershare Investor
Services
LLC.
Preferred Stock
Shares of preferred stock may be issued for any purpose and in any
manner permitted by law, in
one or more distinctly
designated series, including as a dividend or for such consideration as the
board of directors may determine by resolution or
resolutions adopted from time to time. The board of directors is expressly authorized
to fix and state, by resolution or
resolutions adopted from time to time prior to the issuance of any shares of a particular
series of preferred stock, the
designations, voting powers (if any), preferences, and relative, participating,
optional or other special rights, and
qualifications, limitations or restrictions thereof. The rights of the holders
of the common stock will generally be subject to
the rights of the holders of any existing outstanding shares of preferred stock
with respect to dividends, liquidation
preferences and other matters.
As of the date hereof, the Company has no shares of preferred stock designated
or outstanding.
Anti-takeover Effects
Certain provisions of the Charter and Bylaws could make a merger,
tender offer or proxy contest more difficult,
even if
such events were perceived by many of shareholders as beneficial to their
interests. These provisions include (1) requiring,
under certain circumstances, that a “Business Combination” (as defined
in the Charter) be approved by (i) holders of at
least 80% of the outstanding shares entitled to vote, and (ii) by a majority of shares held
by persons other than “Related
Persons” (as defined in the Charter), (2) prohibiting shareholders from removing
directors without cause, and, in order to
remove a director for cause, requiring approval of (i) at least 80% of the outstanding
shares entitled to vote and (ii) a
majority of shares held by persons other than “Related Persons,” (3) advance notice
for nominations of directors and
shareholders’ proposals, and (4) authority to issue “blank check” preferred
stock with such designations, rights and
preferences as may be determined from time to time by the board of directors. In
addition, as a Delaware corporation, the
Company is subject to Section 203 of the Delaware General Corporation
Law which, in general, prevents an “interested
shareholder,” defined generally as a person
owning 15% or more of a corporation’s
outstanding voting stock, from
engaging in a business combination with the corporation for three years
following the date that person became an interested
shareholder unless certain specified conditions are satisfied.
Restrictions on Ownership
The ability of a third party to acquire the Company is limited under applicable U.S. banking
laws and regulations. The
Bank Holding Company Act, or BHC Act, requires any bank holding
company to obtain Federal Reserve approval prior to
acquiring, directly or indirectly,
5% or more of any class of voting securities of the bank holding company.
Any “company”
(as defined in the BHC Act) other than a bank holding company would be required
to obtain Federal Reserve approval
before acquiring “control” of a bank holding company.
“Control” generally means (i) the ownership or control of 25% or
more of a class of voting securities, (ii) the ability to elect a majority of the directors or
(iii) the ability otherwise to exercise
a controlling influence over management and policies. A holder of 25% or more of
the outstanding common stock of a bank
holding company, other
than an individual, is subject to regulation and supervision as a bank holding company under
the
BHC Act. On January 30, 2020, the Federal Reserve adopted new rules, effective
September 30, 2020 simplifying
determinations of control of banking organizations for BHC
Act purposes.
In addition, under the Change in Bank Control Act of 1978, as amended,
and the Federal Reserve’s regulations
thereunder,
any person, either individually or acting through or in concert with one or more persons,
is required to provide notice to the
Federal Reserve prior to acquiring, directly or indirectly,
10% or more of the outstanding voting securities of a bank
holding company,
and receive nonobjection from the Federal Reserve.
EX-19.1
AUBURN NATIONAL
BANCORPORATION,
INC AND SUBSIDIARIES
EXHIBIT 19.1
INSIDER TRADING POLICY
This
is
the
Insider
Trading
Policy
(the
“Policy”)
of
Auburn
National
Bancorporation,
Inc.,
AuburnBank
and
their
subsidiaries
(individually
and
collectively,
the
“Company”).
This
Policy
covers
all
Company
(1)
employees
and
officers,
(2) members
of the
any Company
Board of Directors
(the “Board”),
advisory directors
and
Board observers, and
(3)
consultants
or
independent
contractors
whose
business
relationship
with
the
Company
provides
access
to
Material
Nonpublic Information regarding the Company (“Representatives”).
This Policy also applies to (1) any family member who lives in the same
household as a person covered by this Policy and
any
family
members
who
do
not
live
in
your
household
but
whose
securities
transactions
are
directed
by
you
or
are
subject to your influence
and control, such as children
away at college or parents
or children who consult
with you before
they trade, or
(2) any person
controlled by or under
common control with
any person described
in the preceding
sentence
(collectively,
“Family Members”).
You
are responsible for the transactions of your
Family Members and any entities that
you influence
or control,
including any
corporations,
partnerships, trusts
or estates
(collectively,
with Family
Members,
“Related Parties”).
You
shall inform your
Related Parties
of the need
to confer with
you before they
trade any
Company
Securities
and
before
they
trade
the
securities
of
any
other
entity
(“Third
Party
Securities”)
about
which
you
have
communicated Material
Nonpublic Information
that you obtained
in the course
of your role
with the Company.
You
and
the persons and entities described in the above paragraphs are “Covered Persons
”
under this Policy.
This Policy
applies to
all direct
and
indirect
transactions in
Company
Securities and
Third-Party Securities
by Covered
Persons.
Covered Persons are
subject to, and
shall comply with
this Policy in
all capacities, including
when acting
as an
agent, power of
attorney,
representative, nominee
or fiduciary or
otherwise for or
on behalf of
any other person
or entity.
Transactions by
your Related Parties will
be regarded for
the purposes of this
Policy and the applicable
securities laws as
though made by you.
The special obligations and liabilities of
Section 16 Persons are described in Section
III.B. and Article IV below.
Various
defined terms used in this Policy are provided in Article VI.
Our
Code
of
Conduct
and
Ethics
requires
compliance
with
this
Policy.
You
are
responsible
for
compliance
with
this
Policy.
If you have any
questions regarding this Policy,
please contact the Company’s
Shareholder Relations Officer
or the Chief
Financial Officer.
I.
Reasons for this Policy
Violators
of the
U.S. insider
trading laws
face civil
penalties of
up to
three times
the profit
gained, or
loss avoided,
by
reason of
their Securities
trades.
A criminal
fine of
up to
$5 million
for individuals
(up to
$25 million
for entities)
and
criminal forfeiture, and a
term of up to 20
years in jail, may be
imposed in the event
of a willful violation.
The Company
and its officers and Board
members could also face significant
civil penalties for failing to take
steps to prevent violations
of the insider trading laws by Company personnel,
including penalties of the greater of $1 million or
three times the profit
gained
or
loss
avoided
as
a
result
of
an
insider’s
violation
and
a
criminal
penalty
for
failing
to
take
adequate
steps
to
prevent insider
trading.
Further penalties
may be
assessed for
insider trading
under foreign
and state
securities or
“blue
sky” laws (“State Securities Laws”).
In
addition,
violations
of
insider
trading
laws
can
result
in
significant
expense
to
the
Company
in
connection
with
investigations by
bank or securities
regulators, or
criminal authorities,
including the
United States Department
of Justice.
Violations
could adversely
affect the
Company’s
reputation and
prevent the
Company from
using or
assisting customers
to
use
SEC
Rule
506
for
limited
offerings
of
securities
exempt
from
registration
under
the
Securities
Act
or
require
cautionary disclosures that may discourage investors.
The public and the securities markets
could lose
confidence in
the
Company and its securities as a result of violations.
These could substantially harm the Company and its shareholders.
II.
Prohibited Insider Trading
and Disclosure of Material Nonpublic Information; No Tipping.
All Covered
Persons are
prohibited from
engaging in
transactions, including
purchases and
sales in,
and gifts
of, any
(i)
Company
Security while
in in
possession
of Material
Nonpublic
Information
about the
Company
regardless
of whether
the
Company’s
Trading
Window
is
open
or
closed,
or
(ii)
Third
Party
Securities
while
in
possession
of
Material
Nonpublic Information
about such issuer
that has been
obtained by reason
of the person’s
employment by,
or association
with, the Company (individually and collectively,
“Insider Trading”).
In
addition,
all Covered
Persons
are prohibited
from disclosing
Material
Nonpublic
Information
about
the
Company
or
any Other Entity (as defined in the next paragraph)
that has been obtained by reason of the Covered Person’s
employment
by, or
association with, the Company,
to other persons, including colleagues
within the Company,
and friends and family.
However,
Material Nonpublic
Information may
be disclosed
to certain persons
for the
express purpose
of performing
an
authorized
act
or
service
necessary
to
the
Company
in
accordance
with
the
Company’s
policies,
such
as
to
colleagues
within the Company
whose jobs require them
to have such information
and accountants, attorneys and
other persons who
hold a duty of trust and confidence with the Company.
The other
entity (“Other
Entity”) may
be any
other entity
with which
the Company
competes, does
business with
or
is
involved
in
an
existing
or
potential
business
relationship
or
transaction,
such
as
an
existing
or
potential:
customer,
borrower,
counterparty,
strategic
partner
or
joint
venturer,
and
others,
including
a
party
to
a
potential
business
combination or important contract.
All
Tipping
and
recommendations
about
Company
Securities
or
Third-Party
Securities
by
Covered
Persons
are
prohibited, even if you do not believe that the information, standing
alone, is Material or do not know if the information is
Material Nonpublic
Information, particularly
if the
person is
offering
you anything
of value
in exchange,
including non-
monetary
compensation
or
relationships.
Market
Professionals
employ
many
means,
including
so-called
“expert
networks,” to
try to extract
confidential information
from employees at
all levels
of
a
company.
Do
not
Tip
or
provide
Material Nonpublic Information
to relatives, friends or
other persons or
entities – it is
illegal even if you
get no monetary
benefit, and both you and the tippees will be liable.
Disclosure of
Material Nonpublic
Information
to Market
Professionals by
authorized
persons pursuant
to any
Company
disclosure policy will not violate this Article II.
III.
Specific Procedures Applicable to All Personnel and Section 16 Persons
The following procedures are also considered part of this
Policy and your compliance with these is also required.
A.
General
1.
Trading Windows
and Blackout Periods.
In addition to the
general prohibition on Insider
Trading set forth
in this Policy,
you must observe the
“Blackout Periods”
described below.
Periods outside Blackout Periods are “Trading Windows.
”
Blackout Periods are the following:
a.
Covered
Persons
cannot
engage
in
a
transaction
in
Company
Securities
from
the
beginning
of
the
second
week prior to the end
of each fiscal quarter through
the close of business on
the second (2
nd
) full trading day
after the Company’s financial results
for such quarter have been publicly disclosed.
b.
The
Company
may
provide
a
“Blackout
Notice”
at
any
time,
including
during
a
Trading
Window,
that
a
transaction in
Company Securities
is not
permitted in
the event
of Material
Nonpublic Information
that has
arisen and
exists at
that time.
Until such
Blackout Notice
is terminated,
you cannot
engage in transactions,
including purchases, sales and gifts) in Company Securities.
c.
The
Company’s
Chief
Executive
Officer
and
Chief
Financial
Officer,
or
either
of
them,
have
the
authority
to
impose
additional
restrictions on
trading
in Company
Securities at
any
time,
including
during
periods that
would
otherwise
be
Trading
Windows,
and
to
apply
such
additional
restrictions
and
the
pre-clearance
process applicable to Section 16 Persons to certain Company
officers and employees, who may in the course
of their activities
have access to
or be exposed
to Material Nonpublic
Information.
In such event,
notice of
such additional restrictions will
be provided to the
affected individuals personally or
by e-mail or telephone,
including
voicemail.
The
affected
individuals
shall
not
inform
any
other
person
of
such
additional
restrictions.
Such notice
may be
given by
the Chief
Executive Officer
or the
Chief Financial
Officer,
who
may delegate
such action
to the
Shareholder Relations
Officer.
Nothing herein
shall limit
or preclude
any
additional transfer
or other
restrictions in
any Awards
under the
2024 Incentive
Plan, or
which are
adopted
to
comply
with
any
applicable
Securities
Law,
banking
law
or
contractual
requirements,
including
any
lockup agreements.
d.
If you
have placed
a limit
order or
open instruction
to buy
or sell
Company Securities,
you shall
terminate
such instructions immediately
upon the earliest
of (i) the expiration
of any trading approval
or preclearance,
and (ii) the commencement and during the existence of a Blackout Period or other
trading restriction.
2.
Preclearance and Approval of Transactions.
a.
Preclearance
and
prior approval
by the
Company
of transactions
in Company
Securities is
not required
of
Covered Persons, when effected during times when the Trading
Window is open for the Covered Person.
b.
All Rule
10b5-1 Plans
and Non-Rule
10b5-1 Trading
Arrangements should
be adopted,
modified, suspended
or terminated
only during an
open Trading
Window which
is applicable to
that person, and
must be approved
by the Company in advance
of adoption, modification, suspension
or termination, except for certain
automatic
transactions expressly
approved by
the Company
as part
of the
adoption of
the Rule
10b5-1 Plans
and Non-
Rule 10b5-1
Trading
Arrangements.
Transactions
made pursuant
to previously
approved Rule
10b5-1 Plans
and
Non-Rule
10b5-1
Trading
Arrangements,
Award
vesting
and
exercises of
Awards
that do
not involve
a
sale other than cashless exercises
of options and tax
withholding with the Company
as provided in Sections 4,
6.a.
and
6.b.
of
this
Article
III
do
not
require
pre-approval.
Section16
Persons
are
responsible
for
the
applicable
Exchange
Act reporting
of any
such transactions,
including
on SEC
Forms 3,
4, 5,
and
Schedule
13D/G.
c.
If a
request for
pre-clearance is
made, it
must be
submitted to
the Chief
Financial Officer
or Chief
Executive
Officer at least two
(2) business days in advance of
the proposed transaction.
The Company has no obligation
to approve a transaction submitted for pre-clearance and may determine
not to permit the transaction.
If a pre-
clearance
request
is
not
approved,
the
requesting
person
must
refrain
from
initiating
the
transaction
in
Company Securities and should not inform any other person of the restriction.
d.
Any approval
or preclearance
of a
transaction will
be granted
subject to
a time
limitation within
which the
trade
must be
executed.
If no
time
limit
is specified,
then the
approval
will expire
at the
close of
normal
trading
on
the
Nasdaq
Global
Market
(or
such
other
exchange
or
over-the-counter
market
on
which
the
Company’s
Securities are then
principally traded)
on the third
trading day
after approval (including
the day
of approval).
If
the transaction
is not
consummated
within
such
time
period,
a
new
pre-clearance
request
must be submitted and approved before such person may engage in
the transaction.
e.
At the
time of
entering into,
modifying
or terminating
a Rule
10b5-1
Plan or
a Non- Rule
10b5-1 Trading
Arrangement, or
placing a
trade in
or transaction
Company Securities,
you are
responsible for
determining
that
you
are
not
in
possession
of,
and
do
not
have
access
to,
Material
Nonpublic
Information,
and
for
verifying that the Comp
any has not
imposed any restrictions
on your ability
to engage in
trades.
3.
No Speculative Transactions.
a.
No Covered
Person may
engage in
speculative
transactions
in
Company Securities at any
time.
All Covered Persons
are
prohibited
at
all
times
from
short-selling
Company
Securities
or
engaging
in
transactions
involving
Derivative
Securities
with
respect
to
Company
Securities
or
otherwise,
including
hedges
of
any
options,
restricted stock
and restricted stock
units, appreciation
rights or other
awards (“Awards”)
granted under
the
Company’s
2024 Equity
and Incentive
Plan (the
“2024
Incentive
Plan”)
or otherwise.
These
prohibitions
include,
but are
not limited
to, short
sales, equity
and
other swaps,
forwards,
futures,
puts, calls
and
other
options contracts and derivatives,
including straddles, any other
Derivative Securities or strategies
involving
one or
any combinations
of such
instruments and/or
Derivative Securities
or short-term
buying and
selling
of Company Securities.
b.
Nothing
in
this
Section
3
shall
otherwise
prohibit
a
Covered
Person
from
receiving
Awards
under
the
2024
Incentive
Plan or
other Company
incentive plans
and realizing
the value
in accordance
with terms
of such
Awards,
provided
no
Covered
Person
may
use
hedging
instruments
or
strategies,
including
Derivative
Securities to increase the value or reduce the risks of such Awards.
4.
Rule 10b5-1 Plans
Transactions
(including
gifts) that
would
otherwise
be prohibited
at certain
times by
this Policy
are allowed
if they
are
made pursuant
to a
Rule 10b5-1
Plan or
Non-Rule 10b5-1
Trading
Arrangement, which
is preapproved
by the
Company
and
is adopted
and operated
in accordance
with this
Policy and
all SEC
Rule10b5-1
requirements
and related
reporting
obligations.
See
Article V below.
5.
Gifts of Company Securities, etc.
All
gifts
of
Company
Securities,
and
gifts
of
Third-Party
Securities,
if
any,
that
are
subject
to
this
Policy,
should
be
planned
and
made
during
open Trading
Windows
or
pursuant
to
a
Rule
10b5-1
Plan.
This requires
year
end
gifts
and
charitable contributions of
such securities to be
made before end
of the second
week of December.
Gifts, including bona
fide
gifts
are
generally
considered
by
the
SEC
as
“sales”
or
“trades”
under
Rule
10b5-1
and
for
Section
16
reporting
purposes on
SEC Form
4.
Whether a
gift is
“bona fide”
and can be
made outside
an open
Trading
Window will
depend
on the
facts and
circumstances surrounding
each gift,
including the
donor’s relationship
with the
recipient, the
nature of
the tax benefit of the donor and the expectation or
intent that the recipient will sell the Company Securities received.
You
should contact
the Shareholder Relations
Officer or
Chief Financial Officer
as to whether
any gift is
bona fide, including
all relevant facts,
and can
be made
consistent with this
Policy outside
an open
Trading Window
at least two
(2) business
days in advance
of a proposed
gift, although exceptions
for bona fide
gifts are not
to be expected
or assured.
All gifts by
Section 16 Persons must be precleared
in advance and reported timely on Form 4.
6.
Non-Market Transactions.
Certain
limited
non-market
transactions
described
below
(“Non-Market
Transactions”)
are
allowed
even
while
in
the
possession of Material Nonpublic Information:
a.
Stock
Purchase
and
Dividend
Reinvestment
Plans.
Acquisitions
of
Company
Securities
consistent
with
instructions established
at the
time of
enrollment
in a
Company employee
or direct
stock purchase
or dividend
reinvestment
plan.
This
Policy
does
apply,
however,
to
your
elections
to
participate
or
change
your
level
of
participation in
these plans, to
transfer shares
into or out
of such a
plan, and to
any sales of
Company Securities
acquired
through
these
plans,
which
only
may
be
made
when
during
an
open
Trading
Window
and
otherwise
pursuant to this Policy.
b.
Vesting
of Awards
and Cashless Exercises with the Company.
Vesting
of restricted stock or other Awards
under
the 2024 Incentive
Plan, or the exercise
of a tax
withholding right pursuant
to which an election
is made to have
the Company
withhold shares
of Company
stock to
satisfy tax
withholding requirements
or a
cashless exercise
of
a
stock
option
or
other
Award
between
the
grantee
and
the
Company
where
options
or
Awards
are
surrendered to the Company.
Cashless exercises of Awards
through brokers, other
third parties or on the
market
or other transactions are subject to this Policy,
however.
c.
Other
Non-Market
Transactions.
A
specific,
non-market
transaction
approved
in
writing
in
advance
by
the
Company’s
Shareholder Relations
Officer or
Chief Financial Officer,
or if neither
of these persons
are available
or are a party to such transaction, the Chief Executive Officer).
B.
Additional Procedures Applicable to Section
16 Persons
Section16 Persons
must timely
report
all
trades, transfers,
pledges or
other transactions
of Company
Securities, including
all
gifts, including
those made
when the
Trading
Window
is open
for such
persons, and
are responsible
for the
applicable
Exchange Act
reporting of
any such
transactions, including
on SEC
Forms 3,
4, 5
(each A
“Section 16
Filing”), and
SEC
Schedule 13D/G.
Any transfers, including gifts, of Company
Securities and any exercises of Awards
under the 2024 Incentive Plan or other
plans, whether
or not
exempt under
Section 16(b),
must be
reported
to the
SEC by
filing a
SEC Form
4 within
two (2)
business days.
The Shareholder Relations Officer will,
if requested, assist in completing the SEC Form 4
or other Section
16
Filings
in reliance
upon
information
provided
by,
and will
file
it on
behalf
of,
the Section
16 Person
with
the SEC.
However,
the completion,
contents,
and
timeliness
of
any Rule
144,
Section 16
filing
and
any
Schedule 13D/G
are the
sole responsibility of each Section 16 Person or other reporting person,
as applicable.
Section 16 Persons are also expected to comply
with Section 16(b) of the Exchange Act (“Section 16(b)”),
which imposes
liability for
any profit
derived by
them as
the result
of a
purchase and
sale of
Company Securities
occurring within
any
six-month period.
For more information, please see Article IV,
Consequences for Violations of
this Policy.
C.
Additional Provisions Applicable to All Persons
The terms “Material Information”
and “Material Nonpublic Information” are defined
in Article VII below.
The “Material
Information” definition contains a non-exclusive list of examples of “material”
items.
This Policy’s
provisions
about Material
Nonpublic
Information regarding
the Company
apply
to you
regardless of
how
you
become
aware
of
the
information.
You
may
learn
Material
Nonpublic
Information
about
Other
Entities
and
third
parties
as a
result
of
their relationship
to
the
Company
or discussions
about
possible
relationships
or
transactions.
For
example,
if
you
are
an
administrative
assistant
and
you
have
learned
that
a
large
contract
has
just
been
received
by
company A from the Company,
or that an acquisition of company B by the Company
is about to occur, you are prohibited
from trading
in Company
Securities through
the close
of the
second (2
nd
) full
trading day
after
Public Disclosure
of the
news.
Each of company
A and company
Bb would be
Other Entities under
this Policy.
Therefore, you also
cannot trade
in
these
Other
Entities’
securities
which
are
Third
Party
Securities
under
this
Policy,
as
discussed
further
in
the
next
paragraph.
When you are
in possession of
Material Nonpublic
Information of
the Company
or such
Other Entities,
you
have
a
duty
to
the
Company
to
keep
that
information
confidential and
not to
use it
for your
personal
benefit, and
you
cannot provide it
to or Tip
anyone for
your or
their benefit.
With
respect
to
Material
Nonpublic
Information
concerning
an
Other
Entity,
this
Policy
applies
to
you
if
you
became
aware
of
the
Material
Nonpublic
Information
about
the
Other
Entity
by
reason
of
your
affiliation
or
work
with
the
Company.
In the example
above, you also
would not be
able to trade in
the securities of
company A or
company B until
after
Public
Disclosure
of
the
news.
Trading
securities
on
inside
information
is
illegal,
and
you
cannot
use
Material
Nonpublic Information regarding the Company or Other Entities to trade in their
respective securities.:
i.
Possession
of Material
Nonpublic
Information.
If you
are aware
of Material
Nonpublic
Information
about the
Company,
you
are
prohibited
from
trading
in
Company
Securities,
even
if
the
Trading
Window
is
open,
general
ly.
ii.
Questions.
If
you have
any questions
as to
whether any
information
you have
about the
Company
or another
entity you
believe may
be an
Other Entity,
is Material
Information or
is Material
Nonpublic Information
about
the
Company
or an
Other Entity,
and
you are
contemplating
a transaction
in
Company
Securities or
the
Other
Entity’s
Third
Party
Securities,
you
must
contact
the
Shareholder
Relations
Officer
or
the
Chief
Financial
Officer
(or
if
neither
of
these
persons
is
available,
the
Company’s
Chief
Executive
Officer)
at
least
two
(2)
business days
prior to
executing the
transaction to
determine if
you may
properly proceed.
Section 16
Persons
should
be
particularly
careful
to
avoid
even
the
appearance
of
engaging
in
improper
securities
transactions.
WHEN IN DOUBT, DO
NOT TRADE.
iii.
Requests for
Information.
You
should be alert
to anyone who appears to be
asking you
for
Material Nonpublic
Information
of
any
kind
about
the
Company
or
Other
Entities.
If
you
receive
such
a
request
for
information,
comments
or
interviews
regarding
the
Company
(other
than
routine
product
or
services
inquiries)
or
Other
Entities
that
may
result
in
the
dissemination
of
Material
Information
or
Material
Nonpublic
Information,
you
must direct the
request to the Company’s
Shareholder Relations Officer
or Chief Financial
Officer,
or if he or
she
is
unavailable
or
is
a
party
to
such
transaction,
the
Chief
Executive
Officer,
so
that
an
authorized
Company
spokesperson
may
determine
whether
or
how
to
respond
to
any
such
request
consistent
with
the
applicable
securities
Company’s
obligations
under
SEC Regulation
Fair Disclosure
(“Reg.
FD”) and
the Company’s
then
current disclosure policy
.
iv.
No Exceptions to Policy.
There are no exceptions to
this Policy, including
for emergencies or to
avoid hardship
.
One
of
the
Company’s
responsibilities
as
a
public
company
is
to
enforce
this
Policy.
Except
as
specifically
permitted
by
this
Policy
(for
example,
in
the
case
of
Non-Market
Transactions
and
transactions
pursuant
to
a
Rule
10b5-1
Plan),
you
must
refrain
from
a
transaction
even
if
you
planned
or
committed
to
the
transaction
before
you
came
into
possession
of
the
Material
Nonpublic
Information,
regardless
of
the
economic
loss
you
believe you
might suffer
as a consequence
of not
trading.
Also, if
you are
in possession
of Material
Nonpublic
information,
it
does
not
matter
that
publicly
disclosed
information
might
provide
an
independent
basis
for
engaging
in
the
transaction.
EXCEPT
AS
SPECIFICALLY
PERMITTED
BY
THIS
POLICY,
YOU
CANNOT
TRADE
IN
SECURITIES
WHILE
IN
POSSESSION
OF
MATERIAL
NONPUBLIC
INFORMATION.
v.
Size of a Securities
Transaction.
The size or amount
of a securities transaction
is irrelevant.
There are no dollar
minimums
or
limits
on
the
size
of
a
transaction
that
will
trigger
insider
trading
liability
or
a
violation
of
this
Policy
or
applicable
insider
trading
laws.
The
SEC and
the United
States
Department
of
Justice
have
pursued
relatively small
trades, and
the Company
does not
permit any
Insider
Trading,
even
if the
trades
are
small.
In
addition,
you
can
be
subject
to
civil
and
criminal
penalties,
even
if
you
receive
no
monetary
benefit
from
disclosing or
using Material
Nonpublic Information.
IV.
Consequences for Violations of this Policy and Exchange Act,
Section 16(b)
Failure to comply
with this Policy
could result
in a serious
violation of
Securities Laws by
you and/or the Company,
and
may
subject you to civil and criminal penalties
described in
Article I
above.
In addition to any criminal or civil penalties
prescribed by law,
violation of this Policy
constitutes grounds for
adverse actions by the
Company,
including termination
of your employment for cause, or with respect to Representatives, the termination
of any relationship with the Company.
Exchange
Act
Section
16(b)
imposes
liability
on
Section
16
Persons
for
any
profit
derived
by
them
as
the
result
of
a
purchase
and
sale
occurring
within
any
six-month
period.
Any
excess
of
the
sale
price
over
the
purchase
price
is
considered “profit,”
and must
be paid
to the
Company.
It does
not matter
whether the
purchase or
the sale
occurs first,
and it is not
necessary for the
same shares to be
involved in each
of the matched
transactions.
Transactions are
paired so
as
to
extract
the
maximum
profit
by
matching
the
lowest
purchase
price
and
the
highest
sale
price
within
a
six-month
period;
losses cannot
be
offset
against
gains.
The result
is that
liability
may
exist under
Section
16(b)
even
though
an
insider’s overall trading in the stock resulted in a loss.
If Section 16
Persons engage in transactions
after they are
no longer executive
officers or directors,
such transactions can
be matched
for Section
16(b) purposes
if these
occur within
six months
of an
opposite-way
transaction
which occurred
while such person was still a Section 16 Person of the Company.
Good
faith
or
inadvertence
on
the
part
of
a
Section
16
Person
is
no
defense
to
liability
under
Section
16(b)
and
no
knowledge of
inside information
needs to
be involved.
If the
Company itself
does not
press a
claim for
recovery of
the
short-swing profit,
any stockholder
may do
so on
behalf of
the Company
(and may
be awarded
attorneys’ fees
as well).
Section
16(b)
plaintiffs’
attorneys
monitor
insiders’
Section
16
reports
and
request
that
the
Section
Person
restore
any
profit made or loss avoided to the Company and pay their legal fees.
V.
Rule 10b5-1 Plans and Similar Trading
Arrangements
Rule 10b5-1 Plans
SEC Rule
10b5-1,
as amended,
provides
an affirmative
defense from
insider
trading
liability,
and
permits purchases
and
sales
Company
Securities
under
a
qualifying
Rule
10b5-1
plan
(“Rule
10b5 -1
Plan”)
without
regard
to
certain
insider
trading restrictions.
A Covered
Person Policy
must enter
into a
Rule 10b5-1
plan for
transactions in
Company Securities
that is
approved in
advance by
the Company
and meets
the conditions
in Rule 10b5-1.
A Covered
Person may
only enter
into a Rule 10b5-1 Plan when that person is not aware of Material Nonpublic
Information.
A
Rule
10b5-1
Plan
must
be
a
binding
contract
to
purchase
or
sell
a
Company
Security,
instructed
another
person
to
purchase or sell
the security for
the instructing person’s
account, or adopt
a written plan
for trading securities.
The Rule
10b5-1 Plan must:
•
specify the amount of securities to be bought or sold, and the price and date
for the transaction;
•
includes a
written formula,
algorithm or
computer program
for determining
the amount,
price and
date of
the
purchase or sale; or
•
does
not
permit
the
person
to
exercise
any
subsequent
influence
over
how,
when
or
whether
to
effect
purchases
or sales,
while at
the
same time
ensuring
that any
person
effecting
trades under
the Rule
10b5-1
Plan is not aware of any material nonpublic information while doing so.
Once
a
Rule
10b5-1
Plan
is
adopted,
the
person
must
not
exercise
any
influence
over
the
number
of
securities
to
be
traded, the
price at which
they are traded
or the date
of the trade.
The Rule 10b5
-1 Plan must
either specify
the amount,
pricing and timing of transactions in advance or delegate discretion on these
matters to an independent third party.
Any Rule 10b5-1 Plan must
be submitted to the Company for
prior approval at least 10 business days
prior to the entry
into
the
Rule
10b5-1
Plan.
In
order
for
a
Rule
10b5-1
Plan
to
be
approved,
the
following
requirements
must
be
observed:
•
the person
adopting the
Rule 10b5-1
Plan must
include a
representation certifying
that he
or she
is adopting
the
plan in good faith,
at a time when he
or she is not in
possession of material nonpublic
information and not as part
of a plan to evade insider trading prohibitions.
•
the
Rule
10b5-1
Plan
must include
a
cooling-off
period
between
the
adoption
of
the
Rule 10b5-1
Plan
and
the
first trade
under the
Rule 10b5-1
Plan.
For Section
16 Persons,
the cooling
off
period is
of the
later of
(A) 90
days
after
the
adoption
of
the
Rule
10b5-1
Plan
and
(B)
two
business
days
following
the
disclosure
of
the
Company’s
financial
results
on a
Form
10-Q
or
Form
10-K for
the
completed
fiscal
quarter
in
which
the
Rule
10b5-1 Plan is
adopted; provided,
in no event
will the required
cooling-off period
exceed 120 days
following the
adoption of
the Rule
10b5-1 Plan.
For all
other Covered
Persons, the
cooling off
period is at
least 30
days after
the adoption of the Rule 10b5-1 Plan.
•
Covered Persons
may not
have more
than one
Rule 10b5-1
Plan in
effect at
the same
time other
than under
the
following
limited
exceptions:
(i)
a
series
of
separate
contracts
with
different
broker-dealers
or
other
agents
to
execute
trades
that
are
treated
as
part
of
a
single
plan,
provided
that
the
contracts
taken
as
a
whole
meet
the
conditions
of
Rule10b5-1
and
remain
subject
to
such
Rule;
(ii)
one
later-commencing
Rule
10b5-1
Plan
for
purchases or
sales of
securities in
the open
market under
which trading
is not
authorized to
begin until
after all
trades under
the earlier-commencing
Rule 10b5-1
Plan have
been completed
or have
expired without
execution;
and
(iii)
a
Rule
10b5-1
Plan
that
authorizes
an
agent
to
sell
only
securities
that
are
necessary
to
satisfy
tax
withholding obligations
arising exclusively
from the
vesting of
compensatory awards
such as
restricted stock
or
stock
appreciation
rights
and
the
person
does
not
exercise
control
over
the
timing
of
sales
(“sell-to-cover
transactions”).
•
a Covered Person may not
have more than one Rule
10b5-1 Plan that is intended
to effect open-market purchases
or
sales of
a
total
amount
of securities
as a
single
transaction
in
any
12-month
period
(other
than
sell-to-cover
transactions for tax withholding purposes); and
In addition, there are various other conditions, disclosure and filing requirements
on users of such plans and the Company:
•
That the
person establishing
such 10b5-1
plan did
not have any
other contracts,
instructions, or
plans that
would
qualify
under
Rule
10b5-1(c)(1),
except
for
specified
exceptions
available
under
such
Rule
10b5-1
when
such
person entered into such the 10b5-1 plan;
•
Quarterly
disclosures
by
the
Company
of
the
use
of
10b5-1
plans
and
similar
“Non-Rule
10b5-1
trading
arrangements,” by the Company’s
directors and officers;
•
Annual disclosure of the Company’s
insider trading policies and procedures; and
•
A requirement
that Section 16
Persons report transactions
in the Rule
10b5-1 Plan timely
on SEC Forms
4 and 5
and indicate on that such transactions were intended to satisfy the affirmative
defense conditions of Rule10b5-1.
Non-Rule 10b5-1 Trading Arrangements
Non-Rule
10b5-1
Trading
Arrangements
are
similar
to
Rule
10b5-1
Plans,
that
are
intended
to
satisfy
the
affirmative
defense
of
Rule
10b5-1,
but
do
not
include
either
the
cooling
off
or
certification
provisions
required
for
Rule
10b5-1
Plans.
Non-Rule
10b5-1
Trading
Arrangements
must
be
submitted
to
the
Company
for
prior
approval
and
include
the
same information as
Rule 10b5-1 Plans,
as applicable, to
the Company at
least 10 business days
prior to the
entry into the
Rule 10b5-1 Plan.
Please
contact
the
Shareholder
Relations
Officer
or
Chief
Financial
Officer
at
least
10
business
days
in
advance
of
establishing
any
Rule
10b5-1
Plan,
Non-Rule
10b5-1
Trading
Arrangement
or
other
trading
plan,
and
coordinate
with
those
officers
so
that
you
and
the
Company
can
comply
with
the
SEC
requirements,
including
receipt
of
trade
confirmations and timely reporting of all transactions on SEC Form 4 and
other Section 16 Filings.
VI.
Company Trading
in its Securities
The Company’s Policy on
trading in its securities is attached as Exhibit A.
VII.
Certain Reporting
The Company is required to publicly disclose information filed by
Section 16 Persons and this Policy.
SEC Form 3, 4 or 5
filings by
Section 16
Persons are
posted by
the Company
on its
website.
The Company’s
proxy statement
for its
annual
shareholders’
meeting
is
required
to
include
disclosure
of
delinquent
Section
16
reports
by
the
Company’s
Section
16
Persons.
Such reports
include the
names of
delinquent filers,
the number
of late
reports, the
number of
transactions that
were not reported on a timely basis, and any known failure to file a required form.
The
Company’s
annual
and
quarterly
reports
are
required
to disclose
the
adoption
and
termination
of 10b5-1
Plans
and
any
contract,
instruction
or
arrangement
(each,
an
“arrangement”)
under
Rule
10b5-1
or otherwise,
including
Non-Rule
10b5-1
Plans, by
Company
Section 16
Persons in
the Company’s
annual and
quarterly reports
on SEC
Forms 10-Q
and
10-K,
,
including
the
material
terms
thereof,
such
as
the
name
and
title
of
the
director
or
executive
officer,
the
date
of
adoption or
termination of
the plan
or arrangement,
the duration
of the
plan or
arrangement and
the aggregate
number of
shares to be purchased or sold pursuant to the plan or arrangement.
This Policy is filed with the SEC.
VIII.
Definitions
The following defined terms are provided for
ease of reference.
Additionally, as
used in this Policy,
the singular includes
the
plural and
vice versa,
and any
reference
to gender
includes all
genders.
The words
“include,”
“including”
or
any
derivation
thereof
are
not
limited
by
virtue
of
any
enumeration
and
shall
be
deemed
followed
by
the
words
“without
limitation.”
“Company Securities”
means all Securities issued by the Company or its subsidiaries, including
Company common stock.
“Derivative Securities”
are swaps,
options, warrants,
restricted stock
units, stock
and other
appreciation rights
or similar
rights or other
instruments, including other
Awards,
whose value is
derived from the
value of an
equity or other
security,
including Company Securities.
“Exchange
Act”
means
the
means
the
federal
Securities
Exchange
Act
of
1934,
and
the
SEC
rules
and
regulations
thereunder, each as amended and in effect.
“Insider” is
a person
who is
in possession
of Material
Nonpublic Information
concerning the
Company or
another entity
by reason of
his or her affiliation
with the Company.
This includes all Covered
Persons.
For purposes of
this Policy,
any
family member who lives in the same household as an Insider is also considered
an Insider.
“Market Professional”
is any person
who is, or
is associated with
(i) a securities
broker-dealer,
(ii) an investment
adviser
or certain
institutional investment
managers, and
(iii) investment companies,
private equity
and hedge
funds, other funds
and family offices, and their affiliated
persons.
These categories include sell-side analysts, buy-side analysts, institutional
investment
managers
and
other
market
professionals
who
may
be
likely
to
trade
on
the
basis
of
selectively
disclosed
information.
“Material
Information”
is
information
that
a
reasonable
investor
would
consider
important
in
deciding whether
to buy,
hold or sell
securities.
“Materiality” is fact-specific,
and it
is not possible
to define all categories of Material Information or
determine
whether
specific
information
is
Material
outside
its
particular
factual
context,
the
following
types
of
information typically
are regarded as
Material. The following
are examples only,
and this list
is not intended
to be and
is
not a complete or exclusive list of all information that may be Material:
•
Revenue, including revenue growth rates;
•
Gross and net interest margins and spreads including projections
of such items;
•
Earnings, including estimates on future earnings and changes in earnings guidance;
•
Changes in credit quality,
provisions for loan losses and potential losses outside the ordinary course of business;
•
Liquidity;
•
Proposals,
plans
or
agreements
(whether
or
not
binding)
regarding
mergers,
acquisitions,
divestitures,
tender
offers,
joint ventures,
strategic alliances
or purchase
or
sales of
material
assets or
securities outside
the ordinary
course;
•
Significant regulatory developments affecting the
Company or its subsidiaries;
•
Developments regarding
customers (when
applicable) or
strategic partners
(including the
acquisition or
loss of
an
important contract or relationship);
•
Changes in business plans or strategies
•
Changes in senior management or auditors;
•
Changes in compensation policy;
•
A change
in auditors
or auditor
notification that
the Company
may no
longer rely
on an
audit report,
or
that
the
auditor is resigning or declining to be reappointed;
•
Financings
and
other
events,
plans
or
proposals
regarding
the
Company’s
Securities
(e.g.,
defaults
on
debt
Securities,
calls of Securities
for redemption, repurchase
plans, stock splits,
proposed
public
or private offerings
or
sales of Company Securities, tender offers, and repurchases of Securities);
•
Material litigation or governmental investigations or proceedings;
•
Material data or cybersecurity breaches;
•
Bankruptcy, corporate
restructurings or receivership; and
•
Any factor
that would
cause the
Company’s
financial
results to
be substantially
different
from
the Company’s
publicly announced projections, analyst estimates, prior trends or
previous
filings.
Material Information
also could be
information similar to
that in the
above list relating
to any other
person or entity
with
which
the
Company
does
business
with
or
is
involved
in
a
business
relationship,
or
potential
business
relationship
or
transaction,
such
as,
for
example,
an
existing
or
potential
customer,
counterparty,
vendor,
strategic
partner,
potential
merger partner or large shareholder.
“Material Nonpublic
Information”
means Material
Information that has not
been Publicly Disclosed
by the Company
or a
third party, as applicable.
“Publicly Disclosed”
or “Public Disclosure”
means a communication
or series of
communications calculated
to reach the
general public,
such as
a press
release widely
disseminated,
including
over a
national wire
service, a
SEC Form
8-K or
other
public
filing
with
the
SEC,
or
a
public
webcast
presentation.
Generally,
disclosure
to
a
large
group of
financial
analysts, other
Market Professionals
or investors,
or comments
made in
interviews or
via social
media
do
not
constitute
Public
Disclosure,
unless
the
information
has
been
previously
Publicly
Disclosed
or
until
such
information
is
Publicly
Disclosed.
Generally,
Public Disclosure will be
deemed to have been
accomplished by the close
of business immediately
following the second full trading day after such information is publicly disclosed
as manner described above.
“Rule 10b5-1” means SEC Rule 10b5-1 as amended and in effect
on any date of determination.
“Rule
10b5-1
Plan”
generally
is
a
written
plan
that
has
been
adopted
and
implemented
by
a
Covered
Person
for
purchasing or
selling Company
Securities that
meets each of
the requirements
under SEC Rule
10b5-1, including:
(1) the
plan
is
adopted
during
a
period
when
the
quarterly
Trading
Window
is
open
and
no
Blackout
Notice
or
other
trading
restrictions have been imposed;
(2) the plan is adopted during
a period when the individual is not in possession of Material
Nonpublic Information; (3) purchasing
or selling under the
plan does not commence
until after the applicable
cooling off period
in Rule 10b5-1(c)(ii);
(4)
the
plan
is
adhered
to
strictly;
(5)
the
plan
either
(a)
specifies
the
amount
of
Securities
to
be
purchased or
sold and the date
on which the Securities are
to be
purchased or
sold, (b) includes a written formula or algorithm,
or computer program, for determining
the amount of Securities to be
sold and the price at which and
the date on which the
Securities
are
to
be
purchased
or
sold, or
(c) does
not permit
any Insider to exercise
any subsequent influence over how,
when, or
whether to
effect sales;
provided
that
any
other
person
who,
pursuant
to
the
contract,
instruction,
or
plan,
did
exercise
such influence
must not
have been
aware of
the Material
Nonpublic
Information
when doing
so; and
(6)
at the
time it
is adopted the
plan conforms to
all other requirements
of SEC Rule
10b5-1
“SEC” means the United States Securities and Exchange Commission.
“Section 16” means Section 16 of the Exchange Act.
“Section 16 Person”
means any Company
director, executive
officer described
in SEC Rule 16a
-1(f) under the
Securities
Exchange Act,
including the Company’s
president, principal financial
officer,
principal accounting
officer
(or,
if there
is
no
such
accounting
officer,
the
controller),
any
vice-president
of
the
Company
identified
by
the
Company
who
is
in
charge
of a
principal business
unit,
division
or function,
any other
officer
who performs
a policy
-making
function,
any
other person
who performs
similar policy-making
functions for
the Company,
and shareholders
of the
Company holding
10%
or
more
of
the
Company’s
outstanding
common
stock.
Officers
of
the
Company’s
subsidiaries
(or
any
parent
company, if any) are deemed officers
of the Company, if they perform
such policy-making functions for the Company.
“Securities”
includes
common
stock,
preferred
stock,
options,
warrants,
restricted
stock,
restricted
stock
units,
stock
appreciation rights,
debentures and
derivatives, including
all other
securities of
an entity
the value
of which
is related
to or
derived from an entity’s common
stock or other securities.
“Securities
Act”
means
the
federal
Securities
Act
of
1933,
and
the
SEC
rules
and
regulations
thereunder,
each
as
amended and in effect.
“Securities Laws”
means the
Securities Act
of 1933,
the Exchange
Act
(the
“U.S.
Securities
Laws”),
and
all
applicable
State Securities Laws, domestic and foreign.
“Tip”
and
“Tipping”
refer
to
when
a
person
subject
to
this
Policy
discloses
material
nonpublic
information
about
the
Company or another
company to another
person or recommends
that another person
trade in the
securities of any
company
while
in
possession
of
Material
Nonpublic
information
about
that
company
and
the
other
person
either:
(i)
trades
that
company’s
securities
while
in
possession
of
that
material
nonpublic
information;
or
(ii)
provides
the
material
nonpublic
information to
a third
party who
then trades
in such
company’s
securities. Tipping
is illegal
even if
you do
not personally
make a trade or otherwise benefit monetarily from disclosing Material
Nonpublic Information.
Exhibit A
Auburn National Bancorporation, Inc.
Policy on Company Trading
in its Securities
Auburn National
Bancorporation, Inc.
and its subsidiari
es (the
“Company”) may,
from time
to time,
in the
future, issue
or
repurchase
their
own
securities,
but
do
not
otherwise
trade
in
their
securities.
Any
such
issuances
or
repurchases
of
Company securities
will be
reasonably designed
to promote
compliance with
(i) the
Nasdaq listing
standards applicable
to
the Company, and (ii)
any insider trading laws that are applicable to the Company in connection to
such transactions.
EX-21.1
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES
EXHIBIT 21.1 - SUBSIDIARIES
DIRECT SUBSIDIARIES
JURISDICTION OF INCORPORATION
AuburnBank
Alabama
INDIRECT SUBSIDIARIES
Banc of Auburn, Inc.
Alabama
Auburn Mortgage Corporation
Alabama
EX-23.1
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES
Exhibit 23.1 Consent of Independent Registered Public Accounting
Firm
We
consent
to
the
incorporation
by
reference
in
the
Registration
Statement
No.
333-283711
on
Form
S-8
and
the
Registration Statement No. 333-03516
on Form S-3 of Auburn
National Bancorporation, Inc. of
our report dated March
17,
2026, relating to the
consolidated financial statements of
Auburn National Bancorporation,
Inc. and Subsidiaries, appearing
in this Annual Report on Form 10-K of Auburn National Bancorporation,
Inc. for the year ended December 31, 2025.
/s/ Elliott Davis, LLC
Greenville, South Carolina
March 17, 2026
EX-31.1
AUBURN NATIONAL
BANCORPORATION,
INC AND SUBSIDIARIES
EXHIBIT 31.1
CERTIFICATION
PURSUANT TO
RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, David A. Hedges, certify that:
- I have reviewed this Annual Report on Form 10-K of Auburn National
Bancorporation, Inc.;
- Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not
misleading with respect to the period covered by this report;
- Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods
presented in this report;
- The registrant’s other
certifying officer and I are responsible for establishing and maintaining
disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be
designed under our supervision, to ensure that material information relating
to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in
which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such
internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted
accounting principles;
c)
Evaluated the effectiveness of the registrant’s
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered
by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s
internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter
(the registrant’s fourth fiscal quarter in the case of
an annual
report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal
control
over financial reporting; and
- The registrant’s other
certifying officer and I have disclosed, based on our most recent evaluation
of internal control over
financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s
board of directors (or persons
performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of
internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and
report financial information; and
b)
Any fraud, whether or not material, that involves management or other
employees who have a significant role in
the registrant’s internal control over
financial reporting.
Date: March 17, 2026
/s/ David A. Hedges
President and CEO
EX-31.2
AUBURN NATIONAL
BANCORPORATION,
INC AND SUBSIDIARIES
EXHIBIT 31.2
CERTIFICATION
PURSUANT TO
RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, W.
James Walker,
IV,
certify that:
- I have reviewed this Annual Report on Form 10-K of Auburn National
Bancorporation, Inc.;
- Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not
misleading with respect to the period covered by this report;
- Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods
presented in this report;
- The registrant’s other
certifying officer and I are responsible for establishing and maintaining disclosure
controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be
designed under our supervision, to ensure that material information relating
to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in
which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such
internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted
accounting principles;
c)
Evaluated the effectiveness of the registrant’s
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered
by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s
internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter
(the registrant’s fourth fiscal quarter in the case of
an annual
report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal
control
over financial reporting; and
- The registrant’s other
certifying officer and I have disclosed, based on our most recent evaluation
of internal control over
financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s
board of directors (or persons
performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of
internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and
report financial information; and
b)
Any fraud, whether or not material, that involves management or other
employees who have a significant role in
the registrant’s internal control over
financial reporting.
Date: March 17, 2026
/s/ W. James
Walker,
IV
SVP,
Chief Financial Officer
EX-32.1
AUBURN NATIONAL
BANCORPORATION,
INC AND SUBSIDIARIES
EXHIBIT 32.1
CERTIFICATION
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Auburn National Bancorporation,
Inc. (the “Company”) on Form 10-K for the
period ending December 31, 2025, as filed with the Securities and Exchange
Commission as of the date hereof (the
“Report”), I, David A. Hedges, President and Chief Executive Officer,
certify, pursuant to 18 U.S.C. §
1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act
of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the
financial condition and
results of operations of the Company.
Date: March 17, 2026
/s/ David A. Hedges
David A. Hedges
President and CEO
This certification accompanies this Annual Report and shall not be deemed
“filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liability of that Section.
This certification will not be deemed
to be incorporated by reference into any filing under the Securities Exchange
Act of 1934, except to the extent that the
registrant specifically incorporates it by reference.
A signed original of this written statement required by Section 906 has been provided
to, and will be retained by, Auburn
National Bancorporation, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
EX-32.2
AUBURN NATIONAL
BANCORPORATION,
INC AND SUBSIDIARIES
EXHIBIT 32.2
CERTIFICATION
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Auburn National Bancorporation,
Inc. (the “Company”) on Form 10-K for the
period ending December 31, 2025, as filed with the Securities and Exchange
Commission as of the date hereof (the
“Report”), I, W.
James Walker,
IV,
Senior Vice President, Chief Financial
Officer,
certify, pursuant to 18 U.S.C.
§ 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act
of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial
condition and
results of operations of the Company.
Date:
March 17, 2026
/s/ W. James Walker,
IV
W. James Walker,
IV
SVP,
Chief Financial Officer
This certification accompanies this Annual Report and shall not be deemed
“filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liability of that
Section.
This certification will not be deemed
to be incorporated by reference into any filing under the Securities Exchange
Act of 1934, except to the extent that the
registrant specifically incorporates it by reference.
A signed original of this written statement required by Section 906 has been provided
to, and will be retained by,
Auburn
National Bancorporation, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.